It’s important to benchmark your college savings progress as your child enters their teenage years. If your savings are coming up short of your goal, you may want to consider getting help from friends and family. Every dollar contributed to your teen’s 529 plan is one dollar less they will have to borrow in student loans.
It’s never too late to get help saving for college
Parents should start saving for college as early as possible to get the maximum value from their 529 plan. For example, about a third of your college savings goal will come from earnings if you start saving in a 529 plan when your child is born. But, if you wait until your child is in high school you will have to save six times as much per month to reach the same college savings goal.
However, most families don't save enough. Those who use 529 plans only save around $35,000 on average, which is barely enough to cover the cost of attending one year of a 4-year college.
It's never too late to start saving for college, since any amount you save reduces future student debt. Every dollar saved is a dollar less borrowed. Every dollar borrowed costs about two dollars by the time the debt is repaid. So, saving money even during the senior year in high school will save money.
Benefits of giving the gift of college
529 plan gift contributions are a meaningful alternative to traditional birthday, holiday and graduation gifts and can help boost a teen's college savings in the short-term. Parents should consider asking friends and family to contribute to their teen’s 529 plan instead of giving cash or a gift card.
There are still many benefits to saving in a 529 plan even if college is only a few years away.
- Tax-free compounding. Investments in a 529 plan grow tax-deferred and are not taxed when withdrawn to pay for qualified education expenses. A recurring $25 monthly contribution will grow to over $1,700 in just 5 years.
- State income tax benefits. Over 30 states offer a state income tax deduction or credit for 529 plan contributions. In most of these states, anyone who contributes to a 529 plan is eligible to claim a state tax benefit and there is no requirement to hold the funds in the 529 plan account for a certain period of time. The state income tax break affectively provides a discount on tuition. Tax savings may be reinvested into the 529 plan to give college savings an extra boost.
- 529 plans can be used to pay for more than just tuition. Students can use 529 plan savings to pay for books, a laptop or even internet access.
- Favorable financial aid treatment. Cash gifts may reduce a student’s need-based financial aid by as much as 50% of the value of the gift. This can be avoided by giving a gift contribution to the student's 529 plan. Funds withdrawn from a 529 plan owned by a parent or dependent student are not reported as income on the FAFSA and therefore do not affect the student’s financial aid eligibility like a cash gift.
How 529 plan gifting works
Many 529 plans offer gifting programs that allow friends and family to make a secure, electronic deposit to a child’s 529 plan. There is usually also an option to send a gift by check, or gift givers may purchase a Gift of College gift card. Some 529 gifting platforms allow parents to keep track of gift contributions.
Minimum gift contribution amounts vary by plan and can be as low as $15. There are no annual 529 plan contribution limits, but there are aggregate 529 plan contribution limits, which vary by state. Grandparents may consider using a 529 plan as an estate planning tool, since gifts up to $15,000 per beneficiary ($30,000 if the grandparents give the gift as a couple) qualify for the annual gift tax exclusion and are excluded from the grandparent's estate.
Some 529 plans also allow friends and family to set up recurring gifts. Ugift, the largest 529 plan gifting platform, recently made enhancements to this feature so that parents can easily create a profile and set up a schedule for recurring automatic gifts.
Use of e-gifting grows
529 plans managed by Ascensus feature the Ugift program, which is becoming increasingly popular among families saving for education. In 2018, Acsensus processed over $220 million in Ugift contributions, and $118 million Ugift contributions have been made so far in 2019.
However, recent data from Ascensus shows that even though the majority of Ugift accounts are for beneficiaries age 7 or older, almost half (44%) of college gifts are made to beneficiaries under 4 years old. Just 9% of Ugift beneficiaries are age 16 and over, even though parents of these older students likely need money for college sooner.
A family's need for 529 plan gifts continues as the child grows older and approaches college. At this stage, college is a reality and many students are looking for ways to fill a savings gap. 529 plan gift contributions, along with income from summer jobs, scholarships and financial aid can help a teen reach their goal and attend their desired college with minimal debt.
Ascensus is trying to encourage families to use gifting tools like Ugift throughout the life of their 529 plan accounts to maximize college savings, says Peg Creonte, Sr. Vice President, Business Development at Ascensus.
How to ask for 529 plan gifts
Although crowdfunding is becoming more of a social norm for college savings and other financial goals, many parents still feel awkward asking for 529 plan gifts. To avoid feeling awkward, Creonte suggests discussing your child's college plans and 529 college savings plan with friends and family at a time when you're not actually asking for a gift.
“We’ve found that disconnecting the ask from the event can get people more comfortable,” she said.