All In: A Team Approach to College Savings
From the moment a new baby enters the world, families dream of the successful life their new addition will have. One of the best ways they can help achieve that success is to fund the child’s higher education by contributing to a 529 college savings plan. When families join together for a team approach to their 529 savings, they make it even easier to turn future dreams into successful reality.
The Best Gift
It’s no secret that the cost of higher education has risen sharply. In fact, over the last 40 years, tuition increases have grown at twice the rate of inflation. Students can no longer count on part-time and summer jobs to cover tuition payments. But when family members join forces to save with a 529 college savings plan, they work together to give a cherished child a significant gift – helping to prevent the burden of overwhelming student loan debt.
I’ve heard from grandparents who are helping 10 grandchildren as well as a niece and nephew pay for college by contributing to a 529 college savings plan. Their oldest grandson told them that “having no college debt” was the best gift he could have ever received, so his grandparents are regularly contributing to help do the same for the other children in their family.
Parents have also told me which gifts their children really don’t need - more toys. What they do need is money for college. With options like eGift, parents have a convenient way to tell family and friends that the perfect birthday or holiday gift is money for their child’s 529 account.
529 Plans and Taxes
When parents and grandparents save for college with a 529 plan, such as South Carolina’s Future Scholar Plan, they get the added benefit of knowing neither the principal nor the earnings will be taxed as long as the money is used for qualified educational expenses.
In addition, the IRS allows contributors to front-load a plan to take advantage of the gift tax exemption over a five-year period. Normally, an individual is allowed to gift up to $15,000 in one year, but with a 529 plan, the individual can contribute $75,000 in a single year without incurring gift tax. Contributions to 529 plans are also viewed as completed gifts and are removed from the contributor’s taxable estate.
Currently, 34 states and Washington, D.C. allow contributors to deduct a percentage of their contributions from their state tax returns. For example, South Carolina allows residents to deduct 100 percent of their 529 contribution amount on their state income tax returns.
Owning a 529 Account
Grandparents know that a grandchild represents a living legacy - the ultimate connection to the future, and they are happy to help make that future a successful one by contributing to or owning a 529 account.
While some grandparents may want their grandchild’s parent to be the owner of the 529 plan, others may not. They may live in a state where there are big tax advantages to owning an account.
One grandmother from Mount Pleasant, S.C. opened her own account for her grandson. She said she likes that her contributions are deducted monthly from her checking account. She also likes the tax advantages.
“Monies transferred to our grandson’s 529 are set by us and based on what we can afford. The money is growing faster than we imagined as the compound interest works in our favor, and our annual contributions are tax deductible on our South Carolina state tax returns,” she explained.
In the past, many grandparents worried that saving with a 529 account they owned could hurt their grandchild’s chances of securing financial aid, but the FAFSA Simplification Act of 2020 is eliminating that concern. Set to launch in 2024-2025, the new FAFSA will no longer require students to disclose cash support, allowing grandparents to contribute to the cost of their grandchildren’s education without impacting any needs-based financial aid eligibility.
All In for the Future
I recently heard from parents who told me that having a 529 college savings account for each of their five children gives the whole family a place to set aside money for the children’s future education. When the time comes for each child to attend college, family members will have the satisfaction of knowing they made a difference.
Best of all, the team approach can extend to the students themselves. Many families encourage their children to contribute to their accounts when they are old enough, so they can watch their savings grow and know they are helping invest in their own future education.
When grandparents, parents, and students all contribute, their teamwork makes saving for a successful future much easier. And someday, when the graduate dons a cap and gown, the whole family can swell with pride for a team victory and a dream come true.
About the author: Curtis Loftis is the State Treasurer of South Carolina. He also serves as the administrator of South Carolina’s Future Scholar 529 College Savings Plan. Visit treasurer.sc.gov or futurescholar.com for more information on ways to save through a 529 plan. This article originally appeared on the College Savings Plans Network.