Help clients overcome any fears about saving for college

October is all about Halloween and scary things. One thing clients shouldn’t be afraid of is saving for college in a 529 college savings plan. They may think they can’t afford to save, that a 529 plan hurts their child’s chances of getting financial aid, or it’ll be a waste if their child doesn’t go to college. Here’s how to dispel their fears about these things and encourage them to save. 

What may be scary: I can’t afford to save

Not so scary: Anything helps

Saving for college can seem daunting, particularly when they’re in the midst of raising their kids. But any amount of money, no matter how small, can add up. With compounding, even small contributions can make a difference, particularly if they start when a child is young and save regularly. For instance, a $50 monthly contribution, started when a child is born, could grow to more than $19,000 by the time they reach age 18.¹ That could mean $19,000 less in loans. Have clients think of it this way: Every dollar saved today is a dollar plus interest they may not have to borrow to pay for college. Loans add to the cost of college. 

What may be scary: A 529 plan affects scholarships and financial aid

Not so scary: It doesn’t count as much as you think

First, here are somewhat scary stats² about scholarships and financial aid, which underscore the need for saving:

• Only 7% of students are likely to receive a scholarship.
• Less than 2% of high school student-athletes are offered athletic scholarships.
• The average government grant and scholarship is $13,690 annually. 

Plus, most scholarships and grants are for tuition and fees and generally don’t cover room and board, textbooks and supplies, or meal plans.

In general, 529 plans have a minimal impact on financial aid, and their potential advantages can outweigh the disadvantages. For financial aid purposes, a parent-owned 529 plan counts as their asset and assumes a maximum of 5.64% of it will be used to pay for college. So, for every $10,000 in a 529 plan, the "expected family contribution" toward college costs could increase by only $564 at most. Also, prior-year parent income is used to determine financial aid eligibility. So, 529 plan withdrawals can help pay for a student’s first year of school without impacting financial aid for the second year.

College savings calculator: Estimate how much to save

What may be scary: The child doesn’t go to college

Not so scary: A 529 plan isn’t use it or lose it.

A 529 college savings plan can be used for more than college tuition and expenses. It can be used for tuition for vocational and technical programs and for the required textbooks, supplies, and laptops. Up to $10,000 per year can be used for elementary, middle school, and high school tuition for public, private, and religious schools.

A 529 plan can also be transferred to another beneficiary. It doesn’t have to be a family member — it can be anybody with educational needs — even an adult. Plus, starting in 2024, up to $35,000 in a 529 plan can be rolled over to a Roth IRA in the child’s name. It’s a way for that money to still be used for the child’s financial future. It also allows it to continue to grow tax-free and also be withdrawn tax­ and penalty-free in retirement.³ And finally, a client can withdraw the money, but all earnings are considered taxable income and come with a 10% penalty if not used for education expenses.

College saving doesn’t have to be scary

Leave the scary stuff for Halloween. Encourage your clients to save what they can for a child’s education. Send them the client version of this article, Don’t be afraid to save for college. Get more ways to help guide clients about 529 college savings plans.