Five misconceptions about saving for college

When you’re in the midst of raising your kids, saving for college can seem daunting. There are so many immediate expenses. Plus, some misconceptions about a 529 college savings plan may be stopping you from opening one and missing out on potential benefits. Here are five common misconceptions about saving for college.

1. “I can’t afford to save for college right now.”

Think about it this way: Every dollar saved today is a dollar plus interest you may not have to borrow to pay for college. Loans add to the cost of college. Plus, with compounding, even small contributions can make a difference, particularly if you start when a child is young. 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. That could mean $19,000 less in loans.¹

2. “A 529 plan will affect my child’s ability to get financial aid.”

In general, 529 plans have a minimal impact on financial aid, and their 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 college³. 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.

3.“Money in a 529 plan is wasted if my child gets a scholarship.”

4. “I lose money left over in a 529 plan once my child graduates.”

5. “A 529 plan can only be used for a four-year college.”

Actually, funds from a 529 college savings plan can be used for many education-related things and if it still isn’t used up there are other options for the money. First, here are some 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. So even if your child gets a scholarship, there are other associated costs that can be paid with 529 withdrawals. Money in a 529 plan can be used for tuition, fees, textbooks, laptops, school supplies, room and board, and other educational expenses for vocational and technical college programs, study abroad programs, and postgraduate education such as master’s degrees, doctorates, law school, medical, and dental school. Up to $10,000 can be used for elementary, middle school, and high school tuition for public, private, and religious schools.

If you have money left over in a 529 plan when your child graduates, don’t worry. You have options. Funds in a 529 plan can be used to pay off up to $10,000 of the student’s loans. The 529 plan can also be transferred to another beneficiary. It doesn’t have to be a family member — it can pretty much be anybody. 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. And finally, you can withdraw the money, but for non-qualified withdrawals all earnings are considered taxable income and come with a 10% penalty .

Start now

Yes, kids are expensive, starting from the day they’re born. But saving what you can for college and giving it the potential to grow can make a difference. Learn more about saving for college. If you need help or have questions, contact your financial professional. See how to open a CollegeBound 529 Plan.