Debunking 529 plan misconceptions: 5 common 529 saving plans questions answered

There are currently 16 million 529 account holders, with assets totaling $411 billion. Since 2001, $300 billion has been disbursed from the savings accounts – evidence of their impact and reach.

A few things are coming together to encourage this growth, according to Paul Curley, Director of 529 & ABLE Research for ISS Market Intelligence. Policy at the federal level has increased the types of qualified expenses the funds can be used for and in the process, eased hesitancy about saving. Awareness of the plans’ benefits is more widespread and understood – even literally, as Curley points to the increase his firm has seen in multilingual disclosure statements.

Underlying it all is the rising cost of education. It’s increasing the urgency to save, and contributing to making saving an intergenerational undertaking. Some 10% of account holders are grandparents, and it’s not uncommon to see extended family and even friends contribute to a loved one’s educational goals.

“As the cost of education has gone up, education has become more of a family goal,” said Curley, who has been covering the 529 market for the last 20 years and is one of the industry’s experts.

Flywire spoke with Curley about some of the questions he often receives about 529 savings plans, and some of the newer policy changes easing the barriers to savings and use. Here are some answers to five common questions he often fields.

1. Are parents the only ones who can open and contribute to 529 plans?

529 plans get their name from Sec. 529 in the Federal tax code – which codifies the significant tax breaks they come with. As such, anyone can partake. Parents are the largest group of account holders – with about ¼ of parents saying they save for their children’s education with a 529 plan, according to the most recent data from ISS Market Intelligence. But roughly 10% of account holders are grandparents, and you do not have to be a parent or even a grandparent of the beneficiary to contribute. Aunts, uncles, even friends can make contributions to accounts they own or make gift contributions to an account owned by someone else.

2. Can the funds be used for expenses beyond tuition?

Withdrawals can be made for qualified expenses beyond tuition payments in many states at K-12, vocational and trade schools, community colleges, certificate programs, private and public higher education institutions, graduate schools and continuing education courses. 529 savings can be used for qualified expenses in relation to these pursuits, including books, housing (on and off campus, within certain restrictions), meal plans, fees, supplies, computer technology and special services. (It’s important to note that some states haven’t expanded state level qualified educational expenses (QEE) to student loans, apprenticeships and K-12 tuition. It’s best to confirm with the state’s plan disclosure).

The Secure Act signed into law in 2019 extended these qualified expenses to apprenticeship programs registered with the U.S. Department of Labor, where funds can be used to pay for fees, books, supplies, and equipment.

3. Can the funds be used for study internationally?

Curley says his firm often gets questions about whether 529 plans can be used for students who choose to study internationally, and even in different states. The confusion stems from the fact that 529 plans are administered state-by-state, and managed in conjunction with a program manager.

529 plan savings can be used for qualified expenses at international institutions and programs that participate in federal student aid programs. Eligible schools have a Federal School Code, an identifier assigned by the U.S. Department of Education. There are hundreds of schools outside of the U.S. that may be eligible for 529 payments – including in Canada, Mexico, the U.K., Ireland, Spain, France, Japan, Poland, Israel, The Netherlands, Australia, New Zealand, South Africa and many more countries globally. While Flywire is currently offering digital 529 payments to U.S.-based institutions, the technology allows 529 providers to easily integrate workflow and reference the Federal School Code when mapping their directory to Flywire’s network of eligible institutions.

4. What are the options to ensure 529 savings isn’t “wasted”?

Roughly 5% of assets are taken for non-qualified distribution, Curley said. It doesn’t happen often, but the tax implications and penalties for non-qualified withdrawals should students, for whatever reason, not use the funds for qualified expenses do create a mental hurdle. But there are a few changes and lesser-known things that families can do in this event that work to remove this barrier.

  • 529 savings can be rolled over to a Roth IRA
    New federal law allows account holders to rollover up to $35,000 to a Roth IRA account in the beneficiary’s name, tax and penalty free, starting in 2024. There are conditions. Funding is subject to annual contribution limits and the 529 account has to have been open for more than 15 years.

    Account holders can also roll over to ABLE accounts in the event a beneficiary becomes disabled to the extent that they will not use the funds for any qualified 529 expenses.
  • You can change the beneficiary on the account
    Account holders can change the beneficiary to a qualified family member – which is quite a long list that extends to nieces, nephews and first cousins. “These are intergenerational products,” Curley said.
  • Beneficiaries can use it to pay down student loans
    Funds can be used to repay the beneficiary's student loans up to $10,000, and account holders can withdraw an additional $10,000 to repay student loans held by the beneficiary’s siblings.

5. Will 529 savings affect receiving financial aid?

FAFSA determines financial aid by assessing a family’s income and assets – the latter category of which 529 savings plans fall into. Assets are not weighted nearly as heavily in the financial aid calculation as parental income. The formula for calculating financial aid is complex, but rates increase from 22% to 47% as the adjusted available parental income increases, where non-retirement assets like 529 savings plans factor somewhere between 2.2% and 5.64%.

Digitizing 529 disbursements offers opportunities for schools, providers

As savings grow, so too does complexity when a family wants to withdraw the funds. There are many different touch points in the 529 disbursement process – and most of them are not connected digitally. Families make a withdrawal request from their plan provider. Funds are sent via paper check through the postal service or an overnight courier, rather than ACH. When institutions or organizations receive the checks, staff manually open, sort, post, balance, remote deposit and shred the checks, in accordance with regulations.

By using Flywire’s 529 Disbursement solution, plan providers and institutions can digitize and automate the entire disbursement process for greater efficiency and cost savings. What’s more, a better experience increases the chances the family will use or recommend the plan provider – as how easy it was for a family to utilize plan funds weighs into their decision on whether to use it as a savings vehicle again.

Exiting with a good experience accelerates the use of 529s to the next generation.

Paul Curley, Director of 529 & ABLE Research, ISS Market Intelligence

Want to learn more about how Flywire is easing the 529 disbursement process for providers and institutions?

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