529 plan

With the news full of stories of student loan debts being out of control and ruining lives, it’s a relief to know you have some money put back in a 529 plan to pay for college. Once your child receives admissions offers, it’s time to put that money to good use. But how, exactly?

The process takes some forethought. All along, the goal has been both to fund college and to save tax money since you can contribute to a 529 using pre-tax dollars. When you draw them out for qualified education expenses, they’re taxed at your child’s income level, not yours.


But that doesn’t mean you have to use every cent for college expenses, for the oldest child, or to pay for the most expensive school the 529 could fund.

Go the Direct Stafford Loan route first

If your child qualifies for U.S. Department of Education Direct Stafford Loans, you should probably go for them first before expending any of the 529. They come with attractive fixed interest rates. Also, you can’t opt for them retroactively should you run out of funds in your child’s second, third or fourth year of school. The 529 money, however, will wait until you need it.

It’s also a good idea to research how the American Opportunity Tax Credit would best complement your 529 savings account. You can’t use two tax breaks concurrently, so make sure to max out both at separate times if possible.

529 leftovers can still benefit your family

When 529 savings remain after your child completes an undergrad degree, there are a few options that will still allow you to avoid high tax rates on the money you’ve contributed over the years. Your child can withdraw the money shortly after graduation, for example. Sure, they’ll pay tax, but they’ll still be in a comparatively low-income tax bracket.

There’s another reason not to opt for a school with the most expensive tuition, room, and board you could afford using the whole 529. If you choose a less expensive college and don’t spend all the 529 money during undergraduate school, your child can still use it for grad school expenses. Your family can also name a fresh beneficiary who hasn’t finished school for any unused funds.