Hey everyone, it’s Finance Fridays again. I was going to write about “What have you done for yourself lately” but instead I decided to save that for another time. Today we’re going to talk about “529s and The SECURE Act“.

529s and The SECURE Act

Well, I’ve talked about 529s quite a bit, you can just search 529s on my site or you can just go here and find the list.

Just to catch you guys up, in its current state, you aren’t able to pay for student loans using a 529. I kind of knew this, but in general, it didn’t make sense to ever do that.

Why would you want to take on student loans, then save money with a 529 to pay them later?

The interest on your loans would accrue — of course any interest on your 529s would also accrue as well. I guess, in a min/max world, if your student loans were of a low enough interest rate, say 1-2%, and you were confident in the index funds your 529s were in — then it might make sense in that case. However, that seems like a big risk.

Nonetheless, the SECURE Act stands for:

THE SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT OF 2019

It will make some slight changes to how 529s are handled. As I’ve talked about before, you are now able to use up to $10000 a year from your 529 to pay for private school. This will be expanded to allow its use with student loan repayment and home schooling. The exact wording is here:

Section 302. Expansion of Section 529 Plans
The legislation expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.

At first glance, this probably does not change too many things for those of us who are putting money into 529s. However, if these changes go through, it may change how you utilize your 529s in the future.

How so?

Well, one of my friends expressed concern about funding 529s for his kids and them not having loans for college. They won’t have any “skin in the game” if all their schooling is already prepaid for — and it is known that the money is there. The concern is that there might be a lack of motivation to do well in college and/or cause poor preparation for the future in terms of responsibility.

I understand that.

So let’s discuss it a bit. How can your kids have skin in the game if it’s already taken care of for them? Well, the first thing to consider is — how much have you saved for them?

If your 529 is well-funded (or over-funded), such that you can pay for all of their undergraduate with just the 529, then there is really no benefit to saving it. However, what you could do is you could say that only half of the 529 is available — the other half is designated for any post-graduate education, like a masters degree or professional school. Is this efficient? Not necessarily. However, it does provide your child with “skin in the game” from day 1. Meaning they would take out less loans — but would still have to take out loans in their own name. Then if they opted not to go to post-grad education, then they could utilize the remainder of their 529s to pay back their loans.

However, if your plan is similar to mine — meaning you don’t think you’ll cover all of college expenses — then you could do something similar if you plan ahead of time. For example, you would plan to pay for some % of the expenses (like 50%) per semester with the 529. Then the remainder would be covered by your child through their own loans. Then after finishing college, whatever is left in the 529 can be applied to their student loans (at $10k/year).

Wait a second… wouldn’t it be better to use up all the 529 up front?

Maybe.

If you burn your 529 completely in the first 2 years rather than spreading them out then take out loans for the final 2 years — you are correct, your student loans would accrue 2 years less of interest. However, then there is no “skin in the game”.

Additionally, for the final 2 years there will likely be a mix of both federal/private loans to pay for the full cost. These private loans will likely carry higher interest rates. Whereas if you are able to spread out the 529 over the 4 years, you could potentially have a majority of federal loans, or maybe only federal loans— which could be lower interest.

In other words, there are a lot of variables in place.

There is something to be said for “not having to worry” about money and just concentrating on enjoying college and doing well. I worked 25 hours a week in college and in hindsight, that wasn’t a good idea. However, there is also something to be said for having “skin in the game”. Getting that notice every month that you owe X amount of money is motivation to do well and get out of college in a reasonable time frame.

I see.

I can see both sides of the argument. Either way, I think that allowing us to use 529s for student loans allows for increased flexibility.

There are other instances where this is helpful. For example, let’s say your oldest daughter wasn’t able to secure a scholarship at their dream school but really wanted to go. Their 529 wasn’t going able to cover all of it and so they still had some student loan debt upon graduating. However, your youngest son decided to stay close to home and got a full scholarship. Your son could then opt to use his 529 to help pay off his sister’s loan.

I’m not quite sure how this would work for homeschooling. I assume if you homeschool your children you would be able to use your 529 to pay for any materials you used for education. However, I am unsure if this would also apply to field trips or other enrichment.

When does it go into effect?

Currently, this has already gone through the House and is currently in the Senate. We’ll see if it makes it through or not. However, there is a lot of other stuff in The SECURE Act unrelated to 529s.

For example,

The SECURE Act would change required minimum distributions (RMDs) to begin at 72, instead of 70½.

I’m a fan of increasing the age of RMDs. Once again, it provides more flexibility to save for longer. No need to withdraw if I don’t need to… right?

You can read more here:

10 Ways the SECURE Act Could Impact Your Retirement Savings – Kiplinger

TL;DR

Currently 529s can not be used to pay for student loans.

The SECURE Act, if it passes, will expand 529s to be able to use toward student loans.

While there is something to be said for “not worrying about paying” there is also something to be said for “skin in the game”.

This increased flexibility will help I think.

The SECURE Act has other potential retirement changes as well, see above.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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