MONEY College

4 Traps That Keep You From Maximizing Your 529 College Savings Plan

563963169
H. Armstrong Roberts—Getty Images

Be careful how and when you withdraw money from your 529 in order to get the biggest tax benefits.

Putting money into a 529 college savings plan is relatively easy. Getting it out can be tricky.

This may come as a surprise to the families who have piled money into accounts, hoping to reap tax and financial aid benefits.

“People get tripped up and don’t realize it until it’s too late,” said consultant Deborah Fox of Fox College Funding in San Diego.

Check out the new MONEY College Planner

Assets in the plans topped $224 billion at the end of 2014, according to research firm Strategic Insight, up from about $13 billion in 2001.

Here are four traps that can keep you from getting the most out of your account:

Competing Tax Benefits

Money in a 529 account grows tax-free if the proceeds are used for qualified educational expenses. But there are complications.

The biggest trap may be the rule against double dipping. You cannot use tax-free 529 money to pay for expenses that you use to claim tax credits, including the American Opportunity Credit and the Lifetime Learning Credit. Conversely, you cannot get the tuition and fees deduction on expenses you have paid with tax-free 529 money.

People often do not discover that they have incurred an unnecessary tax bill until they prepare their return, said Joseph Hurley, a certified public accountant and founder of the SavingForCollege site.

At that point, if you want the credits, which are typically more valuable than the tax savings from a 529 distribution, then you have to pay taxes (but not penalties) on at least part of the money you withdrew from the plan in the previous tax year.

Grandparent Help

Accounts owned by grandparents are not included in initial financial aid calculations. Sounds like a good thing, right?

Except that any withdrawals count heavily against the grandchild in the next year’s aid calculations. Distributions from grandparent-owned accounts are considered untaxed income to the student, which means he or she could lose a big chunk of grants or scholarships: up to half the amount distributed.

By contrast, accounts owned by parents or students are considered parental assets. That means up to 5.64% of the account balance is included in financial aid calculations, but distributions are not.

A few workarounds exist, such as transferring the account to a parent if the plan allows or waiting to withdraw the money until Jan. 1 of the student’s junior year. At that point, any withdrawals will not affect aid eligibility, which is based on the previous year’s financial details.

Another solution could be gifting any money withdrawn to the parents. The Internal Revenue Service has not specifically blessed the move, Hurley said, but he does not see much risk from it if the account beneficiary incurs sufficient qualified expenses.

The Divorce Trap

A similar problem awaits divorced parents. Financial aid calculations typically are based on the income and assets of the parent with whom the child lives most of the time.

Non-custodial parent accounts typically are excluded from the first financial aid calculations, but distributions count as the student’s income in later aid determinations.

A non-custodial parent can try the same workarounds as grandparents but may be leery about handing money to the ex rather than to the student or the school.

Timing Is Everything

You only get the tax break on 529 withdrawals if they match the amount of “qualified education expenses” in the same year.

If you withdraw money in December and pay the tuition bill in January, you may not have enough qualified expenses, and the excess distribution could be taxed and penalized.

Tax-free assistance like scholarships must be deducted from the expenses incurred.

What was paid for also matters. Tuition and books are fine, but computers do not count unless the school requires them.

Other costs not covered? Transportation and repayment of student loans.

Bottom line: Do not just call the 529 plan and tell them to send money to the school.

“It’s very important to have a 529 withdrawal plan before you withdraw any money,” Fox said. “You need to know all the ins and outs and how they will affect you.”

Check out MONEY’s 2015-16 Best Colleges rankings

MONEY College tip of the day

2 Ways College Can Cut Your Car Insurance Bill

parents helping daughter pack for college
Alamy

Another good reason to go away to school.

If you’re the parent of a student who’s attending college at least 100 miles from home, and who won’t be bringing a car along, call your insurance agent pronto. You may be due for a break on your auto policy.

Most insurers will either recalculate your premiums or give you a discount, says Jeanne Salvatore, chief communications officer at the Insurance Information Institute, an industry organization. Allstate, for example, says the discount can be as high as 30%.

Even if your student will be taking a car to college, you might still save, depending on where that college is. Insurers look at where a car “resides” in determining premiums, Salvatore notes.

So, if the car will be moving from a busy city to a quiet college town, you could see a reduction in your premium.

On the other hand, if the school is in what’s judged to be a riskier area, your premium could rise.

Either way, you’ll want to contact your insurance agent, just to make sure your car and student are properly covered.

For more useful tools and tips for college-bound students and their parents, check out the new MONEY College Planner. And if you’re still in the process of picking the right college, see our Find Your Fit tool.

MONEY College

Hillary Clinton Promises More Aid for College Students With Kids

Hillary Clinton Campaigns In New Hampshire
Darren McCollester—Getty Images Hillary Clinton hosts a grassroots organizing event at McIntyre Ski Area August 10, 2015 in Manchester, New Hampshire.

The Democratic presidential candidate promised to dramatically increase funding for an existing child care program and create a new scholarship for students with children.

Democratic presidential candidate Hillary Clinton said on Friday that if elected she would dramatically expand a program that provides child care for college students with children, and to create a scholarship program for student parents.

Clinton announced the plan at a town hall meeting in Dubuque, Iowa, as she continued to highlight her platform to make college more affordable.

The proposal would increase funding from $15 million to $250 million for a federal program that provides matching funds to states and institutions for on-campus child care. Her campaign estimates it would create 250,000 additional spaces for the children of students.

Check out the new MONEY College Planner

Clinton also said she would create a “SPARK College Scholarship” to help parents pay for their own higher education.

It would provide up to $1,500 per year to as many as one million student parents who achieve minimum grade levels and meet other requirements, the campaign said.

“Paying for college is driving more and more people farther from their dreams,” Clinton said in Dubuque.

Earlier this week, Clinton announced a plan to increase access to tuition grants, allow graduates to refinance existing loans at lower interest rates, streamline income-based repayment plans and police predatory lenders.

The program would cost an estimated $350 billion over 10 years and would be paid for by capping itemized tax deductions for the wealthy.

Clinton, the front-runner in the race to become the Democratic nominee for the November 2016 election, on Friday won the endorsement of the International Association of Machinists and Aerospace Workers. It was the second national union to give her the stamp of approval.

Check out MONEY’s 2015-16 Best Colleges rankings

TIME Basketball

LeBron James Might Pay for 2,300 Kids to Go to College

USA Basketball Men's National Team Training Camp
Ethan Miller—Getty Images LeBron James #27 of the 2015 USA Basketball Men's National Team attends a practice session at the Mendenhall Center on August 12, 2015 in Las Vegas, Nevada.

Eligible students would attend the University of Akron

Students in the LeBron James Family Foundation program could see their college tuition paid for by the basketball star.

James has announced his foundation will provide full scholarships for all qualifying students in his mentoring program to attend the University of Akron, where a year’s tuition is about $9,500. There are currently 1,000 students enrolled in the program, and hundreds more could join before the offer runs out. The first class eligible for a scholarship will graduate in 2021, but the plan extends to those graduating high school in 2029, which could bring the total as high as 2,300 scholarships, the Akron Beacon Journal reports.

The initiative is in partnership with JP Morgan Chase, which will provide technical assistance in determining who is eligible for the scholarships; the company has pledged 4,000 man hours, according to Cleveland.com.

“It means so much because, as a kid growing up in the inner city and a lot of African-American kids, you don’t really think past high school,” James said. “You don’t really know your future.”

[Cleveland.com]

MONEY Banking

7 Things College Students Need to Know About Picking a Bank Account

college students with backpacks at atm machines
Norma Jean Gargasz—Alamy

Understand a bank's fees, ATM network, account options, and more.

College season is nigh, which means that millions of freshmen from around the country will leave the snug confines of their childhood home for a room with a view of the quad.

For many 18-year-olds, this newfound freedom will also bring the first taste of financial independence. While some may already have savings accounts in place, most will have to set up new accounts as they leave home and manage day-to-day cash flow for the first time.

Parents may worry their children will stumble. After all, even adults make unnecessary banking errors all the time. But plenty of mistakes can be avoided with a little bit of planning and foresight.

College freshmen should consider the following seven rules before starting a relationship with a financial institution.

1. Focus on Free

Almost by definition, students don’t have a lot of money—so they need to be especially conscious of fees that can eat away at what little funds they do have. MyBankTracker.com co-founder Alex Matjanec recommends looking for an account that has the following features: no monthly maintenance fee, negligible or no minimum balance requirement, free debit card, free ATM usage at your bank, free online banking, free check writing, and no money transfer fees. (One place to start looking is Ally, MONEY’s 2014 pick for Best Online Bank.)

Check out the new MONEY College Planner

2. Mix It Up

Your checking and savings account don’t have to be at the same bank, especially if you can receive a higher APY on a savings account elsewhere. You may have to go online to find the best deals, something that shouldn’t concern most millennials who were raised on the Internet.

“Online savings accounts offer higher yields and lower minimum deposits while maintaining access to the money and the safety of federal deposit insurance,” says Bankrate.com’s chief analyst Greg McBride. (For savings accounts, MONEY recommends the Barclays Dream Account.)

Make sure you’re comfortable transferring money electronically, however, otherwise you’ll have to mail in any deposits. If your part-time job involves a lot of cash, for instance, you might be better off at a bank with brick-and-mortar locations.

3. Ditch the School Pride

You may be tempted to just go with the first bank you see near campus, or the one your university seems to endorse. Not so fast, though.

“Don’t pick a bank or credit union just because your school has a relationship with them,” says NerdWallet.com’s Nico Leyva. “Make the decision after doing the research to determine what is going to suit your needs best.”

4. Weigh ATM Convenience

A checking account is essentially a spot to store short-term cash—so when you need to access that money to buy stuff, you’ll want to avoid ATM fees. You have a few options to consider.

  • Large national banks will probably offer a number of branches and ATMs from which you can access your cash for free. Just make sure that you’re not being hit up for other fees on the account.
  • You can also look to regional or community banks with a strong presence near campus; these may have fewer fees than their too-big-too-fail counterparts. Unless you’re sticking close to home, however, be sure that your parents can transfer money easily into this account without fees.
  • Another option is a credit union. “Many credit unions offer free withdrawals through a shared branching network that includes thousands of locations nationwide,” says Tristram Coffin, CEO of Alternatives Federal Credit Union in Ithaca, N.Y. The Co-Op network, for instance, offers access through 30,000 ATMs from 3,500 credit unions.
  • Online accounts also tend to provide a number of free ATM transactions. But read the fine print; Ally, for instance, recently installed a cap.

5. Use Your Phone to Keep Tabs

Your phone can be a powerful tool for keeping an eye on your balance. “Using technology to monitor your account activity and available balances is a great way to be on guard against fraudulent transactions and also your best strategy to avoid costly overdrafts,” says McBride.

Most bank apps also include other features, like mobile check deposits and real-time alerts that let you know when your account is below a pre-set limit.

6. Beware Overdraft Protection

While the name may sound prudent, overdraft protection is generally something that students want to avoid. Because such services usually bring high fees, you’ll be better off simply sticking to a budget — or accepting the embarrassment that comes with a declined transaction.

“Don’t let anyone persuade you into overdraft protection,” says Money-Rates.com’s personal finance expert Richard Barrington. “Overdraft fees are very expensive, and in particularly college students should learn to do without overdraft protection so they develop responsible banking habits.”

7. Think Ahead

If you’re using a specially designated student account, be aware of any age restrictions. “Many student accounts have age limits, at which point the account converts into a standard checking/savings account with different fee structures,” says Matjanec.

If you’re going to get stuck with an automatic conversion, make sure the standard account doesn’t come with onerous fees, high monthly minimums, or other undesirable traits.

Read next: 3 Secrets to Maximizing Your Credit Card Travel Rewards

MONEY’s 2015-16 Best Colleges rankings

MONEY College tip of the day

Why Savings Bonds Can Be a Smart Way to Pay College Tuition

081415_EM_collegebonds
Getty Images—Getty Images

Hint: It involves the IRS.

Have any old U.S. savings bonds lying around your safe deposit box? If so, you may be able to cash them in, tax-free, to pay college tuition.

As with most things tax-related, there are a few restrictions:

  • You need to have been at least 24 years old when the bonds were issued (which makes this tip more applicable to parents and people returning to college in midlife than to younger students who might own savings bonds).
  • The bonds must be of the Series EE or Series I variety and issued after 1989.
  • The tax exclusion phases out if your modified adjusted gross income is above a certain level, currently $92,200 for singles and $145,750 for joint filers or qualifying widows or widowers.

The IRS explains the details in Publication 550, and you can calculate your exclusion using Form 8815.

Another reason to check your old savings bonds: Series EE or Series I bonds issued more than 30 years ago have stopped earning interest, so it’s time to cash them in anyway.

For more advice on paying for college and to see our latest rankings of “The Best Colleges for Your Money,” visit the new MONEY College Planner.

MONEY College tip of the day

The Big Difference Between Applying for College Early Decision and Early Action

150812_FF_earlydecision
Getty Images—Getty Images

One is legally binding on applicants.

If you’re pretty sure about where you want to go to college, applying for early decision or early action will get you a speedier yea or nay. The specifics can vary somewhat from school to school, but in general:

Early decision (ED) is a legally binding agreement between the student and the college. If an applicant gets in, he or she is committed to go there unless the college’s financial aid package is inadequate.

Early action (EA) gives applicants a faster verdict than the normal admissions process but is not binding on the student.

We’ll explain the two in greater detail and provide some strategic advice for students and parents in a future post. Meanwhile, the College Board advises that, “ED and EA applicants must take the October SAT or SAT Subject Tests in order for these scores to make it to the college in time.”

To learn more about any college you’re considering for ED or EA, and to create a customizable list of colleges based on criteria such as size, selectivity, and affordability, visit the new MONEY College Planner.

MONEY College tip of the day

12 Banned Items to Leave Off Your College Shopping List

150812_FF_CollegeShoppingList
James Woodson—Getty Images

Yankee fans take note.

Before you go back-to-college shopping, check your school’s website to see if it has a list of what to pack and, maybe even more important, what not to. You’ll save money, free up some precious car space, and stay out of trouble—at least on move-in day.

A MONEY survey of more than 50 colleges found that virtually all forbid halogen lamps in student dorm rooms, calling them a potential fire hazard.

Many schools also ban:

  • Multi-head lamps with plastic shades
  • String lights, such as miniature Christmas lights
  • Extension cords
  • Cooking appliances, such as hotplates and toaster ovens
  • Air conditioners or space heaters
  • Electric blankets
  • Candles and incense
  • Waterbeds
  • Darts and dartboards
  • Firearms or any other weapons, including paintball guns
  • Pets (some colleges make an exception for goldfish, but check on the allowable tank size, which varies widely).

Other schools have additional, and sometimes unusual, items on their leave-it-home lists. For example, Olin College of Engineering in Needham, Mass., a suburb of Boston, recommends not bringing “any paraphernalia supporting the New York Yankees.” (Sounds wise to us…)

For more useful tools and tips for college-bound students and their parents, check out the new Money College Planner. And if you’re still in the process of picking a college rather than packing for one, see our Find Your Fit tool.

MONEY

Paying a Public College President Big Bucks Doesn’t Always Pay Off for Students

The highest paid public college presidents and how their schools stack up in terms of value.

As concerns over the cost of college continue to grow, so has interest in how the schools spend their money—including the often generous salaries of campus administrators.

For the 2013-2014 year, the median salary for public college presidents who served a full year was $428,250, up from $375,000 five years previously, according to the Chronicle of Higher Education.

But those base salaries are often just a portion of their total compensation, thanks to bonuses, deferred pay, and perks such as homes and cars. Last year, half of university presidents enjoyed free housing and more than 70% received some type of car allowance, according to the College and University Professional Association for Human Resources.

The highest paid administrators don’t always work at the biggest, or even the wealthiest, universities. There also appears to be little relationship between the value a college provides to its students and the largesse it provides to its leaders. For example, of the 10 public colleges MONEY ranks best for value, only one (Texas A&M) is represented on the list of the 10 highest paid college presidents. The rest were further down in our rankings, in some cases much further.

Here’s a peek inside the pay envelopes of the best-paid public college presidents, from the Chronicle of Higher Education data, along with how their schools stacked up in MONEY’s latest Best Colleges rankings. The most recent salary figures are from 2013-14, so some of these individuals are no longer in the same role.

Check out the new MONEY College Planner

  • 10. University of South Florida

    University of South Florida president Judy Genshaft
    Daniel Wallace—AP

    Judy L. Genshaft, president of University of South Florida

    Total compensation: $719,675

    Base salary: $719,675

    Money Best Colleges rank: 566

    Note: Genshaft is also president of the University of South Florida system, which includes two regional campuses.

  • 9. Rutgers University at New Brunswick

    Robert Barchi
    Frank Franklin II—AP

    Robert L. Barchi, president of Rutgers University

    Total compensation: $739,624

    Base salary: $649,624

    Money Best Colleges rank: 119

    Note: In addition to the main campus in New Brunswick, Barchi also oversees campuses in Camden and Newark.

  • 8. Virginia Tech

    Charles Steger
    Matt Gentry—AP

    Charles W. Steger, president of Virginia Tech

    Total compensation: $745,195

    Base salary: $466,191

    Money’s Best Colleges rank: 48

  • 7. University of Delaware

    Patrick Harker
    Saquan Stimpson—AP

    Patrick T. Harker, president of the University of Delaware

    Total compensation: $800,156

    Base salary: $682,502

    Money Best Colleges rank: 65

  • 6. University of Houston

    Renu Khator
    Pat Sullivan—AP

    Renu Khator, president of University of Houston

    Total compensation: $850,000

    Base salary: $700,000

    Money Best Colleges rank: 473

    Note: Khator is also chancellor of the University of Houston system, which has four universities.

  • 5. University of Illinois at Chicago

    Dr. Paula Allen-Meares
    M. Spencer Green—AP

    Paula Allen-Meares, former chancellor of University of Illinois at Chicago

    Total compensation: $872,458

    Base salary: $422,458

    Money Best Colleges rank: 154

  • 4. Washington State University

    Elson Floyd
    David Smith—AP

    Elson S. Floyd, former president of Washington State University (now deceased)

    Total compensation: $877,250

    Base salary: $725,000

    Money Best Colleges rank: 96

  • 3. Ohio State University

    Joseph Alutto
    Adam Cairns—AP

    Joseph A. Alutto, former interim president at Ohio State University

    Total compensation: $996,169

    Base salary: $634,572

    Money Best Colleges rank: 134

  • 2. Texas A&M University

    R. Bowen Loftin
    Aaron M. Sprecher—AP

    R. Bowen Loftin, former president of Texas A&M University

    Total compensation: $1,128,957

    Base salary: $155,525

    Money Best Colleges rank: 20

    Note: Loftin’s total compensation is for a partial year as president of Texas A&M. He left mid-year for position at a different university.

  • 1. Pennsylvania State University

    Rodney Erickson
    Abby Drey—AP

    Rodney A. Erickson, former president of Pennsylvania State University

    Total compensation: $1,494,603

    Base salary: $633,336

    Money Best Colleges rank: 157

    Note: The president of Penn State’s flagship campus also has some administrative responsibilities for the other 23 branch campuses that make up the university, though each campus has its own president or chancellor.

MONEY College

7 Things You Need To Know About Hillary Clinton’s College Plan

Under the new proposal, students could attend in-state colleges without borrowing for tuition and change how they repay other loans.

With anxiety over college costs and student debt running high, Democratic presidential candidate Hillary Clinton unveiled a wide-ranging plan to make higher education more affordable at a campaign event today.

The proposal, estimated to cost $350 billion over 10 years, would rely on a federal-state partnership to reduce the price of a degree at public colleges, make a variety of changes to student loans, and provide grants to colleges that are improving their graduation rates and other student outcomes.

Clinton’s plan—like those of her Democratic opponents—is already drawing criticism from some Republicans. And her strategy to pay for it by eliminating tax deductions for wealthier families is sure to be a hard sell to congressional Republicans. But should the ideas be put into action, here’s what they’d mean for you:

1. Attending an In-state College Would Be Cheaper

The core of Clinton’s plan would allow students to earn a four-year degree from state colleges and universities without taking out loans to pay for tuition. She’d do that by providing federal grants to states, as long as the states up their investment in higher education. As tuition at public colleges has climbed rapidly in the past several years, state spending per student has fallen by almost a quarter, according the the State Higher Education Executive Officers Association. Families are now responsible for roughly half the cost of college. This federal-state partnership would account for more than half the cost of Clinton’s plan, about $175 billion.

2. But it Wouldn’t Be Free

Unlike suggestions by progressive activists to create a completely free college education, Clinton’s plan would require families to make a “realistic” contribution toward tuition costs. Along with money from personal savings and borrowing, the estimated family contribution would include student earnings from 10 hours of work a week. Also, states wouldn’t be able to use money from Pell Grants in designing their loan-free tuition programs, so the federal grants for low- and middle-income students could still be used to help pay for living costs, such as room and board.

3. Applying for Aid Would Be Simpler

Calls for simplifying the 108-question Free Application for Federal Student Aid (FAFSA) have come from lawmakers on both sides of the aisle and from college access advocates who say the complexity of applying for aid keeps many low-income students from attending college. Clinton, too, backs simplifying the form, though she doesn’t offer any details aside from letting families know earlier if they qualify for Pell Grants.

4. So Would Repaying Loans

Clinton’s plan also calls for streamlining the repayment of loans and creating a Borrower Bill of Rights. Today’s four, income-based repayment programs would be consolidated into a single plan with simple rules. All borrowers could enroll in a program that caps their loan payments at 10% of income and forgives any outstanding debt after 20 years of payments.

5. Current Borrowers Could Refinance at Favorable Rates

Graduates who earn a bachelor’s degree now leave college with just under $30,000 in debt, on average. By allowing most current borrowers to refinance their loans at today’s interest rates (4.29% for undergraduate student loans), Clinton says 25 million students would save an average of $2,000 over the life of their loans.

6. Future Borrowers Would See Lower Ones

For future borrowers, interest rates would be reduced “significantly,” cutting the profits the federal government makes on student loans, a money source that’s been criticized by some politicians, most notably Sen. Elizabeth Warren (D-Mass.).

Check out the new MONEY College Planner

7. Colleges Would Be Held to Higher Standards

Clinton wants colleges to be more transparent about student outcomes such as graduation rates, likely earnings, and debt load so families can make better-informed decisions when choosing a school. That argument is similar to one President Obama made in pushing for his ratings plan, which has since been scaled back after repeated criticism from some in higher education.

Clinton’s New College Compact Plan would give additional grants to colleges that further reduce costs, serve a significant minority or low-income population, or invest in student support services that lead to higher graduation rates. (Currently, four in 10 students don’t graduate within six years.)

On the other hand, Clinton would penalize colleges whose graduates aren’t able to repay their loans. Her campaign doesn’t offer specifics on requiring colleges to have “skin in the game,” but Clinton does say she’ll support bipartisan efforts to do so, such as a recently introduced bill that would require colleges to pay back to the government a share of the loans that their graduates aren’t repaying.

The Democratic frontrunner, Clinton unveiled her plan in New Hampshire, where undergraduates have some highest average student loan debt in the nation, and where she faces considerable competition from Vermont Sen. Bernie Sanders, an independent who’s running for the Democratic nomination. Sanders was one of the first candidates to announce a debt-free college plan. His plan calls for spending roughly $70 billion a year (two-thirds of that would come from the federal government) to make public colleges tuition-free.

The other major Democratic candidate, former Maryland Gov. Martin O’Malley, also has introduced a plan that would give students access to a debt-free degree from in-state colleges or universities, though his proposal doesn’t have a price tag attached. O’Malley also wants to allow students to refinance their loans and to automatically enroll all borrowers in income-based repayment plans.

Check out MONEY’s 2015-16 Best Colleges rankings

Your browser is out of date. Please update your browser at http://update.microsoft.com