Answers to your college savings questions
August 29, 2013
Vanguard college savings experts Michael Corr and Kara Brigandi recently spent their lunch hour answering questions on Vanguard's Facebook page. Here are edited highlights of their conversation:
How much will we need for two kids to go to private colleges? How much should we save and how much should we borrow?
Kara Brigandi: The amount you need to save for any college, whether it's private or public, depends on the tuition costs and the scholarship/financial aid package your child might receive. That being said, the more you save the better. The great thing about 529 college savings plans is that anyone in your family—even you—can use any proceeds in the account for higher education. For a better idea of how much you should aim to save, check out our calculator, or use our College Cost Projector to estimate what education costs might be in the future. Good luck!
Related: College debt—how much is too much?
Is it possible to save too much in a 529 account?
Michael Corr: There are limits to how much you can save, but the limits are different for each state's plan. Depending on the state, you can contribute until your beneficiary's total assets reach from $200,000 to $300,000 or more. (Contribution limits are typically found on a plan's website or in the program description.) Once you've reached your plan's limit, your account can continue to accrue earnings but you can't make any more contributions. If you don't use all the money in your account or if your child decides not to go to college, you can transfer it to another family member of the original beneficiary without adverse tax consequences.
Related: Compare 529 plans
Doesn't a 529 hurt your child's eligibility for federal student aid and loans?
Michael Corr: Eligibility for financial aid depends on various factors, including whether a student is dependent on his or her parents and whether the assets are determined to be owned by the parent or the student. Regardless, in general, the more money saved, the less money that will need to be borrowed. 529 plans offer one of the best opportunities for savings due to their tax benefits and their simplicity with regard to investment options.
Related: Compare your college savings options
Do I need to set up a 529 for each child? Or can multiple children use the same account?
Kara Brigandi: Even though a 529 plan allows you to transfer savings between siblings, you'll want to set up a separate account for each child. There are a few reasons why. First, you may want to make different investment choices, depending on your children's ages. Also, the distributions going to the higher education institution need to come from the account of the child attending the school.
Related: Learn more about 529 plans
Does it make sense to withdraw less (even nothing) from a 529 in the early years of college in order to get a few more years of compounding, even if it means taking loans?
Michael Corr: You make a good point. If you know you're going to pay out of pocket, it may be worth delaying the 529 withdrawal to allow your contributions to continue to grow tax-free. There are other factors to consider as well. Consult your personal tax advisor to determine what makes sense for you.
Years ago we set up a prepaid account in our state. We have three years left before college begins. Should we open a 529 or is it too late?
Kara Brigandi: Congratulations on thinking ahead and setting up a prepaid plan. Yes, it can make sense to also open a 529 account. It's never too late to save for college, whether it's in a 529 plan or other type of account. Some things to consider when you're opening a 529: what type of state tax benefits you might get, what fees or other fund costs there are, and what investment choices are in the plan.
- All investing is subject to risk, including the possible loss of the money you invest.
- Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.
- For more information about The Vanguard 529 College Savings Plan, call 866-734-4533 or obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor and Underwriter.
- For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.