Bill Cass

Keep student debt down with a 529 plan

Bill Cass, 5/29/2014

At a record $1 trillion, outstanding student debt is second only to mortgages as the largest source of household debt, the Fed reported. That trend is likely to continue. With the average cost of a four-year degree from a public university at $30,000, the need to borrow continues to rise.

Of the 37 million Americans with outstanding student loan debt, more than half of the borrowers are age 30 and older. For many, student debt can become particularly challenging as many graduates have other financial goals they want to focus on, such as buying a home or saving for retirement.

Start saving early Families should consider starting to save early for higher education. A 529 plan is one way to save that can offer advantages not available from other savings vehicles. Proceeds from a 529 plan may be used for tuition, fees, room and board, books, and other qualified expenses. Anyone can contribute to the student's account.

There are several tax advantages with a 529 plan including:

  • Account earnings are free of federal income tax
  • A gift tax exclusion allows you to make five years' worth of gifts to a single beneficiary in one year without triggering the federal gift tax
  • In certain cases, contributions to the account can be used to decrease your taxable estate
  • In some states, there are tax deductions or credits for making 529 contributions

Set goals before deciding to borrow Before families consider taking out loans, it's a good exercise to calculate what is needed to fund a college education. Putnam's College Savings Calculator allows you to access tuition costs for specific schools and determine if your savings are on track.

Even with planning, there may be a need to borrow. If your student begins to accumulate debt and graduates with a significant number of loans to repay, a financial advisor can help with strategies to manage the situation. Also, the Institute for College Access & Success published "Top 10 Student Loan Tips for Recent Graduates," in order to help graduates tackle the challenges of debt.