Handling the 'problem' of too much in college savings

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Paying for college is a top financial concern for many families. So what happens when you have too much set aside?

In the scheme of things, it's a nice problem to have — and judging by 529 plan balances alone, a situation many families aren't likely to encounter. Although parents have saved more for college, most don't even have enough set aside to cover a year of tuition at an in-state public college.

But other factors can render even smaller balances too much: generous scholarships, an early graduation, or picking a cheaper college, just to name a few.

"It's not the norm, but we do see it," said Kevin Meehan, regional president of Wealth Enhancement Group, based in Itasca, Illinois. One of Meehan's clients recently found himself with a surplus after three of his four kids secured full-ride athletic scholarships.

To determine the best use of extra savings in a college account, first consider your child's future education needs. Those funds can be used to make a dent in graduate and professional school tuition and other qualified expenses, he said.

Then think about whether the funds could be used for other family members — to cover a younger child's college costs, for example, said certified financial planner Erin Durkin, director of client planning for EP Wealth Advisors in Torrance, California. Keep in mind that you can change the beneficiary to yourself, too.

"I've asked parents, would you ever consider going back to school?" said Durkin. One of her clients recently decided to use 529 leftovers after retirement to take classes for a second career.

Occasionally, families look further afield, choosing to change the 529 beneficiary to a niece or nephew, son- or daughter-in-law or cousin, said Meehan. (All of those qualify under IRS guidelines.)

You could even look really long term and let the funds continue growing, with the intent of eventually changing the beneficiary from your child to a grandchild, said David Levy, editor of

If you come up empty on other education uses for the money, you could simply withdraw the funds to use as you choose, Durkin said.

"It's still your money," she said. "You can take it back."

Two of her clients recently started looking into doing just that, after their older son decided to attend an in-state school instead of what had been his first choice private college. That dropped the family's expected annual cost from $60,000 to just $10,000.

"He's going to have a lot of money left over," Durkin said, and his parents told him he could have the difference.

Withdrawals that won't be used for qualified education expenses do come with a few strings. Generally, you'll owe federal taxes and a 10 percent penalty on the earnings and you may owe state taxes if you had claimed a deduction or credit for those contributions, Levy said.

If your child receives a scholarship, you can withdraw funds equal to that without paying a penalty, he said. But you'll still owe taxes on the earnings.