Personal Finance

College tuition bills are coming. Here are 3 ways to navigate them and give your 529 balance time to recover

Key Points
  • The latest stock market decline may be troublesome if you have a smaller 529 plan balance and need to cover college tuition this fall. 
  • However, you can pay out of pocket and claim other tax credits while waiting for your 529 plan to recover, experts say.
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The latest stock market decline may be troublesome if you're relying on a now-smaller 529 plan balance to cover college tuition this fall. But crafting a multi-year tax strategy may be one way to lighten the burden, experts say.

The major stock market indexes have seen double-digit losses in 2022, with the S&P 500 Index and Nasdaq Composite dropping by 23% and 34%, from record highs in January and November, respectively. 

The average 529 account value was $30,287 in 2021, according to the College Savings Plans Network, and newly smaller balances may require some extra planning to cover tuition payments this academic year.   

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"The more time you give yourself, the more flexible you can be," said certified financial planner Dennis Nolte, vice president at Seacoast Bank in Winter Park, Florida.

Before shelling out for tuition, you'll want to consider 529 plan balances, tax credits and other strategies. Here are three strategies parents with college-bound students might consider.

Claim tax breaks that can't combine with a 529

529 college savings plans are a popular way to save for education since the earnings grow tax-free for qualified expenses, such as tuition, fees, books, room and board, computers and more.

However, if your balance is down, you may prefer to use other funds for fall tuition while waiting for the stock market to recover, said Byrke Sestok, a CFP and co-owner of Rightirement Wealth Partners in Harrison, New York. 

How to use a 529 plan to save for college
How to use a 529 plan to save for college

The strategy may allow you to score a tax break for 2022, and preserve your 529 plan funds to use in 2023 or later, he explained. 

By paying out of pocket, you may be eligible for the American Opportunity Tax Credit or the Lifetime Learning Credit, both subject to income limits. You can't claim either break on expenses paid with money from your 529 plan. 

"So few families have a full four years of college education money in the 529 plan anyway," Sestok said, explaining how clients often wait to use their funds for the second two years. 

The bigger write-off, the American Opportunity Tax Credit, is 100% of the first $2,000 and 25% of the next $2,000 per student. To claim the full $2,500 credit, you need to pay $4,000 of expenses out of pocket. You can receive the credit up to four tax years per student.   

While the American Opportunity Tax Credit only applies to the first four years of higher education, the Lifetime Learning Credit may pay for undergraduate, graduate or professional degrees. There's a comparison of the two here.

Transfer the 529 balance to another beneficiary

If your child is graduating this year, it may still be worth leaving that 529 untapped so it can recover. With the flexibility to change 529 beneficiaries, families may opt to use their savings for another child or family member instead.

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Tap 529s for your child that other relatives own

If grandparents have set up a 529 plan for a grandchild, families may want to use that money before tapping their own. That negates any risk the owner will decide to use the money elsewhere, Nolte said.

"You want assets you can control, and you can't control your parents," he said.

There is currently one downside of using non-parental 529 money, however. The withdrawals typically count as the student's income on next year's Free Application for Federal Student Aid, or FAFSA, which can negatively affect financial aid. 

Worth factoring into your decision: Starting in the 2024-2025 school year, students will no longer be penalized on the FAFSA for withdrawals from grandparent-owned 529 accounts. If you have other ways to cover costs, allowing the 529 plan to keep growing may pay off.