Between stock market upheaval, campus closings and major regulatory and tax changes, the COVID-19 pandemic has inserted a great deal of complexity into education planning. If you’re currently paying for college or repaying a student loan, the following Q&A addresses three education financing changes you should be aware of.
“I made a withdrawal from my 529 College Savings Plan to pay for room and board, which the school refunded when they closed the campus. What should I do with the refund?”
Withdrawals from a 529 College Savings Plan are tax-free when used for qualified higher education expenses. While that was certainly the intention when you originally made the withdrawal, the portion that was refunded would now be considered a nonqualified distribution, which could result in taxes and penalties. Fortunately, you and your student have some options:
- Is the student attending classes virtually? If so, you can apply the reimbursed room and board toward the student’s current housing costs, such as off-campus rent or living at home. This option applies so long as the student is considered at least a half-time student. (Your institution can tell you how many academic credits are required for a student to attain half-time status.)
- Are there other qualified expenses for which the funds can be used? You can apply the money toward other qualified education costs for the remainder of the calendar year.
- If neither of these options applies to you, you can also recontribute the refunded amount back into your 529 plan – but you have to act fast. You have 60 days from the date you received your room and board refund to avoid taxes and penalties on the withdrawal. Your specific 529 program will have more details.
“Is it true I no longer have to make payments on my student loans?”
It depends on the loan. A provision in March’s coronavirus relief bill automatically suspended federal student loan payments for six months, retroactive to March 13, without incurring any new interest. This option, called forbearance, will run through September 30th. Note that forbearance is not forgiveness: Your loan balance on March 13 will be your loan balance on September 30, assuming no other payments are made. Here are other things you should consider:
- Automatic forbearance only applies to federal loans through the U.S. Department of Education, including Federal Direct Stafford Loans, Federal Direct Grad PLUS Loans, Federal Direct Parent PLUS Loans and Federal Direct Consolidation Loans. To determine if your loan is in automatic forbearance, log in to studentaid.gov with your FSA ID.
- While some Federal Family Education Loan Program and Perkins loans were automatically placed in forbearance, not all of them were. The coronavirus relief bill does not apply to FFEL Program loans owned by commercial lenders or Perkins loans held by academic institutions. If you have one of these loans or a private loan, contact your loan provider – many have chosen to follow the government’s lead and suspend payments.
- Some students who qualify for automatic forbearance are best served by not making these payments and maintaining their current financial flexibility. However, any payments you do make during forbearance will be applied entirely to principal, which can make a meaningful difference in your loan balance going forward.
- Be wary of anyone offering to suspend your payments for a fee. The forbearance provided by the coronavirus relief bill is automatic, requiring no action on your part. Anyone offering to do this for you in exchange for money is running a scam and should be reported to the FTC’s complaint line.
“With all the volatility in the market, should I continue contributing to my 529 savings fund?”
Having experienced the dramatic swoons and rebounds over the past several weeks, it’s understandable that many 529 plan owners are unsure if they should keep contributing to their plan or want to reconsider the plan’s investments.
- While we’re living through a very unpredictable time, be sure to consider the financial benefits of your 529 plan before making changes to your contributions. 529s offer tax advantages that are hard to match: Your investments grow tax-deferred, qualified withdrawals are tax-free and you might receive state tax benefits, depending on where you live. Also, if you have an automatic contribution plan, you’re already benefiting from dollar-cost averaging.* With dollar-cost averaging, an investor making regular automatic contributions will purchase fewer shares per dollar invested when the market rises but more shares per dollar when the markets are down. Your Baird Financial Advisor can discuss with you how your 529 fits with your time horizon and education planning goals.
- If you are thinking of making a change to your plan, you have options there too. 529 College Savings Plans offer many investment options, including age-based options, static asset allocations and individual funds. Plan participants are allowed to make two investment changes per calendar year tax- and penalty-free, and if you are not satisfied with your current 529 plan, you can roll it into another 529 plan once every 12 months, also tax- and penalty-free. Again, your Baird Financial Advisor can work with you to make sure you’re getting the most out of your plan.
One final piece of advice: While the federal income tax-filing deadline was postponed to July 15, not every state followed the federal deadline. That’s true for state 529s as well, as each state’s 529 contribution benefit and deadline will vary and might not coincide with the federal income tax filing deadline. The Gervais Group can help you sort through all your education financing options and make sure you’re making the best decisions for your situation.
*Dollar-cost averaging does not ensure a profit and does not protect against a loss in declining markets. You should consider your financial ability to continue your purchases through periods of low-price levels.
Investors should consider the investment objectives, risks, charges and expenses associated with a 529 Plan before investing. This and other information are available in a Plan’s official statement. The official statement should be read carefully before investing.
Baird: https://bairdwealth.com/insights/QA-on-Education-Planning-During-COVID-19 (5/29/19)