Highlighting the importance of saving for college, even in uncertain times, occupies the thoughts of Linda Lambert, financial capability director for Edvest, Wisconsin’s 529 college savings plan. With stock market volatility caused by high inflation, supply-chain issues, worker shortages, and other factors, there understandably is a great deal of concern among parents and families who want to save for college.
But even when the market is unpredictable and college is already expensive, they also know that it won’t get any less expensive as their children progress toward high school graduation. In this Take Five interview, Lambert discusses the importance of staying the course and touts the tax advantages of doing so through Edvest, which is celebrating its 25th anniversary with a celebration sweepstakes.
Things are getting scary with the economy and the faltering stock markets and record high inflation. Should parents continue to invest in their 529 accounts, or should they sit tight until the market stabilizes?
“I would suggest that just like anything, stay the course. Markets go up and down, traditionally, over the past 90 years. I’d say the hardest thing for anyone, even experienced investors or portfolio managers, is to time the market. And so, I always think it’s a good habit to get into of setting up recurring contributions and by doing that, you actually average out your cost. So, you can see that you can often buy low and then you don’t have to worry about timing when the market is at its lowest because you’re actually averaging the cost that you’re purchasing. It’s hard to predict when it’s the best time to sell and then when it’s the best time to buy, and so if you just stay the course and consistently continue with your planned recurring contributions, you’re better off in the long run.”
You’re basically talking about dollar-cost averaging for the long-run.
“It’s the same process, so if you set up, either through a payroll deduction or you can set it up through your bank or credit union, an automatic electronic payment, there is really no minimum when doing that. Some business might say $5 is the minimum they want set for a payroll deduction, but we don’t have a minimum amount. The idea is set it and forget it, where you’re setting it up, you’re having recurring contributions, and over time the dollars start adding up. It’s the same concept for dollar-cost averaging, which is just a set recurring purchase of an investment, and over the ups and downs of market volatility, you are averaging your costs. So, ideally, you’re buying at some of the lowest prices and those are averaging out over the course of your investment.”
When it comes to fighting inflation, it seems that we have all our eggs in the interest rate basket and that could temper inflation by slowing the economy. What if inflation just continues unabated for a prolonged period of time? Investors haven’t had to deal with this for 40 years.
“That’s a big question. I’m not a financial advisor to advise on that, but the good thing about investing is that most of the investment options within Edvest, or Tomorrow’s Scholar, or [other] college savings plans are diversified. So, they are not all interest rate contingent or based on interest rates. There are stocks, bonds, and fixed income, so there is a variety of diversified underlying investments in the plans.”
Are you worried at all that if the federal government forgives more of this college debt that people will lose inventive to save — thinking the government will just come to my rescue at some point if they choose to borrow more?
“No, because I don’t believe they will fully forgive all loans. There will be contingencies on them. I don’t think there will be a blanket forgiveness. If there is, that might be for those existing student debt holders but not for future ones. So, they are going to go into the future student loans much more carefully and thoughtfully. We even say to individuals, ‘Look at the federal because there are all kinds of student loans and just loans that people take out for school.’ We always say start with the federal student loan programs first.”
And a college education isn’t going to get any less expensive over the next generation.
“No, and we always say, ‘Try to minimize the amount of student debt by setting up a college savings plan as soon as you can. The earlier the better. It’s never too late.’ Again, I always try to encourage people to set it up for a number of reasons. Setting it up with a recurring contribution so that it’s there, you’re paying yourself first, and in volatile market times, it helps to average the cost of your purchase as well.
“There are great benefits in setting up a college savings program. For all Wisconsin residents, there is a tax deduction on the contributions made. Its $3,560 for individuals who are married and filing jointly or half that, $1,780, for joint-filing individual tax returns, and that’s a tax deduction. That comes right of your tax liability.
“In addition to the tax deduction on the contribution, those dollars that grow in the college savings program grow tax-free. So, they are exempt from federal and state taxes, and then once you use those dollars for college or room and board or books or fees, there’s no tax. So, it’s a qualified higher education expense. There is no tax on that, federal or state, so there is a huge tax advantage in saving in a college savings program. I like to say it’s a triple tax advantage.”
Does the same apply for vocational education in the tech colleges?
“Yes, it can be used for four-year private, for public college, or two-year technical colleges. In 2019, under the Secure Act, the federal government expanded the use of what they call qualified higher education expenses, to include the cost of apprenticeships, as well as up to $10,000 to pay back student loan debt. That can be used for anyone in your family, so there is also a lot of flexibility in terms of changing the name of the account, changing the account owner, changing the beneficiary. They are very flexible.
“If you are saving for two children and one child doesn’t go to school, you can combine it or rename that beneficiary at any time, use it for your other children, or use it for yourself, or you can let your child use it for their future children — your grandchildren — as well. It’s pretty flexible in terms of transferring the ownership and the beneficiary name, and like I said, you can now use it for the cost of apprenticeship as well as paying back student loan debt.
“Additionally, it can be used for K–12 tuition. So, if you’re sending a child to a private school, it can be used for that tuition as well.
“Parents don’t have to save everything in order to save at all. So, on our site, there is a gifting option. It’s really easy. We work with a platform where if your child has a birthday or graduation, you can send out a link from the account. You don’t have to send the account number, and it makes it really easy for people to say, instead of giving them a gift, that you can contribute into their college savings program, so that’s kind of a nice additional way for grandparents to give.
“In fact, later this year, if a grandparent also has a 529 for the same beneficiary, it’s going to be exempt from the federal FAFSA application, the financial aid form. So, it’s not counting in on the child’s assets at all. Even a parent’s 529 is counted like 5% of their total assets, so it’s minimal when it comes to calculating your assets. That leaves more money for potential grants that the child could be eligible for.”
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