Should University Savers Go For Student Loans This Fall?


Federal undergraduate student loan interest rates could fall below 3% for the first time in more than 15 years in July, based on the latest 10-year Treasury bill auction.

At the same time, parents with 529 college savings plans may have seen their account balances plummet during the coronavirus pandemic.

“If you can get a 3% loan,” says Melissa Ellis, certified financial planner and founder of Sapphire Wealth Planning in Overland Park, Kansas, “why wouldn’t you? “

While that low rate sounds good, here’s how to know if this strategy is right for you.

You lost money

Like other investments, 529 savings plans fluctuate due to market fluctuations. Most 529s try to reduce that impact by switching from aggressive investments to more conservative ones as you get closer to paying for college.

If you’ve been aggressive, your account may be underwater right now. Avoid panicking.

“Don’t stray completely from the market and block permanent losses,” says Vivian Tsai, president of the College Savings Foundation, a nonprofit in Washington, DC

Instead, consider taking out federal student loans so you can stay invested long enough for your 529 to recover. Ideally, you will earn enough to write off the interest accrued on the bad credit payday loans as well.

You would be eligible for interest free loans

You will still be in better shape if you qualify for federal subsidized loans, which do not charge interest as long as your child is in school at least part-time.

Subsidized loans are available to students who demonstrate financial need. This may not be the case for those with a 529.

You agree with the risk

If you don’t qualify for a subsidized loan – and your 529 account remains in good shape – you can be sure your income will exceed a potential interest rate of 3%.

“It’s probably a very good time to be able to look forward to better returns,” Ellis said. “Because every time you have a really sharp downturn, at some point it’s going to come back. “

If you are borrowing, pay off the interest on the loan before it is capitalized or added to your balance. Otherwise, the amount you pay back will increase, reducing your potential profit.

Ian Aguilar, CFP at Mellen Money Management in Ponte Vedra, Fla., Agrees that “if you play the purely mathematical game, you will probably do better with the markets.”

But he adds that the relatively short repayment term and small size of student loans limit the benefits of this strategy.

“It’s not something I think you want to play with,” Aguilar says.

You have a non-parent 529

Regardless of how your 529 has performed recently, you might want to wait to withdraw money if a grandparent or non-custodial parent holds the account.

When calculation of federal financial assistance, withdrawals from these accounts count towards the student’s income, which has “the highest assessment rate,” says Shannon Vasconcelos, university finance consultant at Bright Horizons College Coach, educational advisor at Watertown, Massachusetts.

Students in this situation may want to opt for loans for their first year and a half in school.

“Once we achieve that magic on January 1 of the second year,” Vasconcelos says, “the non-custodial parent can then pay off the student loans with the 529.”

This transaction would not affect future eligibility for aid, she said.

Your state will not tax you

529 savings plans are investment accounts in which income can grow and be used tax-free, provided the funds are used for qualifying educational expenses.

The 2019 Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, made repaying student loans up to $ 10,000 a qualifying expense.

But not all states have aligned with these federal guidelines, says Vasconcelos.

If not, you may have to pay state taxes on withdrawals, and states may seek to reclaim your previous deductions for 529 contributions.

Examining your state’s history with past 529 federal changes can help you make an informed estimate of potential penalties. For example, California and New York did not align with the 2018 change to allow 529 funds to be used for K-12 education spending.

This article was written by NerdWallet and was originally published by The Associated Press.

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