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Maria Bruno: Hi. I’m Maria Bruno, head of U.S. Wealth Planning Research here at Vanguard.

Joel Dickson: And I’m Joel Dickson, global head of Advice Methodology at Vanguard. Welcome to our podcast series, The Planner and the Geek, in which we will discuss topics that are important to individual investors.

Maria Bruno: And we’ll have some fun along the way.

Joel Dickson: Well Maria, college savings really turned out to be an interesting topic.

Maria Bruno: It really was. So much so that we ended up doing our first ever 2-part podcast.

Joel Dickson: It’s a celebration. We need to mark this in the history of the Planner and the Geek. So let’s rejoin our conversation on college savings. One of the things that I picked up from our discussion with Lynn [O’Shaughnessy] is that almost everyone is going to finance college using a variety of sources and account types and so forth. Several years ago, Maria, you did some research that was titled Tackling the tuition bill that looked at a number of these questions. What’s your perspective on thinking about college planning and the after-tax benefits, or after-tax differences, in saving and then spending?

Maria Bruno: I think it’s a two-pronged approach. First and foremost, you want to do an inventory of what you have in terms of assets and income coming through to pay for college and then see if there’s a gap there. I think Lynn did a really nice job in terms of better understanding the costs of college; once you get a handle there, then think about how you want to approach this as a parent or even as a student going through this. The first thing, as Lynn had talked about, would be to see whether or not you qualify for financial aid and get a sense of what that looks like. For lower-income households, for instance, aid or even loans might be more substantial than for higher-income or wealthier families. In that situation, then, it’s more how do I spend down tax efficiently to minimize the tax burden and to maximize my after-tax value of what I’m paying for college? So if you first think about financial aid, you want to think about what impacts financial aid, and that’s income and assets. Income impacts financial aid more than assets. And student income impacts financial aid more than parental income.

Joel Dickson: So there’s a strategy potentially or planning opportunities for thinking about those different sources.

Maria Bruno: Right. You want to think about this before you actually pull the trigger. We covered this in the piece—you can google the topic or look on for the paper. We have a visual that outlines this—it’s pretty straightforward in terms of what are parental income sources or student income sources versus parental assets and student assets. Some of it’s clear; some of it’s not so clear.

When you think about 529s, for instance, a grandparent may open an account for one of their grandchildren where they’re the owner and the grandchild is the beneficiary. That is considered student income when you go to make withdrawals, so that’s actually a greater impact to financial aid than some other income sources. That one doesn’t necessarily seem as intuitive. The other might be if you have a 529 plan account that’s owned in the child’s name, that’s actually considered a parental asset. So, again, we outlined this in the paper, but you want to understand what you have and then what are the impacts to financial aid, because it is different. And Lynn had mentioned this as well. When you think about 529s, yes, they can impact financial aid eligibility, but really not by that much.

Joel Dickson: And when we think about drawing down or spending to meet those college expenses—we spent a lot of time at the beginning talking about the details of 529 plans—but isn’t it the case that for a lot of families that might not be the first account to tap in paying for college expenses because of potential tax credits, for example, that might be available.

Maria Bruno: Right. The big one is the AOTC, or the American Opportunity Tax Credit. That is a tax credit where if you’re eligible—there’s income limitations, of course, to the eligibility for that—that is an annual tax credit. And, again, a credit is always above the line, so a credit is always going to be more lucrative than a deduction, for instance. And, if you’re eligible, that would be available for up to four years of college.

Joel Dickson: Yes, and there the income limitations are relatively generous compared with many types of credits and deductions that have income limitations—$90,000 of income for a single taxpayer, $180,000 for a joint taxpayer. And the credit can be quite substantial—up to $2,500 of tax credit in each of the given years.

Maria Bruno: Each year for the four years, correct.

Joel Dickson: And that’s going to be a lot more advantageous, in many cases, than taking the money from the 529 plan if instead you can get this credit for what would be up to the first $4,000 of spending that could give you that $2,500 credit.

Maria Bruno: Correct.

Joel Dickson: Yes, it’s one of those interesting tax-planning things that I geek out about that’s kind of fun to think about.

Maria Bruno: Well, it is important. And it’s tough, because you want to think through this. College planning can be emotional for parents, because it’s also emotional because the kids are leaving the house—there’s a lot going on. I think if you tackle this in the years approaching college and start to get a better sense of what we’re looking at here financially, you can get a roadmap, and you don’t have to deal with this when you have a lot of the household emotions going on. The other thing when we think about financial aid, we talk about this do no harm. And how you draw down the assets, the 529 assets, for instance, can make an impact. So Lynn had talked about the FAFSA, which is the financial aid form that you would fill out to figure out what your eligibility would be, for instance. That looks at the prior two-year tax returns to figure out what the eligibility is. And when you think about how you draw down your 529 assets that can be impactful, because as I had mentioned earlier, these grandparent-owned 529 plans are actually student income. So you may want to wait until the later two years of college to draw those down so they may not impact financial aid eligibility. That may not seem intuitive, but it could have a financial impact in terms of how you draw those assets down. And if you have cash inflows coming in through the household, you may not necessarily want to spend those 529 assets right away, regardless of how they’re owned, because you may be giving up on tax-deferred growth for a couple more years on those accounts.

Joel Dickson: Yes, so it does get involved, as you might say, in making some of these trade-offs and decisions.

Maria Bruno: Yes, and if you do have cash flows coming in, it still can make sense to make the 529 plan contribution, in many cases, to be able to take advantage of the state tax benefits, and then use the account to pay the tuition bills.

Joel Dickson: And, again, that’s a strategy I’ve used. While my son is in college, I’ve been continuing to contribute each year to his 529 plan and get the state tax deduction and basically then, in many ways, use those proceeds as necessary.

Maria Bruno: You’re an A+ 529 account owner, Joel.

Joel Dickson: Oh good, I got a good grade finally. Is there anything else from a 529 college decision-making, spending standpoint? I think we’ve certainly covered that pretty well. I know there are lots of questions that we get from clients on this topic. And I don’t know if it’s worth trying to tackle some of—we just tackled the tuition bill. I wonder if it’s worth tackling some of the client questions that we typically get on college savings.

Maria Bruno: Sure. Let’s take a few minutes to do that, Joel.

Joel Dickson: Perfect.

Maria Bruno: All right, let’s see which ones we want to start with.

Joel Dickson: Well, one that we get often and hear about, it’s one that we alluded to before when we were talking about the state of Wyoming and 529 plan availability and so forth—at least the answer is similar. Let’s say I move from one state to another during this college savings process, are there implications for that? Or how should I think about that in terms of my overall savings plan?

Maria Bruno: You can keep it in the plan, so that’s perfectly fine. When you think about future contributions, again we had talked about this, you want to consider where you’re living and whether you need to invest in that state’s 529 plan in order to reap the state tax benefits and whether that makes sense. Again, look at the cost of the plan in terms of making your decision. You don’t necessarily have to keep the plan where you lived before. You could potentially do a rollover—basically transfer the money into the current plan. You’re allowed to do one rollover per year. But, again, I would think about primarily the costs and the diversification benefits within one plan versus the other.

Joel Dickson: So, again, the flexibility of the 529 is coming through from that standpoint.

Maria Bruno: Correct.

Joel Dickson: Yes, I think people will say, “It’s my state, I can only do my state.” But, in fact, that’s not the case at all.

Maria Bruno: Right. And sometimes it can seem overwhelming to try. I mean, how many 529 plans do we have? We probably have well over 100.

Joel Dickson: I think—

Maria Bruno: Yes, all right.

Joel Dickson: The number is something like 111, but that also includes the 529 plans that are prepaid tuition plans. Which is, again, another question that we tend to get from clients—“What’s a prepaid 529 plan?” So maybe we have to explain that a bit.

Maria Bruno: Yes, let’s do that in a minute. But I guess what I was going to say is that it can be overwhelming when you think about, well, do I look at my state plan? What other options do I have? On, we have a college savings center— There’s an interactive state map where you can go and look at, for instance, your state of residence, see what tax benefits are eligible in your state and whether you need to invest in your state plan to reap those benefits, or you could do a comparison of costs and options. So that helps break it down in a very intuitive, interactive way.

Joel Dickson: Yes, and I should mention there are often more than just 529 plans; there are often more than just one 529 plan in each state. For example, there might be, for lack of a better term, a do-it-yourself plan and an advisor-based plan or something like that.

Maria Bruno: Well there is, but you can even talk about Nevada, for instance. Nevada has several plans. We have the Vanguard-branded 529 plan sponsored by the state of Nevada, but then there’s also the Nevada plan. So you do want to look at, within the state, whether there may be more than one option. You’re getting into a direct plan versus an advisor-sold plan as well.

Joel Dickson: That’s right, so there are many different vehicles. That’s why that comparison tool can be extraordinarily helpful.

Maria Bruno: Yes.

Joel Dickson: So I mentioned it before—prepaid 529 plans. Sometimes people will hear about these prepaid tuition plans, which are also technically 529 plans. 529 is just a section of the tax code where these rules and so forth are spelled out. So if you hear about prepaid tuition plans—sometimes they’re called guaranteed savings plans—I think they’re offered by 12 states or so, and there’s a not-for-profit organization that also offers them. But in these cases, unlike the 529 plans that we’ve been talking about in terms of the more flexible, fungible ones, most of the prepaid plans require you to be a resident of the state to participate, and they’re kind of similar to a pension plan where you’re allowed to contractually prepurchase future tuition at a predetermined rate today. So think of it like a fixed income allocation that earns a certain kind of return that’s based on the contractual payout. Typically you’ll buy it, you basically prefund it at a young age, and get the benefit over time. So there’s a way to look at that if you think you might be interested. I think we’ve seen somewhat less adoption of the prepaid 529 plans with the growth of the 529 college savings plans that we’ve been talking about. But if folks are interested in learning more about prepaid 529 plans, you can go to the National Association of State Treasurers’ affiliate website, which is for a list of those plans.

Maria Bruno: Okay, great. How about one more, Joel? I think you may have touched upon this in your story about how you use your 529—can they be a good gifting or estate planning tool and how?

Joel Dickson: So the short answer is yes, and the long answer is long. What I would say is it can be both a very good gifting approach, and it can also be a very good estate planning approach—depending on how they’re used. And even with that, there are some trade-offs. But I think some of the key features are normally, and certainly this applies to 529 plans, you can contribute—a parent or a grandparent or, really, anyone—

Maria Bruno: Anyone.

Joel Dickson: Can contribute $15,000 per child in a single year.

Maria Bruno: That’s the annual gift tax exclusion for 2019.

Joel Dickson: Yes, correct. But one feature of 529 plans is you can do what’s often referred to as “front-load” these plans. You can give up to five years of this annual allowance at once. So you could make a $75,000 contribution, for example, per child in a single contribution and, in essence, have that count as being spread out over five years and $15,000 a year.

Maria Bruno: So essentially, you can front load the gift as long as you don’t make any other gifts to that beneficiary within the next four years—five-year total.

Joel Dickson: That’s right.

Maria Bruno: And that’s per individual per donee. So, for instance, a married couple can double that per grandchild.

Joel Dickson: Right, exactly.

Maria Bruno: It’s interesting from an estate planning standpoint, but the other thing that’s kind of neat is that with these types of accounts, the grandparents still remain the account owner, so they still have control, but the assets are removed from the estate. So that’s a unique feature.

Joel Dickson: Right. Now we’ve talked about how the 529 plans don’t have income limits for contributions, but there are maximum contribution limits within the account or this kind of account balance.

Maria Bruno: At the plan level.

Joel Dickson: At the plan level.

Maria Bruno: Right. They’re pretty generous though.

Joel Dickson: Oh, very generous. Often, they’ll be even well in excess of four years of a pretty expensive college. But it’s something just to be aware of if you’re in that situation where you’re trying to, if you will, maximize some of the tax-advantaged savings vehicles. One of the other questions that’s kind of embedded within this though, Maria—and it’s something that actually has been a little bit in the public discourse of late, and we often get this question quite a bit—is can you use 529 plans to pay off student loans. It’s a very common question.

Maria Bruno: And the answer is no. There is some potential legislation that’s being discussed around that, but currently the answer is no at this point. It needs to be for college—or, excuse me, it needs to be for qualified education expenses. Loans is not one of them right now.

Joel Dickson: So, Maria, we could geek out on 529 and college savings and after-tax payment of college expenses for hours and hours. I’ve enjoyed this discussion, this overview of college saving plans. And maybe, once again, you could just mention some of the resources that are available to dive into this a little bit deeper.

Maria Bruno: Yes, I think that’s a good way to close. We talked about So is basically our college savings center, so you can learn more around the different account types and also delve more deeply into the specific 529 plan options. There are also a couple good ones around that I think Lynn had mentioned as well. is another helpful site as well as So those are just a few. I would encourage that if individuals want to learn more, they go to our episode page for a few more of the sites that we referenced today.

Joel Dickson: Oh, and also, I would encourage—I’ll promote it for you, Maria. A lot of these topics we discuss in that research that you had done—financial planning perspectives, Tackling the Tuition Bill, which can be found on

Maria Bruno: Right.

Joel Dickson: Terrific. Well, I want to thank our listeners, again, for spending some time with us talking about, in this case, college savings. Next time we will be talking about wealth management, with a specific emphasis on estate and legacy or intergenerational planning issues.

Maria Bruno: And this should be fun because usually there’s a conflict between income taxes and estate taxes.

Joel Dickson: Yes.

Maria Bruno: So there should be some fun. We’ll be able to geek out next month.

Joel Dickson: Conflict means planning opportunities, right?

Maria Bruno: Well, I think this will be a really interesting one, Joel. I really look forward to it. We hope you enjoyed this episode of The Planner and the Geek. Just a reminder that you can find more episodes of The Planner and the Geek on iTunes and on

Joel Dickson: Or simply subscribe to our series and you won’t miss an episode. And please don’t forget to rate us on iTunes. Your ratings will make it easier for others to find us when they’re looking for investing podcasts. Please join us next time for another episode of The Planner and the Geek.



For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Vanguard Marketing Corporation serves as a distributor for some 529 plans.

We recommend that you consult a tax or financial advisor about your individual situation.

© 2019 The Vanguard Group, Inc. All rights reserved.