The SECURE Act and Its Impact on Education PlanningSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on January 16th, 2020
Devone McLeod, CFP®, January 17, 2020
Nearly 45 million Americans currently owe $1.56 trillion in student loan debt, owing on average $35,000 per borrower.1
This level of debt pales in comparison to the difference in average earnings between college graduates and non-college graduates (college graduates earn on average $1 million more in lifetime income.2), yet there is little question that many college graduates struggle to repay their loans. Millions of Millennials have delayed traditional post-college milestones such as buying a home, getting married or having children due to the burden of their debt.3
The SECURE Act, touted mainly as a law that addresses the retirement crisis, also makes it a little bit easier for some students, graduates and their families to pay for higher education by increasing the usefulness and flexibility of 529 plans. A 529 plan is an investment account earmarked for education expenses, allowing parents and grandparents the ability to invest after-tax money, allow it to grow tax free and take tax-free distributions when using it to pay qualified education expenses.
Here is a summary of some of the changes within the SECURE Act that will impact how Americans pay for education:
- Families may now take 529 plan distributions to pay for up to $10,000 of student loan debt for the plan beneficiary.4
- An additional $10,000 of distributions may be taken without penalty for each sibling of the account beneficiary; in a family with four children, up to $40,000 of a 529 plan may be distributed for the purpose of repaying student loans.4
- 529 Plans may now be used to pay for apprenticeship programs that have been registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act, including fees, textbooks, supplies and equipment.4
Increased Flexibility in How 529 Plans May Be Used
Previously, distributions from 529 plans could only be used for costs like tuition, room, board, books and supplies. Distributions taken to repay student loans or pay for apprenticeship costs would be taxable, plus an additional penalty would be owed because those were not qualified expenses.
Now that repayment of student loans are a qualified expense, here’s a scenario from The New York Times that illustrates how a family may benefit:
Say a family has several children, each with a separate 529 account. If a younger sibling attends a less expensive college and does not need the full balance in the account, the family could use the money to help pay down the student debt of the older sibling.5
Or, consider the situation of a parent who borrowed money to pay for a child’s college and wanted to use leftover funds from the 529 plan to pay down that debt. According to The Times, the parent could “make a change and designate himself or herself as its beneficiary and take a $10,000 distribution to repay federal or private parent loans.”5
Using a 529 Plan to Pay for an Apprenticeship
Lastly, allowing funds within 529 plans to pay for the costs of an apprenticeship addresses one of the major concerns parents have always had about 529 plans: what if my child chooses to not attend college?
Now, if your child or grandchild grows up to prefer a profession that does not require a college education, at least a portion of that 529 plan may still be useful to help pay for the costs associated with an apprenticeship. Apprenticeships are common among carpenters, electricians, dental assistants, chefs, child care specialists and other professions that make fine careers.
Many studies have shown that America has a shortage of blue collar workers. With more white collar workers in the labor force and fewer handy homeowners, these services are in greater demand than ever.6
As a result, plumbers, HVAC professionals and many other skilled workers often earn wages much higher than those earned by recent college graduates. Here in Fairfield County or Westchester County, it's not uncommon for people in these fields to earn $45 per hour relatively early in their careers and $125 per hour or more after establishing themselves; this translates to $90,000 to $250,000 per year, assuming a 40-hour workweek.
The SECURE Act Represents Progress in Education Planning
Student debt remains a national issue. However, the new changes in the SECURE Act definitely add flexibility to how 529 plans may be used and should remove some of the hesitation of opening one.
If you are planning to pay for a loved one's education - in part or in full - please do not hesitate to reach out to Reby Advisors for planning advice.