Podcast Summary: So Money with Farnoosh Torabi

Episode: 1844: Everything You Need to Know About 529 Plans
Release Date: June 25, 2025
Host: Farnoosh Torabi
Guest: Patricia Roberts, Financial Aid Expert and Author of Route 529

Introduction to the Topic

In episode 1844 of So Money with Farnoosh Torabi, host Farnoosh Torabi delves deep into the intricacies of 529 College Savings Plans, a pivotal tool for families aiming to fund higher education. Recognizing the financial strains associated with college expenses, Farnoosh brings in Patricia Roberts, a leading expert on financial aid and author, to unpack the myths and realities of 529 plans.

The State of College Costs

Farnoosh begins by setting the stage with current statistics on the rising costs of higher education:

• In-State Public Colleges: Approximately $11,000 annually for tuition and fees.
• Out-of-State Public Colleges: Around $30,000 per year.
• Private and Elite Institutions: Tuition and fees can average $43,000 annually, with total costs reaching up to $99,000 at schools like NYU.

Patricia emphasizes the importance of understanding these costs to make informed financial decisions. She states, “[...] it's not just about saving; it's about choosing the right institution that aligns with your financial capabilities” ([04:33]).

General Advice on Saving for College

Before diving into 529 plans, Farnoosh offers broader financial strategies:

1. Choose Affordable Schools: Settling for a more affordable institution can prevent excessive debt. Farnoosh shares a personal anecdote about opting for Penn State over more expensive schools like NYU or Northwestern to avoid burdening her family with significant debt ([04:33]).

2. Scholarships and Grants: Contrary to popular belief, numerous scholarships exist beyond academic or athletic achievements. Patricia highlights, “There are scholarships that go untapped many times because people don't apply” ([05:00]).

3. FAFSA Applications: The Free Application for Federal Student Aid (FAFSA) is crucial for accessing federal loans, work-study programs, and grants. Farnoosh advises, “The earlier you apply, the better because it is a first-come, first-served situation” ([06:00]).

4. Private Loans as a Last Resort: Patricia cautions against relying on private loans due to their higher interest rates and less flexible repayment options, contributing to the looming $2 trillion student loan crisis ([12:59]).

Introduction to 529 Plans

Transitioning to the core topic, Farnoosh introduces the 529 College Savings Plan:

• Definition: A 529 plan is a state-administered savings account designed specifically for education expenses. Contrary to traditional savings accounts, the funds are invested, and earnings grow tax-free.

• Tax Benefits: Contributions may offer state tax deductions, and withdrawals used for qualified education expenses are tax-free.

Farnoosh explains the flexibility of 529 plans, noting they can be used for a variety of educational paths beyond four-year colleges, including community colleges, trade schools, and even certain apprenticeship programs ([12:59]).

Common Myths About 529 Plans

Patricia Roberts addresses several misconceptions surrounding 529 plans:

1. Limited to Traditional College: Many believe 529s are only for four-year institutions. Patricia clarifies, “These plans can be used for two-year and four-year colleges and universities, community colleges, trade and technical schools, as well as certain registered apprenticeships” ([28:23]).

2. Loss of Funds if Not Used for College: A prevalent fear is that unused funds are lost. However, the account owner retains control, allowing for changing beneficiaries within the family or using the funds for qualified education expenses beyond the initially intended beneficiary. Patricia emphasizes, “The account belongs forever to the account owner” ([28:23]).

3. Need for a Financial Advisor: While having a financial advisor can be beneficial, Patricia notes that over 60% of 529 investors manage their accounts independently, given the wealth of online resources and state-provided information ([28:23]).

4. Perceived as Just a Savings Plan: Contrary to the belief that 529s are simplistic savings accounts, they are investment vehicles offering potential growth to keep pace with inflation. Patricia warns against assuming the funds are FDIC-insured and highlights the importance of understanding investment options within the plan ([38:51]).

Benefits and Flexibility of 529 Plans

The discussion highlights the multifaceted advantages of 529 plans:

• Tax Advantages: Earnings grow and can be withdrawn tax-free for qualified expenses. Some states also offer tax deductions or credits for contributions.

• Flexibility in Usage: Funds can cover a wide range of educational expenses, including tuition, room and board, books, supplies, and even computers. For instance, Farnoosh mentions using a 529 plan to cover her son's off-campus living expenses without incurring penalties, provided expenses are documented and do not exceed the institution's cost of attendance ([28:23]).

• Control Over Funds: Unlike custodial accounts, the account owner maintains control regardless of the beneficiary's age, preventing misuse of funds. This ensures that the money is used as intended or can be reallocated within the family ([28:23]).

• Rollover Options: Unused funds can be rolled over to a Roth IRA for the beneficiary, subject to specific IRS rules, or utilized for other family members’ education needs. Patricia advises, “You can roll up to $35,000 of a leftover balance that the child doesn't need or isn't going to use to a Roth IRA” ([42:14]).

Practical Tips on Implementing 529 Plans

Farnoosh and Patricia offer actionable steps for listeners considering a 529 plan:

1. Research State Plans: Evaluate your own state's 529 plan for potential tax benefits. Websites like Savingforcollege.com and Morningstar provide comprehensive comparisons of different state plans’ performance, fees, and benefits.

2. Determine Contribution Amounts: The amount to save monthly depends on individual financial situations and educational goals. Farnoosh shares her personal strategy, initially contributing $500 monthly to her children's plans, which she later increased to $1,000 as they approached college age to better meet her savings goals ([21:13]).

3. Automate Savings: Setting up automatic contributions ensures consistent saving without the need for manual intervention. Farnoosh emphasizes the ease and discipline this approach brings to long-term savings ([21:13]).

4. Monitor and Adjust Investments: As the beneficiary nears college age, it's prudent to adjust the investment strategy from growth-oriented stocks to more stable bonds and dividend-paying instruments to mitigate risks ([24:20]).

Personal Experiences and Strategies

Farnoosh shares her family's approach to saving for college:

• Early Start: She opened a 529 plan during her pregnancy, initially naming herself as the beneficiary before designating her son.

• Regular Contributions: Committing to consistent monthly contributions, her husband spearheaded the savings by allocating $500 each month, later increasing to $1,000 as expenses grew and concerns about meeting the total projected costs arose ([21:13]).

• Flexibility in Educational Paths: Farnoosh remains open to various educational trajectories for her children, whether traditional college, trade schools, apprenticeships, or entrepreneurship, leveraging the flexibility of 529 plans to support diverse outcomes ([24:20]).

Patricia echoes the importance of starting early and being adaptable, ensuring that families can adjust their strategies as circumstances evolve ([20:35]).

Recent Changes and Future of 529 Plans

The episode touches upon recent federal expansions and potential future enhancements to 529 plans:

• K-12 Education Expenses: Federal law now allows 529 funds to be used for up to $10,000 annually for K-12 tuition, though some states may not recognize this change for state tax benefits.

• Registered Apprenticeships: Eligible expenses now include certain registered apprenticeship programs, broadening the scope beyond traditional academic institutions.

• Student Loan Repayment: Families can use up to $10,000 from a 529 plan to repay the beneficiary's or their sibling's student loans, introducing a strategic method to manage educational debt ([42:14]).

Patricia advises listeners to verify state-specific regulations, as not all states may have updated their statutes to reflect these federal changes. She also highlights the importance of aligning investment strategies with these evolving uses to avoid tax penalties when reallocating funds ([46:22]).

Conclusion and Next Steps

Farnoosh wraps up the episode by reiterating the importance of 529 plans in the broader context of financial planning for education. She encourages listeners to:

• Educate Themselves: Utilize available resources to understand the nuances of 529 plans.

• Start Early: Begin saving as soon as possible to maximize growth potential and minimize debt accumulation.

• Stay Flexible: Be prepared to adapt savings and investment strategies as educational needs and financial landscapes evolve.

Patricia adds a final note of reassurance, reminding families that any amount saved is beneficial and that it's never too late to start planning for higher education expenses. She emphasizes, “Put a lot of pressure on ourselves as parents. Don't beat yourself up if you didn't save or you didn't save enough or you haven't started. Get started and do something” ([38:51]).

For listeners seeking more personalized advice, Farnoosh invites them to join the So Money Members Club for exclusive workshops, Q&A sessions, and a comprehensive library of financial resources.

Notable Quotes:

• Patricia Roberts: “There are scholarships that go untapped many times because people don't apply.” ([05:00])

• Farnoosh Torabi: “The earlier you have these conversations with your children, the better.” ([06:00])

• Patricia Roberts: “The account belongs forever to the account owner.” ([28:23])

• Farnoosh Torabi: “Saving for your retirement is more important than saving for college.” ([20:35])

• Patricia Roberts: “Don't beat yourself up if you didn't save or you didn't save enough or you haven't started. Get started and do something.” ([38:51])

Resources Mentioned:

• Savingforcollege.com: A comprehensive platform to compare different state 529 plans.

• Morningstar: Provides data and analysis on 529 plan performances.

• FAFSA: FAFSA Official Website

• Patricia Roberts' Book: Route 529: A Guide to Saving for College and Career Training.

Join the Conversation:

For those interested in further exploring the topics discussed, consider joining the So Money Members Club at SoMoneyMembers.com. Members gain access to exclusive workshops, detailed financial planning sessions, and a supportive community focused on achieving financial well-being.

This summary captures the essence of episode 1844 of So Money with Farnoosh Torabi, providing listeners and readers with actionable insights into 529 College Savings Plans and broader strategies for managing the financial demands of higher education.