Editor's Picks

– 529 Essentials: Savings vs. Prepaid Plans
– Article Round-Up
– Research: Survey Stats on the Go
– 529 Conference 2016 Update
– ABLE Act Column

Cyclical Summertime & Perennial Value Creation: This summer as families head to the beach to enjoy some lobster, build some sandcastles and ride some waves, family members across multiple generations will have time to sit down outside together to relax. This key point in time every year provides the opportunity to think about long-term goals in terms of where they want to be. Along the road of the conversation, the path will inevitably shift to children and grandchildren. And from there, the conversation inevitably progresses towards when, where and how the children and grandchildren will go to college or university. Most will focus on the family dynamics of the transition such as living far away or attending a commuter school nearby, as well as the academics en route to and through their ideal college or university. While the majority of parents have dreams about full ride scholarships, some more confident in their false hopes than others, the reality is that they fail to see that the windy road ends more frequently than not in student loan debt. In fact, the number of families landing in student loan debt after passing through the campus iron gates has nearly doubled from 23 million to 43 million in the past 10 years. Few families focus on both the academics and the financial side of college financial planning. This provides you as a financial advisor, accountant or estate planner with the opportunity to ensure that the conversation does take place, and in turn grow and build your book of business. Summer may not last forever despite the relentless heatwave, but education and financial planning will continue to provide value to your clients through all market cycles. Have the college financial planning conversation today.

529 Dash, Required Reading for Your 529 Education: The goal of the 529 Dash is to address the specific needs and concerns of advisers, accountants and estate planners who sell and service families and institutions in the college financial planning process by providing industry relevant news, product training and best practices. Building upon the product training and trends will be our editorial insight, market data and research. Also, the 529 Dash will provide opportunities for you to learn from and network with your peers based on real life case studies and forums such as the Strategic Insight 529 Dash LinkedIn Group. By reviewing these success stories on college financial planning from your peers of advisers, accountants and estate planners, the barriers to supporting your clients and building your book of business will be reduced.

Please Read, Engage and Share.

Paul Curley, CFA
Editor-in-Chief of 529 Dash
Director of College Savings Research
Twitter: @PaulCurleyBC
LinkedIn: Strategic Insight 529 Dash LinkedIn Group

529 Essentials: Savings vs. Prepaid Plans

This week, we will compare and contrast 529 college savings plans and 529 college prepaid plans.

Two Basic Types of 529 plans: prepaid tuition plans and savings plans. Each state determines which plans to offer, and they are allowed to offer one type or both types of plans. Additionally, state entities have the option to not offer a plan as does happen currently with the state of state of Wyoming. While state entities are permitted to offer both types, a qualified education institution can only offer a prepaid plan. Lastly, in addition to each state determining which type of plans to offer, each plan is also somewhat unique. Therefore advisors can provide value by knowing these differences and selecting the right plan for the unique needs of their client.

Market Sizing: As of March 2016, there were 19 prepaid plans overseeing $23 billion in assets across 1.1 million accounts. Of those 19, 12 prepaid plans were open to new investors with $21.5 billion in assets across 1.0 million accounts and 7 prepaid plans were closed with $1.5 billion in assets across 0.1 million accounts. In comparison, there are 92 savings plans with $235 billion in 11.7 million accounts as of the end of March 2016. Together, 529s allow 12.8 million families to save over $258 billion in assets as of the end of March 2016.

Types of Prepaid Plans: Fundamentally, 529 prepaid plans provide families with the opportunity to pay today for tuition and specified fees tomorrow. Therefore, they allow families to prepay the future cost of college. There are generally two types of prepaid plans that get prepurchased: contract plans and unit plans. While a contract plan allows the account holder to purchase a specific number of years of tuition, a unit plan allows the accountholder to purchase a specific percentage of years of tuition. Later, when the student actually attends the qualified college and the family wants to use the contracts or units to pay for the education, the family calls the state agency that the contracts or units were purchased from and the credit gets applied to the cost of college. In terms of which colleges that the credits can be used for and which specified fees that the credits will cover, each 529 prepaid plan varies and families should review the plan disclosure statements of the plans to learn more.

Compare and Contrast:

  • Market Risk: While a 529 prepaid plan locks in tuition prices and specified fees at eligible colleges, parents can lose money in a 529 savings plans as it does not lock in college costs and therefore does not protect the investor from market risk. As such, 529 prepaid plans allocate the market risk to the state entity while 529 savings plans allocate the market risk to families. This is why some investors that are familiar with the retirement industry compare 529 prepaid plans to defined benefit accounts, and 529 savings plans to defined contribution accounts.
  • Advisor Compensation: Currently, no 529 prepaid plans provide a load or commission to an advisor as part of the product structure. In contrast, certain types of 529 savings plans do include a load or commission, while others do not.
  • Enrollment Periods: While 529 prepaid plans have open enrollment periods, families can make contributions into 529 savings plans anytime.
  • Payment Plans: While contributions into 529 prepaid plans are typically based on various types of payment plans, contributions into 529 savings plans can take place at any time and some have a minimum contribution level as low as $15.
  • Age Restrictions: While 529 prepaid plans typically have age and/or grade school level restrictions, families can open and contribute to a 529 savings plans for a beneficiary at any age or grade level. Also while 529 prepaid plans typically have time limits on when the assets need to be used by, 529 savings plans do not have to be used within a set period of time.
  • Residency Requirements: While residency requirements are much more prevalent in 529 prepaid plans as most plans require state residency of the accountowner or beneficiary, they are less prevalent in 529 savings plans. Therefore advisors and their clients should review the plan’s website and plan disclosure statements for confirmation.
  • Eligible Colleges or Universities: While assets in 529 prepaid plans are typically available for certain in-state schools and programs, and for certain private schools for the Private College 529 plan, 529 savings plans can be used for the vast majority of colleges and universities in the U.S. and many abroad so long as they are eligible for financial aid from the U.S. Government.
  • Qualified Expenses: While assets in a 529 prepaid plan can cover tuition and specified fees based on the plan disclosure statement, they typically do not cover room and board unless the option is specifically offered by the state entity and purchased by the accountholder. Alternatively, 529 savings plans are be used for any qualified higher education expense.

Therefore, advisors, accountants and estate planners should understand the key product features of 529 prepaid plans and 529 savings plans, how the two types of plans function independently, and more importantly how they can be used together.

Next week, we will compare and contrast 529 savings plans and Coverdell Education Savings Accounts.

Article Round-Up

Here is what you need to know from stories released this week.

ABA Journal, “In a BigLaw first, Orrick will pay new associates an extra $100 a month toward student loans.” Editor’s Take: Planadvisers should note the trend in more firms providing college financial planning benefits to their employees in the form of student loan payments and 529 college savings plan contributions.
Business Insider, “A 29-year-old who’s paid over $100,000 of student loans gives her 2 best pieces of debt-repayment advice.” Editor’s Take: Advisors have an opportunity to provide value throughout the saving, paying and repaying process. This article can help your clients understand the long-term impact on not properly saving and paying for college.
Ginita Wall, CPA, CFP via Turbo Tax Blog, “Cashing in Your 529 plan to send your kids to college.” Editor’s Take: Tips on taking 529 distributions.
Buchbinder Tunick & Company, “529 Plans to the Rescue.” Editor’s Take: Advisors and accountants can build their book of business with 529s.

Research: Survey Stats on the Go

Here is what you need to know from data and research released this week.

52% of those with no financial stress successfully maximize available tax-advantaged savings vehicles, compared to 25% of those with overwhelming levels of financial stress. Editor’s Take: Helping clients to use the tax-advantaged 529 college savings plans will provide value to them by lowering their level of stress.
50% of those with student loan debt under the age of 35 years old do not want a mortgage and do not think they would qualify for a mortgage. Editor’s Take: The lack of college financial planning is having a negative impact on other parts of ones life.
37% of student loaners defer saving for retirement or other financial goals to pay off debt.
20% of student loaners do not know the terms of their debt.

529 Conference 2016 Update

The 529 Conference 2016 will take place from September 12-14, 2016 at the JW Marriott Grande Lakes in Orlando. Updates to the agenda will be announced in this section. Register today.

Sheff Faulkner, Vice President of BlackRock, to present on “Engagement Strategies for the Independent RIA Channel” panel.
Nicole Whitman, Lead Marketing Manager, College Savings, T. Rowe Price, to present on “Effective Direct-Sold Marketing Strategies” panel.

ABLE Act Column

This section will cover this week’s top legislative updates, product developments, news and resources relating to 529A ABLE Accounts. ABLE Accounts are tax-advantaged savings accounts for individuals with disabilities and their families. Income earned by the accounts will not be taxed when used for qualified expenses. For training on the product’s fundamentals and an update on the product’s trends, register for the upcoming ABLE Afternoon Summit on September 14, 2016.

Round-Up of News & Resources:
– ABLE National Resource Center,  “A Closer Look at the New ABLE Programs” Webinar on August 4th at 2pm ET
Buchbinder Tunick & Company, “How an ABLE account can help those with disabilities”, Editor’s Take: Learn how this CPA is building their book of business with ABLE accounts.

List of Open ABLE Programs:

Ohio STABLE Program
Nebraska Enable Savings Program
Florida ABLE United Program

July 25th, 2016
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