When my sister heard that her son’s college would be abruptly changing from on-campus living to online learning, she was overwhelmed with questions. For example: What happens to the money we paid for housing? This spring, many colleges across the country returned millions of dollars to families. Miami University in Ohio is scheduled to return $27 million; Michigan State reports refunding around $50 million.
“These are anxious times. And that leads to uncertainty about what will happen in the fall,” says Tim Gorrell, executive director of the Ohio Tuition Trust Authority (OTTA), which manages Ohio’s 529 Plan, CollegeAdvantage. He’s well-positioned to understand the financial implications of COVID-19 and college, since 529 plans provide a tax-advantaged way to save for life after high school.
Here are some of the questions and concerns he’s hearing most right now from parents:
How Should Families Plan for What’s Next?
Q. Should I keep saving for college?
Tarun Garg, head of college savings at BlackRock Financial, reports that roughly 13% of the U.S. working age population lost their livelihood in the first five weeks of the pandemic. And many more have seen their income reduced. He notes, “for families that are directly impacted, saving for college may not be a top priority.” That said, experts suggest staying the course as much as possible for those who can. “If you can keep contributing to your 529, even at a reduced amount, you should,” says Gorrell. “Take advantage of systematic payment options that come directly out of your paycheck or bank account.”
Q. How should I change my investments?
With the stock market fluctuating daily, this is an especially difficult time for parents who are using their savings for education or on the cusp of using them. “A big question right now is about moving investments from one 529 fund into another,” Gorrell says. “Federal policy allows account holders to do a maximum of two exchanges per calendar year. So it’s a good idea not to change things around without thinking through the long-term.” (The CollegeAdvantage website provides tools to help guide families on this.)
For families with more time before college begins, one consideration is “enrollment date portfolios”. These automatically adjust the portfolio to reduce risk based on the anticipated year the child will go to college.
Q. What should I do with any refunded money?
If you received a refund from your child’s university for room and board or other mandatory fees, and that money originally came from a 529 account (vs. personal savings), you should re-deposit the refunded amount back into the 529 Plan to avoid tax penalty. In April, the IRS issued new rules giving families until July 15, 2020 to re-deposit refunds into a 529 account. (Or up to 60 days from the processing date of the refund—whichever comes later).
“If you don’t deposit the money back into a 529 account, the refund amount is considered a non-qualified withdrawal, which is subject to taxes and penalty,” advises Garg. A re-contribution is not considered a new contribution for purposes of state income tax benefits related to 529 plans.
Gorrell strongly encourages including a signed letter stating that this is a re-contribution due to a school refund with your check. These documents could be helpful in the unfortunate event you are ever audited by the IRS.
If you decide instead to use the refund for upcoming qualified higher educational expenses at the school during the same calendar year (rather than re-contributing it), you should still keep those detailed receipts.
In addition, you may want to consult with your tax advisor regarding the tax implications of any refunds and/or re-contributions.
Q. What happens if my child won’t—or can’t—go away in the fall?
“Everything is evolving, and the big questions are, What will higher education look like in the fall? Will students be back on campus?” says Gorrell. He knows many parents may be reassessing out-of-state vs. in-town learning, wanting to keep kids closer to home. “There’s built-in flexibility with 529 accounts. You can use the money you’ve saved at many higher education entities. And that includes training and apprenticeship programs.” Funds can also be used for qualified expenses that go towards college. For example, computer equipment or internet connection costs for virtual learning.
“Right now, all is not lost. This is a great opportunity for both parents and students to think outside the box and broaden their horizons,” says Gorrell.