Mastering College Savings: 529 Plans and Financial Planning Insights

Saving for college is one of the biggest financial decisions families face—but with the right tools and guidance, it doesn’t have to be overwhelming. In this episode, PCM’s Andrew Randisi and Christopher Mallon join Lesley Buck to break down the key strategies for education planning, including the advantages of 529 plans, the pros and cons of UGMA/UTMA accounts, and how financial aid factors into the equation.

They also discuss new legislation that allows unused 529 funds to be rolled into a Roth IRA, the FAFSA process, work-study considerations, and how to approach private loans thoughtfully.

If you’re a parent just starting to save, a grandparent looking to help, or someone facing the college payment years now, this episode offers practical insights to help you plan with clarity and confidence.

🎧 Listen in to learn how to make the most of your college savings plan—and set your family up for success.

Thank you for listening. For more information about how we can help you achieve your financial goals and live a life you love, please visit PCMAdvisors.com.

Transcript

[00:00:00] 

Welcome everyone to our presentation today on saving for college and paying for College. I'm joined today by Andrew Randisi and Christopher Mallon, both certified financial planners here at Pennsylvania Capital Management. And let's get started. We're gonna start off talking about saving for college.

And Andrew, you wanted to talk about 5 29.

Yeah, I'd say Lesley, thank you for having us today. I'd say there's a couple different ways you can for college and we talked to this about quite a few of our clients. There is the 5 29 plan route college savings plan.

You can also do an UGMA or UTMA account depending upon the state you're living in. There's also something that still exists, but it's a very rare species which is the Coverdale Education savings account. But I would say for the most part, what we work with clients on is the first two the 5 2 9, and the UTMA and the UGMA account.

The real main advantage we really like on the 5, 2 9 [00:01:00] is the various different aspects of how you can get that tax free growth for college. You also have the flexibility in terms for college as well, that you can use it for tuition. You can use it for books. You also can even use it to pay back up to a certain amount dollar threshold of student loans.

It also can be used for private school tuition from ages kindergarten through 12th grade. Now it can also be used for trade school as well. With the most recent passing that we've had in the last couple of years.

Can't you also do stuff with Roths now with those, because I know we have come across some situations where 5 2 9s can be, essentially overfunded.

So say they started when, kiddo was born, they're approaching college years and there was a couple hundred thousand in the account, and then, they're gonna finish school and have maybe, 50 or $30,000 left over. What can you do with that now?

Yeah. So with that new little querk that just came in recently up to [00:02:00] $35,000 can be rolled out for the beneficiary to a Roth IRA of the beneficiary. Couple things to keep in mind though. The 5 2 9, I believe has to be somewhere around at least 15 years old with that beneficiary and it can't be. There's also a specific test on the earnings.

The earnings can't be rolled out that have grown in the last five years. Yes, if you do meet all those criteria, you can roll out Lifetime $35,000 to a Roth IRA for the beneficiary of the 5 2 9, another neat idea we have leftover funds we might not have any more children to roll it too, or for, if we don't wanna roll it to grandchildren. That might not be here yet. It can be rolled out to a Roth IRA for that beneficiary.

Yeah, I'd say the 5 29 has become really, it's the backbone of college savings at this point, and then they keep adding new features to make it a little bit more flexible.

A couple years back, you couldn't use it for private, high school or, education. Trade schools was a little bit murkier on what could and couldn't be used [00:03:00] for. And then there was definitely none of the rolling out to a Roth or retirement account either. So now they keep, it seems in every two to four years or so, there's another feature added, which is nice, which frankly will maybe down the line make the UTMA and UGMA custodial accounts less and less of an option. Because I'd say right now we t typically recommend is a combination of both with the 5 29 doing the heavy lifting for education focused spending, and then the UTMA and UGMA accounts being more of a focus on, okay, this will be money for, post-graduate down payments for house, down payments for cars, maybe cover a trip in the future. That's really like your chief, in the way of flexibility. 'cause at the end of the day, that account is really a brokerage account for your child, and that will eventually become theirs once they hit 18 or 25. Just depends on whatever state they're in. But however, with that level of flexibility, there's less tax incentives, right? You're gonna have capital gains tax along the way, interest income tax on those along the way.

So [00:04:00] there's no real tax incentive. For the UTMA and UGMA accounts. However, you do get the flexibility incentive, so you can use it for anything as long as it's for the child. Another drawback of that, I believe, and correct me if I'm wrong, Andrew, the UTMA and UGMA accounts, when you go through the FAFSA process in terms of trying to get various student loans, I believe that's counted more against you in terms of, not necessarily against you, but it is looked at more of, okay, we're gonna see if, student A qualifies for certain financial aid. If they have, say instead of doing a 5 29, there's a hundred thousand dollars in a, UTMA/UGMA account, that's gonna be looked at more. Oh, there's a lot more money to pay for college here versus if that same a hundred thousand was in a 5 29 that was owned by the parent. I think they're looked at different percentage wise.

You are precisely correct. So for FAFSA if mom or dad have that example that you gave 5, 2, 9 plans are counted as part of the FAFSA as [00:05:00] 5.6% of assets when they do that calculation. So if you have a 100 k and a 5 29. 5,600 would be included.

It would be that expected family contribution. For the UGMA/UTMA account, it's 20%, so $20,000 would be considered in the mix when the FAFSA would be calculating the financial aid, potential financial aid package.

Yeah, there's obviously pros and cons.

There are some advantages to stuffing those 5 2 9s.

Yeah. One other thing to keep in mind, we've had. The opposite situation happened. We've had it for some clients along the way with the UTMA and UGMA account. Say that was the focus. There was no 5 29 contributions, so there was a hundred thousand dollars in that UTMA account. And then the age of majority in many states is 21.

Student rolls around, they're entering their senior year, they hit 21 years old. All of a sudden, all that money is theirs. The account, it flips over on that day and is an individual account for them. That is not uncommon for [00:06:00] some, parents or clients of ours to come to us and go, okay, we love our kid. We're not necessarily sure if they're ready to have, a hundred grand plus in their name. What, it's irrevocable. You can't undo it. There's workarounds we've, come up with, but it's not, you can't, all of a sudden when they hit 21, 22 and say, oh actually that's all our money 'cause we contributed all of it. You can't flip it back into your own name. It has to remain in the kids' name, at least in some capacity. 

We've seen a hundred grand is a drop in the bucket for an UGMA or UTMA account. We've seen some in excess of $500,000 to pushing a million dollars. Yeah.

That's quite, I'd say not every client at the very beginning of, oh, our little Johnny or Little Susie is born doesn't necessarily realize they're getting that account. They've made, great, contributions throughout the years, the way the investments have been managed. It's grown, it's done fantastic. The money is not theirs. With the 5 29, mom, dad, grandma, grandpa, they still retain [00:07:00] control. Even though it is for the beneficiary. Grandmom and grandpa, mom and dad are in charge, not the kiddo. 

Sounds like you're recommending 5 29 keep the accounts small and pump all you can into the 5 2 9s.

Is that fair? 

I'd say that's typical. It depends on, again, it depends on the end of the day what. The goals are of the client. There's some situations where it's like, Hey, we're high income here. We're gonna just pay for college out of pocket. We wanna set up a trust account for our kid in the future, and college is covered because we're longtime alumni of this program. We've given millions of dollars to this school, like college will be covered. Or any, some circumstance where focusing on filling up a 5 29 would not be the best interest. But I'd say, yeah, typically it's. Education savings, the 5 29 is gonna do the heavy lifting, and then anything into the other account will be more of a gift for postgraduate spending, maybe some odds and ends during college, but it's less of a focus on education.

I wouldn't classify it as a, Hey, we wanna save for education. My first thought wouldn't be, [00:08:00] first recommendation wouldn't be, Hey, let's fill up an UTMA and UGMA. That would be. If you're filling up the 5 29 enough and it's Hey, I also wanna do this separately, that's where that sits in. 

Okay.

Maybe this is a good segue or did you have more you wanted to say on that? 

No. Yeah, I was about to kick it over to you to talk about the actual paying for college process 'cause there's a difference between the savings buckets. It's filling 'em up and then you get to the actual years, okay, now it's time to fill out the FAFSA.

And then, what's student loans are out there, financial aid, what's that process? 

Yeah. The first thing I'll say is the FAFSA form. It's the federal form for financial aid. All colleges require it for financial aid. Some colleges mostly private colleges will require a second form.

It's the CSS forget what it stands for, but most of the, do you know Andrew CSS profile?

 Yeah. 

CSS profile, but I don't know what CSS stands for. Something. Statement. 

College student something. 

College student statement or something. Yeah. Anyway. CSS profile is required by a lot of the private schools, private [00:09:00] small schools.

The thing about the FAFSA and I have people come to me all the time and say, ah, I'm not gonna do, I'm not gonna bother. I'm not gonna get any money, so I'm not gonna bother. But the thing is you can get the federal loans if you do the FAFSA and anybody can get the federal loans that you won't get the subsidized ones.

You'll get the unsubsidized ones. Which means that the interest accrues from the moment that you take out the loan, whereas the subsidized ones the interest holds off until after you graduate. But I think it's a great way to just get some loans anyway. And I have friends actually who, because of financial reasons, don't actually need the loans.

They take out the loans and then they just pay off the loans when the kid graduates. It's just, it's a way of, using the money in the loan program and then paying it off when the kid graduates or maybe they pay off half of it and have their kid, pay off half of it or something.

So I think it's a great way to start your kid on a financial journey too. If they've got a make, even if it's a hundred dollars payment a month or something to pay off their college, I think it makes a lot of sense. So I'm a big proponent of doing the FAFSA. I know it's [00:10:00] a pain in the neck and it's paperwork and it takes a while and you have to involve your kids because they have to do a certain part of it and they have to, there's a little training thing that your kid has to go through saying that they understand that they're taking out a loan and that will have to pay it back.

But I think it's all just part of, an educational journey for your kids as they're, emerging into adulthood. 

Yeah, I think it makes it real for that. I'm thinking about my daughters 2 now, but when it comes to the college process, definitely want her involved with it.

So if you do want your kid to grow up and be able to manage finances on their own which I think every parent would want it would be okay. Let's get them some experience going through processes like these instead of it being like, oh, parents are gonna take care of it all the time.

And it's oh, I don't need work with that. Parent's taking care of it. And then all of a sudden, then they finish college and they're getting the first job and everything and they're going, Hey, what do I do here? And then maybe the parents aren't the best financial resources for things.

Everybody has their own, mistakes or financial issues. They go, then the parents go, oh, figure it out. Then the kids goes I've [00:11:00] never had to do any of this before. So yeah, it's good to get 'em involved in the front end. And then I think it gets some skin in the game at the very least, or at least they're cognizant of Hey, this isn't all, this isn't all free.

Oh, parents aren't just this costs money. So it gets you, okay, I'm gonna work hard and do a good job in school because I know this, people are making sacrifices for this to happen. And it's all good and healthy. Instead of it being like, oh, don't worry about it.

And then one day when somebody does have to worry about it, then they would not maybe be less prepared than if they were upfront with it on the start. 

Exactly. I totally agree. I had one other friend, I thought this was a clever idea too. They didn't take out any loans. They fully paid for their kids' college.

But as soon as the kids got their first job, they said to them, listen, I fully paid for college for you. You're starting off your working career with a pretty good advantage having no loans. I want you to max out your 401k and like that was their requirement. I gave you this gift of no student loans, max out your 401k from day one.

I thought that was a great idea too, [00:12:00] just to teach them the value of, what the gift was of college and how to save really well starting off. 

Yeah. Especially when you look at first jobs outta school with say two different kids graduate, one has $30,000 of student loans to pay back, or more.

And so when it had zero, just that net cash flow difference is gonna be quite dramatic at the end of every month. So be like, okay, take advantage of the fact that you have this, you know that you're a step ahead here instead of, spending the extra money. Okay, maybe if you're saving it here, then that'll just frankly make later in life easier too. 'cause then you can front load retirement savings a little bit. And then when you're, a little bit older down the line, be like, okay, maybe we can, slow down retirement savings. 'cause that's been so well funded on the front end. Yeah. Yeah. It's just a, it's a great plan.

Yeah. The other thing I'll mention too, and, my kids just graduated from college as Chris and Andrew know, so this is a little fresh in my mind, but both of my kids had jobs all four years of college and not only was it really helpful for finances, but it was a great way for them [00:13:00] to meet people, 'cause in the, at the jobs, it was people that were outside of their. Maybe outside of their major or where they lived or their social scene. So I'm a big proponent of either work study, if you can get it from your school or just having them have a part-time job, on campus or near campus.

My kids did teaching assistant. They worked at a coffee shop, ice cream shop the dining center. There's tons of jobs on campus that kids can get. And I think it's a great way to help your kids on the financial journey.

And you need in order to qualify for work study, you need to fill out the FAFSA. So no matter what start there. And then some schools too there's the federal student loan things and everything. But a lot of times the schools themselves will look at what you fill out in the FAFSA and they might have their own parameters for different, scholarships and things, being like, okay, here's what the government will subsidize or not subsidize in terms of loans, but we're gonna up it to a certain higher amount for them. Income limits and things like that. And then, there're gonna be different things, just tuition reductions or scholarships and things [00:14:00] that if you opted out of filling out the FAFSA you wouldn't necessarily be able to get.

Yeah. Sounds good. And then one other thing I'll just note too, most colleges have payment plans. It's a little bit cheaper if you pay the full amount at the beginning of the semester. They charge you, some sort of small percent, or maybe it's a $50 semester fee, but you can pay monthly rather than having to come up with the big chunk at the beginning of the semester the other thing I'm not super familiar with this because I didn't have to do this, but there's private loans and from everything I researched, the private loans are more expensive and less favorable borrowing terms. So if you do have to borrow money for college, definitely start with FAFSA 'cause you're gonna get better terms.

On that, do you have anything to say about the private loans? 

Yeah. For private loans this is where the private loans, I'd say can come in handy. After school is done and the first job is obtained and there's pros and cons to doing it. We did it, my wife did it for her graduate school, got private loans.

I guess she [00:15:00] might actually had private loans on the front end and then we refinanced them to another private loan. When all said and done, I wasn't involved on the front end, but on the back end, once she started earning an income, then all of a sudden, you can get much better interest rates.

Sometimes they're better than what the federal rates will be because the federal ones are not necessarily looking at. Really like credit worthiness. It's just, hey, here's what the rates are, no matter what. So depending on what that postgraduate, whatever that job is, after you graduate and credit scores and everything, it's okay, might be able to get a better rate here.

Then you have to look at the math. Maybe if I'm working in a nonprofit for 10 years and then some certain student loans are forgiven, that wouldn't happen if you had private loans. And then during COVID for a while there when you didn't have to pay student loan interest back, everything was frozen.

My wife was not like we were paying along the whole way 'cause interest wasn't frozen, it was just, Hey, here's this loan. So it's definitely advantages and disadvantages to both, I'd say. But that's a case by case basis. But yeah, on the front end, typically we wouldn't recommend.[00:16:00] 

Getting private loans. Unless the parents taking them on and they're saying, Hey, my credit's great. I'm gonna take this loan, the rate's low. I can keep this money growing in the, 5 29 and elsewhere and I'll pay a bunch of it off at the end, but that's not, usually, the first lever we pull, usually the last lever, frankly, if it was needed.

Yeah. I think that's it on our list of topics. Andrew, anything additional to add? 

No, I think we pretty much, covered it. I guess the one thing you mentioned paying directly to the institution. If grandparents, nieces aunts, uncles great-grandparents, parents want to make an unlimited gift that doesn't count against the lifetime, the annual $19,000 exclusion for college tuition.

If grandma and grandpa pay, and we do a lot of the, coordinate this with a lot of our clients. If they pay the tuition directly, they can pay an unlimited amount. It doesn't go against that $19,000 annual exclusion. 

Oh, good to know. So you pay the institution [00:17:00] directly and it doesn't count.

Yeah. Okay, great. Thank you both for this conversation on saving for college and paying for college. And as always, if you have any questions please feel to reach out to us at pcmadvisors.com. We are on the website and you can find our contact info there. Take care everybody. 

Thanks.

Bye.