You & Your Money

Important Updates on Student Loans & 529 Savings Rules

September 27, 2023 Weiss, Hale & Zahansky Strategic Wealth Advisors Season 2 Episode 37
You & Your Money
Important Updates on Student Loans & 529 Savings Rules
Show Notes Transcript

Have federal student loans? 🎓

Here's what you need to know about recent changes regarding Student Loan Forgiveness and 529 Savings Rules presented by Leisl L. Cording, CFP®, CDFA®.

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Welcome to You And Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Leisl Cording, senior vice president and financial advisor at Weiss, Hale and Zahansky Strategic Wealth Advisors. Now on to today's topic. All right, let's get to our first topic, the recent developments in student loan forgiveness. Please provide our listeners with an overview of the key changes they need to be aware of. Well, starting September 1st, the federal loan interest will begin accruing again. So that means that you have to make payments starting in October. So this has been pushed back for a number of times since the pandemic started to help those that are in student debt try to, you know, get through the pandemic and making sure they're in a good position. But one of the major changes is the Supreme Court decision on President Biden's student loan forgiveness plan. And that had, you know, a temporary pause on student loan interest. And it also offered a potential forgiveness up to 20,000. That's no longer the case. So there's we're trying to figure out some other ways to help out with this debt problems that that is a serious issue. Leisl the landscape certainly seems to be shifting, can you explain the new saving on a variable education? They call it the S.A.V.E. plan that the Biden administration recently introduced. Sure, of course. So, yeah, that's right. Saving on a valuable education. So save plan and this was recently just introduced and it's an income driven repayment plan and it's aimed at making student loan payments more affordable for borrowers. So it decreases monthly payments based on your income. It also, as long as you make the payment that you're supposed to based on your income, the loan won't grow due to unpaid interest. So that's really key there because that can really build up over time. And also, President Biden, he's also hinted at a potential path for a nationwide student loan forgiveness. We've sort of heard this a couple of times, but we don't know specifics on that yet. So we'll see if that ever comes to fruition. So something to be on the lookout for. With these changes, how should borrowers and parents planning for their children's education navigate this new landscape? Well, that's a good question. It's really key to have a plan in place and know exactly what your college plan is, whether you're going to be funding your child's entire education by saving from when they are born to having some student loans, to maybe paying some of the tuition while they're in college. So they always have a plan. That's that's number one. But also just navigating the loans. Once you get to college, if you are taking student loans, there's there's lots of different options like, for example, with the federal loan interest resuming here, we have potential forgiveness opportunities that are no longer available. So making those payments beginning in October will be key for those that do have the student loan. And, you know, just considering strategies for managing that debt effectively. And there's a really helpful website that at the Federal Student Aid website and that's studentaid.gov and that can help to understand what options there might be for those that are getting student loans and what they might be able to do. We also have referred clients to it's called graduation, and that's a company that helps student students that have loans to understand what their options are and whether they should refinance or not. So that's a really helpful website as well. Nerdwallets that a good one too? What does Nerdwallet tell me? Well, Nerdwallet, I mean, it's one of those websites where you can they can help you understand if there's different available loan options. And typically, I mean, you're going to nerdwallet to see what are the best available credit cards, that kind of thing. So it's sort of an all inclusive. Here are some options for you and and might be able to help direct you. Leisl, with the uncertainty and in some cases confusion over student loans, they'll be forgiven, they won't be forgiven. Over the last year or so has that become a hot topic in your office? Do people come to you looking for consultation about what can I do? What will I do? What should I do? Is that something that a lot of people have talked to you and the other advisors about? It is and our advice is always to I mean, especially when the the initial 20,000 will be are potentially up to 20,000 if you were had certain incomes while the children were in school. But the the idea is might as well apply and see if you qualify for any of these. And of course that never came through, but you might as well. And we always say that even when we have clients that have children that are going through school, they're like, Oh, I'll never qualify for financial aid. We always recommend still filling out the FAFSA and see if there's anything that's available out there for you. So definitely something that clients turn to us to talk with them about. And our advice is always to do at least, you know, try to submit for these types of programs. Good insight from Leisl Cording from Weiss, Hale and Zahansky Strategic Wealth Advisors. In our second topic this morning, changes in 529 savings rules. Can you explain the significance of the Secure 2.0 and its impact on 529 college savings accounts? Of course, so secure 2.0. You've heard probably about that. You probably heard about the Secure Act a couple of years ago, I believe it was 2019 when that was passed. But this introduces a significant change for 529 college savings accounts. And what's really neat is that it allows for tax free rollovers from 529 plans to Roth IRAs. That's starting in 2024. And so this addresses the issue of having accessed 529 plan, which can often I mean, they may remain unspent, but if you have accessed 529 funds in a college savings savings plan for a child, there's a 10% penalty. If you take that money out and use it on non college expenses. So or there's they've brought in that you can use it with you know K through 12 expenses as well. So but if you don't use that then there is a 10% penalty on non tuition or school related expenses. So that's a really great update. Can you just clarify for a second what the 529 counts are and what the benefits? And you just touched on some of the risks as far as taking money out. But how do 529 accounts work and what are they? 529 So it's a college savings plan that you can set up for your child. And here in Connecticut, we have the C.H.E.T. plan, which is run by Fidelity. And so clients can or anyone can go and start a 529 plan for their child or grandchild. And what it is, is it allows you to save into this plan. And you actually, if you're a Connecticut resident, you get some Connecticut tax deduction by saving into the 529 plan. So it's a an investment account that will grow over time as a as you save for college. And the other benefit is that the money grows tax deferred so you're not taxed on any earnings in that account while the account is in existence. And then if you take the money out to pay for tuition and other college expenses, the the money is tax free. You don't have to pay taxes on it. So a really great benefit and something that people should take advantage of. And and it's, you know, something that helped a lot of people send their kids to college. So I'm on the state treasurers website here for the state of Connecticut. Because you touched on the Connecticut Higher Education Trust chat it says chat is a state sponsored tax advantaged 529 college savings plan that's helping families and individuals plan for the cost of higher education. Connecticut Treasurer Eric Russell is a trustee of Chet, a tax advantaged, low cost savings program specifically designed to help families save for future college costs. The funds can be used at accredited colleges and universities across the country, including vocational and technical schools and some colleges abroad. CHET features state and federal tax free earnings and withdrawals on qualified higher education expenses. Connecticut families can take an income tax deduction up to $5,000 for single filers, 10,000 for join on contributions to CHET accounts. And there's more information at the state website on the state Treasurers website two about the Connecticut Higher Education Trust. I have a little experience with these type of funds because I administer the college account my mom set up for my niece and nephew out in San Diego. And one thing that I learned when we went to cash that in and paid for my niece's current college expenses at the University of Southern California is that you need to have documentation that the money out of that account went directly to the school. No real middleman involved other than maybe signing the check over in the like. But there there are some strict rules about that. That money can't go anywhere else. It's got to go to the school. It is a college savings account. That's exactly right. And the reason for that is because the IRS would like to tax you or penalize you that 10% if it's not going to a school. So do you want to touch on some rules and limitations associated with those rollover accounts? Yeah. So, yeah. So the rollover, it offers a solution for those access. 529 plans allowing families to move funds into Roth IRA accounts without incurring the penalty. So that's really pretty neat. And the money and a Roth IRA grows tax deferred just like it did in the 529 during the child's lifetime. And it could be available for retirement for them. But there are several rules that apply to the 529 to Roth rollover. So the Roth IRA that you set up to receive the 529... must be in that 529 beneficiary's name. So it has to be the same where we always say a like account and it must be that 529 plan must be in existence for over 15 years. So sort of a key thing to start that 529 plan early on in your child's life. And and there's also rules, too. I mean, anytime you're saving to a Roth or a traditional IRA, there's limitations on how much you can contribute. And so right now, if you're under 50 contributing to a Roth IRA, the limit is 6500. So that will grow over time. But right now, that's the limit. And that would still apply in this case. And then in addition, there's a lifetime maximum of 35,000 going from 529 to Roth IRA. The hope is that that grows over time and that becomes a larger figure. And then one final thing is that the child needs to have earned income up to that $6500 number to be able to contribute to the Roth IRA. There's some restrictions, but generally, I think it's a great. Great option as all these 529 accounts allowing families to move funds to Roth IRAs, do they give interest that is competitive with other savings plans that don't involve college accounts provide? Yeah, it all depends on what your investment strategy is in that Roth IRA. But yes, I mean, the idea would be if you're moving it from a 529 plan to a Roth IRA for the child, they're young. They're probably, what, 21 graduating from college. They're not. Roth IRAs typically are set up for retirement. They're not going to be retiring for another, you know, 40 years or whatever that might be. And so the idea would be you'd probably want that Roth IRA to be a pretty aggressive investment strategy. So it would likely earn potentially earn more than the 529, because the 529 is a pretty typically a moderate strategy. And especially as you get closer to college age, that 529 plan becomes typically pretty conservative because you want those funds to be available when you go to school. Good information. And lastly, there seems to be some uncertainty around the 15 year clock for rollovers. So elaborate on that. Yeah. So there's a you can change a beneficiary on a 529 plan and which is really neat. So if you have if you've saved a ton in your oldest child. 529 then don't go to college. You can change the beneficiary to, let's say, your middle child and they can use that money. But there's we aren't exactly sure if changing the beneficiary on that 529 plan impacts number I talked about the 15 year clock for rollover so you have to have the money in the 529 for 15 years. So that could have an impact. But the IRS is trying to offer more clarity on that and that's pretty typical when these things roll out. There is always we always need a little more clarity on some of the rules and things that come along with it. So certainly that's something that we should factor and hopefully it doesn't impact it. I mean, I think the idea is that you're not making large contributions to a 529 just to roll it into an IRA. So I think that's into the Roth IRA. So I think that's what their intention was. But we'll find out more as time goes on. But if you have a young child, probably make more to consider starting at 529. Really important and timely information today about student loans and 529 savings rules. To wrap up what advice would you give listeners who are navigating these changes in student loan forgiveness and 529 savings? My advice would be to stay informed, armed and seek guidance from reputable sources. I had mentioned a few earlier on the call, but I mean that finance the Federal Student Aid website is very helpful. It actually lays out what the each of the programs are if you're paying back loans and then just exploring what available resources and options you might have for funding your child's college and make up a plan. So those are really the things that I would I would recommend that you pay attention to. Solid advice, listening and to our listeners, remember that staying informed and seeking expert advice is essential and managing your finances effectively, whether it's student loan forgiveness or 529 savings rules. The more you understand, the better decisions you can make. If you need further assistance or have questions, don't hesitate to call Weiss, Hale and Zahansky Strategic Wealth Advisors. 860-928-2341. Or request a complimentary consultation on their website. Thanks for joining us today Leisl and sharing our expertise on these important topics. Absolutely. Wayne, great to talk with you. There she is, Leisl Cording who was on the 40 under 40 list recognized by the Hartford Business Journal. Thanks for listening to You and Your Money. Find even more episodes, videos and other resources at our web site whzwealth.com. Be sure to come back next week for more tips to help you live fearlessy and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network member FINRA/SIPC, a registered investment advisor. Fixed insurance products and services offered through CES insurance agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut 06259 and can be reached at 860-928-2341. Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strive to support clients in achieving their financial life goals. For more information regarding wealth management and customized financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit. www.whzwealth.com.