529s, loans, credits ... financial strategies for back-to-school planning

It's hard to believe and sad to admit but the summer is drawing to a close and clients’ kids are getting ready to go back to school.

While you or your clients (or both!) might be excited for them to fly the coup, it's also an opportune time to start having financial education conversations around the dinner table.

One of the first steps to a back-to-school financial plan is starting with a budget. A budget will encourage students to stay within their financial means and "is also critical to any financial plan."

“It’ll create some awareness about where the money's going,” says William Spencer, director and wealth manager at Crestwood Advisors, says.

“With the resources that you have, whether that's through student loans, stipend from parents or earnings from the child working, they can use that awareness around where the money's going to allocate it well and have it aligned with what they value and what their needs are,” he added.

Catherine Valega, founder of Green Bee Advisory, suggests clients start a 529 plan as soon as possible or even earlier - at birth. As she puts it, it’s the education savings of choice for a lot of reasons.

“One is you can automate contributions to it pretty easily. Even if it’s $50 a month, you also have that vehicle to take gifts from grandparents, family, etc. [If] you invest those funds, they're tax deferred, and then tax free … and depending what state you're in, you will get a state income tax deduction.”

However, Vida Jatulis, financial planner at Main Street Planning cautions clients that although they can use a 529 plan to fund K-12 private school, it doesn’t mean they should.

“The Tax Cuts and Jobs Act allowed parents to use 529 plans up to $10,000 a year for K-12 private school tuition. First, not all states allow for this, so if you live in one of those states you could pay penalties and state capital gains taxes on early withdrawals. Also, by accessing 529 plans for K-12 tuition, you may limit the growth on your savings to fund college,” she said in an email.

Greg Guenther, financial planner and co-founder of GRANTvest Financial Group explains 529 plans were strictly for post-secondary education expenses, but that has now been expanded to include K-12 expenses, according to the original SECURE Act.

“It's more of an educational savings component now,” he says. “The biggest hesitancy with folks I talk to is, ‘Well, what if my kid doesn't go to college or a private school or what if I overfunded?'”

With the SECURE Act 2.0, clients can transfer a portion of unused 529 plan funds into a Roth IRA, which alleviates the concern about what to do with leftover funds if a child doesn't use the full 529 balance for education, Guenther noted.

Financial planner at DMBA, Gerika Espinosa, advises her clients to ensure they’re not paying for their children's education at the expense of their own retirement.

“A lot of parents have good hearts, but it's negatively affecting them,” she says. Instead, she directs her clients to consider applying for the American Opportunity Credit or the Lifetime Learning Credit or to take government subsidized student loans.

“I'm a huge believer in using these credits, if you qualify for them,” says Valega, noting that there are income limits to both. For instance, if clients jointly make over $180,000, they won’t qualify.

For those with some stashed cash, “discuss investing those funds,” says Charlie Pastor, CFP and contributing expert at The Motley Fool Ascent. “Going over the basics of investing now can spark a lifelong curiosity about saving,” he said in an email.

“Invest in companies they’re familiar with, tracking stock prices and company news over time. Even though this strategy may stray from the principle of diversification, the most important thing is for a child to ‘buy in’ to the benefits of investing while they’re young,” Pastor added.

Ultimately, “time is our biggest asset,” says Guenther. “It's our biggest asset in the life we live, but it's also our biggest asset in saving and investing, especially when the purposes are known. The more time folks have to start planning these things, the better off they are, having control over things that are known.”