In a long overdue nod to the reality of being a student in the 21st century, Congress recently added computers to the list of expenses that can be paid for with tax-sheltered money from a 529 college savings plan.
Up till now, college students had to prove that owning a computer or tablet was required by the school in order to justify the expense for 529 purposes. With this rule change, the tax code formally acknowledges that such technology is as integral to education as textbooks and No. 2 pencils, if not not more so.
In another change, students who become ill and withdraw shortly after the start of a semester can redeposit their tuition refund into a 529 without triggering a tax.
These changes are intended to help 529 plans remain relevant as the college experience evolves. But these plans may need to change even faster. Computers are no longer just a more convenient way to communicate with teachers or checking grades—entire classes now take place online. Massive Open Online Courses, known as MOOCs, threaten the status quo and could reshape education in fundamental and unforeseen ways.
Already, elite universities including Stanford, Harvard, Duke and MIT offer online courses free of charge. Millions of students around the world use these courses to gain skills that lead to better jobs without ever earning a formal degree. Someday even earning a formal degree might be totally free, as presidential hopeful Bernie Sanders has proposed. President Obama has proposed most students get two free years at a community college. Some states, such as Tennessee, already offer that deal to residents.
Given the changes looming ahead, some financial planners question the wisdom of socking away savings in 529s for a newborn. No one knows what a college education will look like in 18 years, so money stashed away in a 529 plan may be stuck in an outdated account.
For now, 529 plans remain hugely popular. More than 12 million accounts hold $258 billion in assets, according to the College Savings Plans Network. These accounts allow parents to save tax-free for eligible education expenses far down the road. The plans have helped millions of families prepare for costs that have long risen faster than the rate of inflation.
But the difficulty of putting these recent changes in places suggests 529s may not be able to keep up with evolving needs of higher education. Computers have been a key part of college for almost as long as 529 plans have been in existence. And it’s taken this long to include computers as an eligible expense. In a world of MOOCs, legitimate expenses might include things like phone and Internet packages, travel and seminars—and future costs we cannot anticipate.
That said, most financial planners still like 529 plans. But for families with the means to put away something close to full tuition, planners are less likely to recommend a 529 as a sole savings vehicle. Some prefer a strategy that also makes use of custodial accounts such as Uniform Gift to Minors or Uniform Transfer to Minors (UGMA/UTMA). You might also consider tapping your Roth IRA, but only if you are well on track toward your retirement goals.
This is a lot more complicated than simply being able to buy a computer with 529 funds. With so much up in the air, flexibility is the key to a good college savings plan.