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Ask the College Savings Expert: Patricia Roberts

Feb 21, 2024

John Hupalo, host of MyCollegeCorner’s podcast, recently sat down with Patricia Roberts, COO of Gift of College, who gives her unique and in-depth insight into the importance of saving for college, 529 savings plans, student loan options, and how getting a head start on it all can positively impact your student’s future.

To see the full interview:

JH:         This is My College Corner’s “Ask the Expert” series. I’m your host, John Hupalo. Today we focus on saving for college. Actually, it’s really a little broader than that. It’s more like saving for education. Joining me is savings expert Patricia Roberts. Patricia, welcome.

PR:        Thank you, John. I’m so happy to be here today with you.

JH:         Well, I’m glad you’re here. You’ve had a deep, long, beautiful background in the 529 world. You’re a lawyer. You’ve worked at some of the big firms, like Citi, Merrill, Alliance Bernstein Investments. You are currently the Chief Operating Officer at Gift of College. You’re also the author of Route 529: A Parent’s Guide to Saving for College and Career Training with 529 Plans. In the book, you talk about the effect that your mom had on you. Your family. Your son wrote the foreword.

Just tell us about what drives your passion and how important they are to what you’ve done in your life?

PR:        By way of background, I’m a product of a very low-income, and at times no-income, family led by a single mom due to circumstances that changed when I was a child. I became a first-generation college goer, but almost missed the opportunity to attend college because of the fragile state of my family. And because of the cost. In fact, I had a high school guidance counselor strongly suggest that I stick with that waitressing job that I had for the weekends and weeknights and just continue along that path. And my mom would have none of it.

So, I did go to college in the end and I was able to work multiple jobs and send money home to help my mom and my one brother who has a developmental disability. I’m hugely passionate about higher education and the many doors that it can open because I experienced that. And it is higher education, I am certain, that enabled me to lift myself and my family out of those challenging circumstances. I eventually bought a home for my mom and brother to live in. And that really would never have been possible had I stuck with that waitressing career.

Now, that education did come at a cost. Working multiple jobs, going to law school at night, I borrowed tens of thousands of dollars. But I still say there was a value in that. I see it every day and I’m very glad I did. But I’m on a mission to help others avoid debt and regret when it comes to preparing for higher education. And I certainly did that for my son, who is a recent debt-free grad, with a lot of effort on my part and his dad’s part. We were determined that he not wind-up with the financial stress we did when we graduated from college and we achieved it. Little steps at a time. So yes, it’s a very close personal connection to all of this.

JH:         You gave a spectacular piece of advice once, actually three pieces of advice, to my question “what advice would you give to anyone who wants to save?” Do you remember what you said?

PR:        Do I remember what I said? Yes. Just “get started”. Get started now. People delay way too long. They regret it as they look back on their life. Get started now. And then I added in “don’t go it alone”. Be sure to let others know that you’re on a journey to save for a child’s future or a loved one’s future. And invite them to join you on the journey. Friends. Family. Your employer. But don’t go it alone. Get started. And, lastly, start making those automatic contributions if you can.

JH:         You are spot on. And that lays the foundation for what we want to talk about next. Which is I happen to think that naming a college savings program after a piece of the Internal Revenue Code is not a stroke of marketing brilliance. Do you agree with me on that?

PR:        I do agree with you, and with 2/3 of Americans still unable to identify these plans, I think we are both right.

JH:         Yes, it is really scary. But the second thing I think we absolutely will agree on is that although 2/3 of Americans still don’t know, the 1/3 that do know have probably chosen the best way to plan for college that’s possible. And I’d love for you to talk a little bit about some of the attributes.

What makes 529 savings plans so special for those who want to save for their college or postsecondary education dream?

PR:        So in my view, what makes 529 college savings plans so special are first and foremost the tax advantages. As these accounts grow in value, as your contributions grow in value, they’re not being taxed along the way, unlike other types of accounts. Less tax can mean more money for college. What’s also great is when you withdraw the money to use for a wide range of, not just college, higher education expenses, those earnings will never be taxed. I think that’s terrific. And beyond this, 37 states, as of my last count, and the District of Columbia, offer state tax incentives for individuals to save for knowledge.

I love that 529 accounts leave the control of the account in the account owner’s hands. That’s different than UGMA, UTMA, and other forms of trust accounts where it is the child or student who gets their hands on the money when they’ve reached an age of majority, 18 or 21 depending on the state. I love the fact that the adult who opened the account decides whether and when and to what extent to withdraw the funds.

I love the flexibility of these accounts. It’s for two-year, four-year, trade and technical, even registered apprenticeships, graduate school, etc. And I also love the low initial minimum contributions that many states have, $25 or even less. Some states you can start with even a dollar. And the high maximum contributions. You need both. You need the low minimums to get people in, particularly those who are struggling a bit to save. You need the high maximums for any and all who can save more for college or trade school or technical school because higher education tends to be expensive.

JH:         Patricia, I think one of the issues that you raised here and it’s so critical is that you want to try to save but you also don’t know what your child is going to do. So a lot of times, parents who are, you know, changing diapers think, “well, gee, it would be great if I could save, but I don’t know what’s going to happen here.” Things change over the course of a child’s life.

So let’s say that my daughter, turns out that she’s a great kid, but college is not going to be for her. What options do I have then as a parent to preserve that? Am I going to lose that money?

PR:        No, you will not lose the money. If the original beneficiary, your child in this example, does not need the funds for college or desire to go for some form of higher education, the money is still yours. It is a myth that there will be money lost. It belongs to you as the account owner, and it’s up to you what now to do. You can wait it out to see if that child changes their mind. They find themselves. They take a few gap years. There’s no time limit on the accounts. You can leave it in the account. You can change that initial beneficiary from one who’s not pursuing higher education to someone else, provided they’re a member of the family. And that is a very broad definition. It goes out to cousins, step siblings, aunts, uncles. Even you. If you are related to that beneficiary, those funds can be used for your own higher education pursuits. You can save it for your child’s children someday.

You can also, as of 1/1/2024, depending on a variety of factors, including how long you’ve had the account open, roll up to $35,000 of that account balance to a Roth IRA for the benefit of that original beneficiary. Not for someone else, not for yourself, for that original beneficiary. Subject to the Roth rules in terms of how much you can roll each year, $7,000 I think it is, and other conditions. And you certainly can always, always, always take a non-qualified withdrawal. Get your money back. You had not been paying tax on the earnings as they grew in value. Fair enough. Upon taking a non-qualified withdrawal, you’re not using the funds for their intended purpose, so you’re going to owe tax on those earnings and you will pay a 10% federal penalty on the earnings only. Example: you’ve contributed $10,000, it’s worth 11. We’re looking at that $1,000 in gains, only a 10% penalty on that, which would be $100.

JH:         Don’t tell my friends and your friends and our colleagues in the 529 world that I paid the penalty and I cashed out of one of those accounts. In fact, I told one of my friends this and, at New Year’s dinner, he said “Wait, you told me to keep it in there. What’s this all about?” And I said to him that I actually regret that mistake. Because my daughter, who I thought would never return to college or to a grad school, is now enrolled in a Grad MBA program, and she could have used that money. But again, to your point, things change. People do things along the route and figure out what they want to do. And taking advantage of this program is really a big part of how families can construct what the answer is for them.

This is a clarification point for a lot of people. You mentioned the states, like a state program. Can you just talk a little bit about why there are so many 529 programs out there? It’s like going to Baskin-Robbins and having all these flavors and I have to choose one. Why is that?

PR:        So, pursuant to Federal Law, Section 529 of the Internal Revenue Code, states actually can create, oversee, and sponsor, so to speak, 529 college savings programs. And most want to do that to help their residents achieve some form of higher education. Every state in the United States, except for Wyoming, has at least one 529 college savings plan, and so does the District of Columbia. Why do I say more than one? Because some states have decided to have a plan that is offered direct to consumers. Via their website, you could go on, research New York’s 529 plan, for instance, a direct plan, and you could do it yourself.

So for those individuals who are comfortable making choices about their own finances on their own, states offer a direct consumer option. They also, in some cases, offer a plan that is sold through financial intermediaries, financial advisors, for instance. For those families or those individuals who feel more comfortable making an investment with advice and guidance from a financial professional, there’s that option for them too.  Some states even have a couple of plans run by different investment firms as well. You wind up with a lot of choices. And that sometimes confuses people.

But again, remember my advice: just get started. You can invest in multiple plans, do something, do the best you can with the research. There’s a ton of information online. Ask others who have done this. If you have a financial professional, you can ask them. But just do something. Pick a plan, and if it’s not to your liking in the long run, you can change to another plan or you can have an additional one. They’re not mutually exclusive. You could have an account in New York, but you’ve heard California’s plan is quite good too. You can have an account there as well, saving even for the same beneficiary.

JH:         One thing you didn’t mention before, Patricia, everyone, every single saver in a 529 plan basically gets the benefit of the financial expertise of those firms that are sponsoring these plans. What I love about it is you, as an unsophisticated investor who may not know anything about it, can literally put the money in, set it and forget it. But you have these different kinds of – they call them glide paths. The closer your child, the beneficiary, gets to college, the less risky the portfolio becomes, the more certain it is. So there’s a lot of investment advice built right into even the simplest, lowest cost plan. It’s not as if you have to go in and choose all these options and have a very big view of what’s going to happen in the future.

PR:        Yeah, that’s a wonderful benefit from these plans. There is professional asset management or money managers, investment managers as they’re called, really developing these plans, deciding on the investment options, with the states overseeing them carefully. That really does give the average person access to some financial expertise. And there’s a ton of information online about how these portfolios, which are offered within the plans, have performed over the past three, five, ten years or over the life of the portfolio. While that’s not necessarily indicative of how they’ll perform in the future, there’s plenty of information for you to look at. There’s ratings of these plans as well. And certainly talk to others who have invested in them.

JH:         What is your #1 myth that you think keeps parents from opening these accounts?

PR:        I think the number one myth is that they’re just for a four-year traditional college and if your child doesn’t go that route, it can’t be used at all. There couldn’t be anything further from the truth. There are so many options for which these plans can be used. And I know they’re called college savings plans. Oftentimes the states refer to them as that. “College” really means something much broader. Most people think of it as that traditional, ivy-colored school with a four-year degree. And they’re not quite sure if this child, this infant, this adolescent even, is going to pursue that path. So I would say the misunderstanding about the very broad use is something that I find really frustrating and I’m out to bust that myth.

JH:         Do you have another myth that you think is in the top three?

PR:        You know, there’s one that’s a little bit nuanced, but I think it’s important to bust, which is that you have to be the parent of the account beneficiary in order to open the account. Not true. So many grandparents and aunts and uncles and godparents and even friends and neighbors sometimes want to get started saving for a child they love. You do not have to be the parent in order to open the account.

JH:         That’s great. I think when you finally get down to it, parents think somehow that when they’re going to pay the college bill they’re either gonna save enough, or they’re going to have to borrow, or they’re going to hit the financial aid lottery, or whatever it is. And then all of a sudden they say, “Oh, someone told me that if I save for college, I’m going to get less financial aid”. That the value of the 529 plan accounts will have a significant adverse impact on federal financial aid eligibility. Wrong! Talk to us about that.

PR:        That is a big misunderstanding that 529 accounts are going to have a significant adverse impact on federal financial aid eligibility. Not true. These accounts are counted very insignificantly. In fact, under the current formula, only 5.64% of the account value, if you even get to that point after looking at some other fundamental issues, will be considered in this federal financial aid formula.

So if you’ve saved $10,000, we’re looking at $564 of it. I think it is completely wrong to assume that saving is somehow not a good strategy. It is much better than holding out hope for financial aid, which largely often is student loans that need to be repaid. So I would say for federal financial aid purposes, set this worry aside. And I think with some of the FAFSA improvements there might even be improved treatment for 529s. That’s a little bit nuanced.

JH:         For those who are into the nuance, two things: one is that the sibling accounts are no longer taken into account for 529 assets. And the second, which is like a huge deal, is that grandparent accounts are no longer a real deterrent. Previously it was if I had a 529 for my granddaughter, but I gave the money, that became income and it offset the financial aid award about 20 or so percent. And now it’s not counted at all. Those two issues that we just talked about around how the 529s are counted on the FAFSA are important.

But there’ve been other significant changes over the last three or four years and this is one of the bright spots in all of financial aid. I believe that if the Congress has done one really good thing in the last five years, it’s to help savers who want to save not just for college, as you said, but for education and for other opportunities, to get ahead. So can you just talk about that a little bit?

PR:        One is something beyond higher education. 529 accounts can now be used for K-12 tuition payments. Not in terms of books and supplies and tutoring and so on. But K-12 tuition. That is a development that I think is significant. You do want to check with your state 529 plan or whatever plan you’re in to make sure they’ve conformed to the federal law change around that because some states have not. But many people are happy to know that they can use the funds if they need to or want to for K-12 tuition.

Another update was that up to $10,000 from a 529 account could be used to repay student loan debt for the beneficiary on the 529 account. So if the child happened to borrow some student loans for whatever reason, the 529 account balance up to $10,000 could be contributed toward that beneficiary student loan balance or the sibling of that beneficiary.

Another development is remaining balances up to $35,000 can now, as of the 1st of 2024, be rolled into a Roth IRA account for the benefit of the 529 beneficiary, subject to a variety of conditions. If you’ve had an account open for more than 15 years, you’re quite certain that there’s not going to be some other need for those funds, and you want to roll it into something else to help that very child that you care about so much, that’s something to consider.

JH:         That’s really great. The one other that jumps to my mind is that the accounts can now also be used for apprenticeship programs. So it’s not just about going to college. Congress has recognized that there’s more than one way to be successful and it’s really great that they’ve allowed that.

So what we’ve really said is that there’s been an expansion of this program pretty significantly, and we’re really hopeful, those of us in the industry who really want to see people be good users of these programs and use them prudently. You can’t really talk about college savings without also talking about college debt. We kind of started with that in the beginning a little bit and I did want to jump into that for just a moment. Because when families are figuring out how they want to pay that college bill when it finally comes, they have limited opportunities, right? They have their savings. They have scholarship opportunities potentially. They have financial aid, which comes from either the federal government or an institution in the form of grants and scholarships. They have work-study. They might use payment plans to try to offset some of the student loans.

But at the end of the day, we say it all the time, we believe really strongly that student loans should really be the last resort, not the first option, to pay for college. And too many times, the way the system is set up, families say “it doesn’t matter what it costs because I’ll just borrow”. And then 15 years later in the New York Times, you’re reading about how this poor borrower took out X dollars more than they could ever afford to repay and how did this happen?

But I wanted to ask you this. There’s a spectrum of thought about this. One side of the spectrum is that student loans are evil and they shouldn’t be here. And the other side of the spectrum says, well, student loans are really great, like the Federal Plus program, which I happen to abhor. But it’s as much as you want and anybody who can sign their name gets it. Where do you think student loans belong in that spectrum?

PR:        I think student loans should be avoided at all cost. I know that many cannot. I know I could not have done that as a student. But I think people need to think really long and hard before they take out student loans. Think of the child, 18 years old. Their brains are not even fully formed at this age. They have no income. They’re possibly going to go on a different career track than they’re even considering at that age. And for somebody so young to be signing up for an excessive amount of student loan debt, I think is really dangerous, quite frankly.

I do think taking on student loan debt should be done in a prudent way, having thought of all possibilities: Was there a lesser price quality school that you could attend instead? Or attend for the first few years? Is there a way to get the cost down by maybe that second year serving as a resident advisor or finding some other way to make the net cost of the university more affordable? I think it’s not a good idea to let a child make a decision to pursue a dream school that is absolutely unaffordable for your family and for that child without really giving it a tremendous amount of thought.

And I know your website has such great calculators for so many purposes in order to figure out what you might be eligible for. I’ve seen calculators that can help you estimate what a career might pay. Student loans over projected earnings. There used to be something called a slope calculator.

But without taking a careful look at what those loan payments are going to feel like for 10, 15, 20 years or more down the line, either for the child or for the parent, I think it’s really, I want to say almost negligent. I really don’t think it’s a great idea. And I repaid student loan debt for 20 years. I know what it feels like. I got it done. I would say my student loan payoff letter was something I wanted to frame. I couldn’t afford to frame my undergraduate or my law degree. But I wanted to frame that pay down letter. That is how important that was to me. And that was such a relief when it was finally done. But I can’t say they’re evil. I think they serve a purpose. But I think they should be avoided and really, really carefully thought through.

JH:         The other side of that coin, to play devil’s advocate a little bit, because we fundamentally agree excessive debt is not good for anybody. But I think what you said is right, a prudent or a reasonable amount, a thought-out planned amount is not necessarily difficult. And there are lots of indicators out there.

One of those is if your total borrowing is less than what your first-year earnings are that’s going to be a comfortable amount of debt for a student. I found this with both my daughters. I asked them both to take loans in their senior year. I wanted them to understand what the consumer experience was, to actually take a loan and go through that whole process. Because you’re right, now they’re young adults and they’re going to be consumers soon. So I thought there was some value in that. And I know some of my friends had their kids take some of the loans during the course of the year just to keep them involved. And so there’s that argument as well.

Finally, something which is not readily apparent but is actually quite helpful, when the student gets out and they have a job and they have a reasonable amount of debt and they’re making the payments, they build their credit score really quickly. And there’s some value to that as well. I think you and I agree prudence is really the most important part of that equation. You can’t borrow excessively. And if you don’t have to borrow at all, that can be great too. But if there is a way to think about it for the future, for what you’re trying to do with your children, there’s no right answer. There’s no silver bullet. But there are two sides to that coin for those who can manage that appropriately.

PR:        Absolutely. And I know we’re gonna talk about Gift of College, but one of the things about taking out student loans, it is possible to maybe get an employer who’s willing to help pay back some of that student loan debt for you.

JH:         Let’s talk about your day job.

PR:        So at Gift of College, we bring awareness of 529 plans to the workplace. And also awareness to 529A ABLE Plans which really help people save for disability-related expenses. But with the amount of people unfamiliar with 529 plans and the number of people who are really used to, in the workplace, learning about investments from time to time – retirement, for instance – we offer a platform through which employees can take money directly from their paycheck and send it to any 529 college savings plan. Our design has been desirable for employers, particularly multi-state employers who have employees who live in different parts of the country or even just over state lines. It’s Connecticut and New York, or New Jersey and Pennsylvania. The employer doesn’t want to pick just one 529 plan to offer to their employees. So we’ve got a platform that takes that stress off of the employer. It lets the employee pick for themselves. They can connect any plan.

Now, why is it valuable that there’s a platform to send money directly from your paycheck? Well, research has shown that individuals who save directly from their paycheck save 75% more. Makes sense, John. The money’s not passing through your hands. It’s going direct into the account. It really is advantageous. So our platform does the 529 college savings, the ABLE, and then also student loan repayment assistance. We have a lot of expertise around ways that employers can help on a tax-free basis to pay back employee student loan debt. And our platform allows the employer to do that through it and also to match contributions to college savings accounts.

There are a growing number of employers in all industries, of all sizes across the United States, that are recognizing fully the amount of stress their employees are under with respect to higher education. Either paying back the cost of it or saving for the cost of it. Or both, as was the case in my life. I was doing both when my son was born. So employers are starting to help and we’re at the forefront of helping them to help employees. And I love this aspect of my job. It’s exactly what I did for my son. I took money directly from my paycheck. It helped me at a time when I thought “how am I going to afford this?” I just started a little at a time and it really has turned out quite favorably for me. And I’ve heard this from other people. It just makes it easier. You’re not thinking about it. You’re not deciding “do I need that money for something else? Where else can I put those funds? Should I put it in the 529?” No, it’s going directly. So I’m real proud of our work in the workplace. That’s one thing we do.

We also have Gift of College gift cards. We now know that some employers are using these gift cards in the workplace. Instead of giving a silver spoon when a baby is born or something with the company’s logo on it, they’re starting to realize that giving a gift towards higher education is perhaps more meaningful. And some are even coupling that gift card with my book. So we’re really happy about that. And those gift cards are available in retail stores like CVS, H-E-B in the South, Cumberland Farms, Save Mart. These can be purchased in retail as well, not in an employer context, but for friends and family. I get them for every baby shower I go to, every birthday party for a small child or older child. And they can be redeemed into any college savings account, ABLE account, or as a contribution towards student loan debt. So that’s where we’re at at Gift of College.

And one other innovation for parents who are about to send their kids off to college, we’ve come up with a convenient way to keep track of the money coming out of the 529 account and where it’s being spent. We have a disbursement card that’s a B2B product. We’ve got one state and others in line to help their investors take the money out of the 529 account and keep careful track of it. So you could send the kid off to college with a disbursement card with a certain amount on it. And you then know where that money is being spent, should you ever get audited from a 529 perspective.

JH:         Yeah, as the former CFO of a company, I immediately thought that’s great for audit purposes because if anyone ever comes back and knocks on the door and says “OK, how did you really spend the money?”, there’s the record. Well, thank you so much for joining us here on My College Corner. You’ve been a great friend, a great colleague, and obviously a passionate advocate of saving for families. So thank you so much.

PR:        My pleasure, John. Thank you again for having me.

This transcript was edited for content and length.