Set a Smart College Savings Withdrawal Strategy

Reyna Gobel

There's one common truth in higher education: College costs are rising.

Financial aid officials help parents and students navigate the waters of paying for college, but one difficult decision is how best to use money saved in a tax-advantaged college savings account known as a 529 plan.

Those rising costs are why Craig Munier, financial aid director at University of Nebraska--Lincoln, says parents need to think about their overall strategy before one penny saved in a 529 plan is withdrawn: how they'll pay for as much as possible over the course of four years.

Taking out money before parents and students have a long-term plan isn't a smart move, he warns.

"Many families may be inclined to simply draw down 25 percent of their student's 529 fund balance each year for four years," says Munier. "But since college costs, like many other things, have a tendency to go up in price each year, families can offset some of that annual increase in cost by how they draw down a 529 balance."

Experts say families should figure out an annual distribution schedule before the first year of college.

[Take these steps to get money out of a 529 plan account.]

Withdrawing a smaller percent early on allows money to grow and for families to pay a larger percentage of later college years, he says. He recommends families use 15 percent of the money in a 529 plan for a student's first year, 20 percent in the second year, 30 percent in the third year and 35 percent in the final year.

Laurie Wolf, executive dean of student services at Des Moines Area Community College in Iowa, has a different distribution plan to stretch out college savings plan funds: withdraw 20 percent per year.

"This will leave you with some funds in case your student has to attend a fifth year," she says. This strategy could help a child who is an education major required to do a semester of student teaching after four years of course work, for example.

There are other ways to make college savings go further. One way is to carefully pick 529 plans that are consistently getting good returns, says Eileen O'Leary, assistant vice president of student financial services at Stonehill College in Massachusetts.

In Massachusetts's 529 plan, families have consistently seen good returns, she says. But anyone in a plan that isn't performing well consistently may want to contribute to a plan that is, she says. This strategy can provide more funds for later college years.

[Find out when you should stop 529 plan contributions.]

Another step is to teach students to budget, so distributions go further. Parents should make it very clear what maximum amount they are willing to pay and what they expect their child to contribute, Wolf says. "Be very frank with how much money there is to work with."

"Explore budgets, planning and the value of picking up part-time employment," she says. With part-time work, students can potentially graduate with less debt and have a financial stake in their own education before they graduate.

The final step in withdrawing funds is carefully planning the actual withdrawal - and part of that is knowing due dates.

[Learn what 529 plan savings can pay for.]

Contact your plan manager or financial advisor well before you need withdrawals, experts say. Ask "How much advance notice does the 529 plan need to process your request to withdraw funds?" Wolf says. Then ask the university "When is the due date for payment at the college/university?" she says, and mark your calendar or planner with these dates.

"Remember that you do not want to miss the payment due date, as there may be late fees that you will need to pay to the college and/or the student's enrollment may be dropped due to nonpayment," she says.

While it's hard finding the cash to save for a student's education, the work begins before the first bill is due - and doesn't end until a student graduates.

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.