6 FAQs About 529 College Savings Plans

College is a large expense and one worth planning for, especially if you want your future college graduate to start their lives with minimal debt. One common way to prepare for such an expense is to open a 529 college savings plan.

Photo by Ruijia Wang on Unsplash

Photo by Ruijia Wang on Unsplash

What is a 529 plan?

College savings 529 plans are state-sponsored savings accounts that offer both tax and financial aid benefits.

What states run a 529 program?  

Almost every state has a 529 program, each with different perks and benefits. You can pick based on perks and you don’t need to live in the state you opened the account in.

You can look at 529 plan options using this tool from

What are the two types of college 529 plans?

There are two types of 529 plans, they are:

  • College savings plans – This plan is similar to a Roth 401k or Roth IRA by allowing you to contribute after-tax income in the form of mutual funds and other types of investments. There are a number of investment options to choose from and the 529 account will go up and down and value according to those investment choices. The money is this account is available for tuition, books, and often housing.

  • College prepaid tuition-  This plan can be used to pre-pay all or part of the costs of an in-state public college education. Sometimes, they can be converted for use at private or out-of-state colleges.

What are the perks of using a 529 savings plan?

Each state provides slightly different incentives for its 529 programs. But some of the overall benefits include:

  • Large income tax breaks (for federal and often state taxes)

  • The donor stays in control of the account until its use

  • They’re low maintenance

When can you start them?

You can start one of these savings plans at any time. Most 529 programs are “set it and forget it” meaning the investments come straight out of your paycheck or bank account.

Where can I learn more about college 529 plans?

There are a lot of online resources for comparing and ranking different 529 programs. You can reference one of these, or reach out to your friendly neighborhood tax professionals. We can help you select the best option for you.

*Contact us here*

Senators seek tax relief for student loan burdens

By Bankrate

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Screenshot 2016-07-29 at 9.21.25 AM

College graduates in 2015 owed an average of slightly more than $35,000 on their education loans. Overall, student debt is around $1.3 trillion and growing.

With those kinds of numbers, it’s no surprise that in many cases debt-burdened students look for ways to lessen their loan loads. In rare cases, lenders reduce or completely erase the loan balances.

But what is a surprise to these cash-strapped scholars is the tax bill that comes with that loan forgiveness. Federal tax law says that in most instances, the amount of erased debt is taxable income to the person who used to owe.

A group of Democratic U.S. senators wants to change that tax law.

Student debt dragging down economy

Sens. Bob Menendez of New Jersey and Elizabeth Warren of Massachusetts have introduced S. 3266, the Student Loan Tax Relief Act. Joining as original cosponsors of the bill are their Democratic colleagues Sens. Ron Wyden of Oregon, Debbie Stabenow of Michigan and Cory Booker of New Jersey.

“Students and families are being crushed by student debt, dragging down the economy and holding back an entire generation in its pursuit of the American dream,” said Menendez, who serves on the tax-writing Senate Finance Committee. “If you’re able to get your student loans forgiven and secure a fresh financial start, you shouldn’t then be saddled with an unexpected tax bill.”

Consumer advocate Warren echoed that sentiment, saying the legislation “will give peace of mind to borrowers who have earned the right to have their student loans discharged by ensuring they don’t get stuck with a big tax bill when that happens.”

Streamlining tax-free student loan forgiveness

There are a few cases where student loan debt is forgiven, such as when the borrower suffers total and permanent disability or dies. And only in rare cases the forgiven debt isn’t taxed.

But generally, says Warren, the tax consequences of student loan forgiveness is a mess. “Sometimes the government charges students taxes and other times there are no taxes if the student loans are forgiven,” according to the junior senator from Massachusetts.

S. 3266 would clarify student loan forgiveness tax situations by amending the Internal Revenue Code to exempt student loans discharged through the federal income-based repayment and income-contingent repayment programs.

In addition to the current disability tax exemption, erased loan amounts would no longer be considered taxable income in cases of the debtor’s death, as well as in cases where fraud was committed by a school.

The fraud provision already is part of a separate bill introduced earlier by Stabenow.

Mostly symbolic pending the election

While the Student Loan Tax Relief Act is good news for struggling students and their families looking for ways to reduce their educational debt, don’t start the loan forgiveness process just yet.

Right now, the bill is largely symbolic.

I’m not questioning the sincerity of the 5 Democrats who support it. But the timing of the measure’s introduction just happens to coincide with Democratic National Convention, underway now in Philadelphia.

And the Party’s 2016 platform includes a section decrying “crushing student debt” that discusses support for loan forgiveness and discharge efforts.

Plus, unless the bill is acted upon soon by the Senate, which is unlikely since that chamber is controlled by the Republican Party, it will die at the end of the current congressional session later this year.

But look for the Student Loan Tax Relief Act to be reintroduced in early 2017 when the 115th Congress convenes. Depending on how the November election turns out, it could then become law.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Bill would make some forgiven student loans tax-free

By Bankrate

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!


Owing a debt you can’t repay is bad. Owing federal taxes on that debt amount even after you no longer have to pay it back is even worse.

Federal tax law, however, requires in most cases that when a loan is forgiven, the amount that is written off by the lender is taxable income to the previous debtor.

Sen. Debbie Stabenow, D-Michigan, thinks that’s wrong when the debt was incurred under fraudulent circumstances, specifically to pay for college. Stabenow has introduced the Student Tax Relief Act, a bill that would protect defrauded borrowers from being taxed on their forgiven student loans.

Corinthian College cause

Her bill, S. 3008, was drafted in the wake of the federal investigation into Corinthian Colleges, Inc. and its associated schools.

The Department of Education found that the now-defunct for-profit chain run by Corinthian defrauded students at more than 100 schools in more than 20 states across the country.

Following the fraud finding, the Education Department told students who borrowed money from Uncle Sam to attend Corinthian classes that they would not have to repay those loans. Affected students can apply for loan forgiveness through the department’s Federal Student Aid division.

That’s a welcome step for the bilked students. The Education Department says that as of March 1 it had processed almost 9,000 claims from former Corinthian students nationwide, totaling more than $132 million.

Canceled, but taxable, debt

The forgiven debt provisions of the Internal Revenue Code generally require that such canceled debt is taxable. For example, folks who are able to negotiate down or away debt owed on credit cards face the same tax due on what is called phantom income.

A notable exception is in the case of some residential foreclosures or mortgage renegotiations, where a special, temporary law allows certain home-related canceled debt amounts to be tax free.

The Corinthian students also were provided special tax relief on the amounts cleared by the Department of Education.

Stabenow’s bill, which has 7 Democratic cosponsors in the Senate, would give the same tax relief to students in similar educational fraud cases.

“When students take out loans to attend college, they should get a fair deal and a fair shot,” said Stabenow in announcing the introduction of the Student Tax Relief Act. “No student should be the victim of false advertising from a college that promises skills or job placement. And the last thing they deserve is to be hit with an enormous tax burden on their forgiven loans.”

Time running out

Stabenow’s bill might be able to garner some additional support. The issue of burdensome student debt in general already is under a spotlight, thanks in large part to Vermont Sen. Bernie Sanders’ campaign to be the Democratic nominee for president.

But time is not on the side of Stabenow’s effort. The tax-writing Senate Finance Committee, where the bill is pending, has not scheduled any hearing on S. 3008.

And with the upcoming November elections, the House and Senate aren’t going to be in session much. The chambers’ schedules are reduced so that Representatives and Senators can return home to make their reelection cases.

If, however, enough constituents let lawmakers know of their student debt concerns, both on a wider scale and in connection with cases like Corinthian, there might be some action on Stabenow’s bill this year. That would be a welcome development for former students facing an unexpected tax bill next filing season on their forgiven school loans.

Have you ever faced a tax bill on forgiven debt? Do you agree with Stabenow’s proposal? Do you think the tax code is right, or should all forgiven debt be tax-free?

Low tax receipts point to Nov. 5 debt deadline

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate


Congress has until Nov. 5 to raise the federal debt limit. If lawmakers don’t act by then, Uncle Sam won’t be able to pay his bills.

The deadline was set by U.S. Treasury Secretary Jacob Lew in an Oct. 1 letter to the Republican and Democratic leaders on Capitol Hill.

The debt limit is the amount of money that the United States can borrow to meet its existing legal obligations. These include payments of Social Security and Medicare benefits, military salaries, interest on the national debt and tax refunds.

Uncle Sam’s credit limit

The debt limit is not to cover new borrowing, but debts that have already been incurred.

Once upon a time in Washington, D.C., raising the debt limit was routine. Since 1960, Congress has agreed 78 times to permanently raise, temporarily extend, or revise the definition of the debt limit. Those increases have come under a Republican administration 49 times and while a Democrat was in the White House 29 times.

In recent years, however, the process has become politicized.

Members of Congress have used the debt ceiling deadline as a way to pressure colleagues and the president to accept other legislation. This happened in 2011 and 2013, with the U.S. borrowing authority going down to the wire in both cases.

Limits on extraordinary measures

In anticipation of possible problems with raising the debt ceiling, the Treasury secretary can use what are called “extraordinary measures” to slow the impending default.

These include such things as not investing fully in federal employee retirement funds and delaying securities rollovers. Essentially, it’s Uncle Sam’s large-scale version of robbing Peter to pay Paul.

Those measures, however, will only last into early November, warns Lew.

Lew says that “on or about Thursday, November 5 … we would be left to fund the government with only the cash we have on hand, which we currently forecast to be below $30 billion.”

That’s only around half of what the federal government needs on certain days, writes Lew.

Not enough tax money

Part of the reason that Uncle Sam is running out of money, says Lew, is that the recently paid quarterly corporate and individual tax amounts were lower than Treasury projected.

At the same time, Lew says, investments in certain large trust funds, including military retirement trust funds, were higher than projected.

Uncle Sam’s bottom line: We’re heading into the red.

Will lawmakers with specific legislative agendas hold the country’s financial stability hostage? Maybe. It has happened before.

In his letter, Lew warns against such politicking, saying it could cause “catastrophic damage” to the U.S. economy and global financial markets if, for the first time in history, America fails to meet all of its obligations. Lew also warns that simply waiting until the deadline is imminent also is unwise.

“Moreover, we have learned from previous debt limit impasses that failing to act until the last minute and engaging in partisan brinksmanship can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” writes Lew. “To remove these unnecessary and avoidable threats, I respectfully urge Congress to take action as soon as possible and raise the debt limit well before Treasury exhausts its extraordinary measures.”

Congress now has less than a month to act. We’ll see how seriously representatives and senators will take Lew’s pleas.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.