A 529 plan is an education savings account that provides the account owner with tax and financial aid benefits, like tax-free withdrawals, when used for qualified education expenses. The Dell Scholars program began administering scholarship funds via 529 plans to reduce financial aid displacement, ensure students could get the maximum value from awarded funds, and reduce the time before these funds are in their hands.
The process has been well-received by our students – 95% of Dell Scholars were satisfied with this approach, and 65% said that it was less stressful than our old model, which sent scholarship funds via paper checks directly to their colleges but with added turnaround time for processing and mailing. At the same time, it’s worth acknowledging that 529 plans are complex financial instruments and are not designed with scholarship providers in mind. The transition to administering funds via 529 plans came with several technical and programmatic challenges that scholarship providers will want to consider in advance.
Based on what we have learned so far, here are four factors to help determine whether 529 plans are right for your scholarship funds.
1. Is there a clearly defined problem you are working to solve?
What is your “why”? Previously, financial aid displacement was a pain point in our process. Dell Scholars funds are flexible throughout a student’s time in college (and even graduate school), so we are laser focused on eliminating any institutional reduction in funds. But with 529 plans, the potential for displacement is greatly reduced. Learn more about potential benefits here.
For any scholarship provider considering this approach, ensure the benefit to your students will justify the technical challenges. Consider launching a survey of scholarship recipients about your current processes to better understand their experience and identify opportunities for improvement.
2. Do you have access to the right student information?
At a minimum, your program needs each student’s basic information, including date of birth, social security number, and current address in order to properly manage the set up of a 529 plan account on their behalf. You will also need access to your recipient’s financial aid award letter to ensure awarded funds don’t exceed the cost of attendance, or the student may incur a tax penalty. If you aren’t already collecting this information, consider how doing so would impact your processes and data management.
3. What is your students’ level of financial literacy?
Financial literacy is very important as students undertake this new procedure, as it can feel quite daunting and as the ultimate account owner, the student needs to be able to navigate the associated processes themselves. This doesn’t mean your students need to come in with personal knowledge of college savings plans and a financial advisor on speed dial. What it does mean is that your team will have an increased responsibility in helping them learn the necessary steps.
Building financial literacy has always been a priority for the Dell Scholars program; we assess a student’s level of knowledge during onboarding and review the basics together on our welcome calls. Priority topics include how funds are disbursed, the basics of displacement, and what’s included in cost of attendance. With our transition to 529 plans, we have built on this foundation to provide additional guidance, from linking and verifying bank accounts to withdrawing funds and paying for college expenses. Developing informational materials has been critical to the process, and one-on-one coaching with our advisors has kept things running smoothly.
4. Do you have the right partner?
Next up is a landscape assessment of 529 plans. There are state-sponsored plans in all 50 states, plus the District of Columbia, and there are no restrictions based on where your program is located. However, if a majority of your scholarship recipients are in a certain state, it’s worth exploring whether certain tax benefits are available exclusively to residents. Dell Scholars are enrolled in colleges across the country, and while the program is headquartered in Texas, we found our ideal partner in Utah’s my529.
Research fund management costs and program benefits, but just as importantly, find a program that will work with you as a true partner over time. When administering funds to your students, the stakes couldn’t be higher, and it’s critical that you have a trusted partner who will support you every step of the way, through a pilot process and eventually a large-scale implementation.
Administering funds through a 529 plan may be optimal for certain scholarship providers, depending on programmatic and technical resources, the program’s relationship and level of communication with students, and ultimately the needs of those scholarship recipients. The requirements to get this off the ground are significant, but there’s nothing more rewarding than seeing students benefit from the process.