The little one is now 19 months. While college maybe years away it’s never to early to start saving. She has around 10k in the bank now which is a good start. My father did well enough for my brother and I as we were able to go through college without having to worry about money.
We know of three different ways to pay for college, the 529 plan, prepay, or just save and invest ourselves. We however, don’t know much about all of the different pros and cons.
The 529 has a big plus of being able to use the money for different people. If the baby gets scholarships the the money could be transfered to another child or one of us to pay for school. That’s all well and good, but what if she doesn’t want to go to college at all and we have two 529s, I don’t think I’ll be able to use all of that money for us in 20 years. I know there are tax savings, but I don’t know how much that is, nor how much one can put away in a year.
The prepay plan seems ok, but you have to put 40-50k within five years. I don’t think that covers anything but tuition, so we’ll still have to save for room and board. I don’t know if this money can be transfered or not, nor what will happen if she gets a scholarship or doesn’t want college. We will also have a tough time coming up with that kind of money. Here in Maryland they do not have the window open very long either. I’m also wondering if we can’t make more money in the long run with the same money up front.
Saving the money is the last option that I know of. While we have done well, a lot of that has come from my father, and from my mother’s estate, I don’t think that we can put away 10k every year and a half. We have opened a Vanguard accout so that should help out. The big plus here is that if she does happen to get scholarship money or doesn’t go to college, she will have a lot of money to buy a house. I know that because I went to a smaller school and didn’t use all of the money my father saved for me I was able to have money to put down for a house. The big drawback for this now is the tax laws have changed from what my father has told me. Before he said I would pay the taxes since I wasn’t making much money then I wasn’t paying taxes, now I’m told that this is different and the earnings are taxed more.
So I’m asking the Dopers what you’ve done. I’m guessing some sort of combination.
One “con” of the 529 approach (or money saved in a custodial account for the kid, outside of any 529) is that it can reduce the amount of financial aid the child is entitled to. I think on the FAFSA and other forms, you’re expected to spend down a lower percentage of your own assets - say, 5% per year, while the child is expected to use 35% of his personal assets to pay for college (I’m guessing / making up those percentages). As in if you’ve got 100,000 put by, you’re expected to pay 5,000 that first year, 5% of 95,000 the second year, etc. If your kid has 100,000 put by, he’d be expected to pay 35,000 the first year, 35% of 65,000 the second year, etc.
Beyond that, the intricacies of college-financing are still major mysteries to us though we need to look into some of the same things you’re researching. I don’t love the idea of a prepaid tuition plan because I don’t trust that it would be flexible enough, though I admit I haven’t researched it much.
I have my doubts on whether Dweezil is college material but Moon Unit definitely will be, so we need to work on this, well, YESTERDAY. Our current plan has been to max out our retirement savings figuring we can reduce that rate when the time comes, and pay many of the expenses out of current income; I do know that retirement savings aren’t figured into assets for financial aid calculations so we’re doing one thing right at least. We do have a bit put by for each kid, but not nearly enough at this point. And it’s in custodial accounts so would be hit by that 35% rule (but that’s what it’s intended for so that’s cool).
Anyway I’ll be interested to see what others say in this thread.
I’m a big fan of the 529 plans. The biggest tax advantage is that when the money is taken out of the plan for education expenses, the earnings (capital gains) are taxed based on the income level of the student, rather than the parent. For most poverty stricken students, this means no tax.
Also, if the money winds up not being used for education, for one reason or another, you can still take the money out of the plan. You just have to pay the tax on the earnings at YOUR rate, which will probably be a little higher.
It’s actually gotten better than that. What you’re describing is how the plan was originally setup - but it’s been modified since that the earnings are tax-free when used for educational expenses.
The prepay plans I saw all limit college choice in some way. Rejected for this reason. My son insisted on choosing his own high school–I expect to have limited say in where he goes to college.
A child can earn up to $850/yr in interest from a plain old non-educational custodial account (UGMA, which you can open without paperwork at any bank) in his name without the parent having to show that amount on the parent’s tax return or the child having to file a return. This means, roughly, that you can put about $10,000 into such an account and earn roughly 5% and let it ride without tripping up any tax reporting requirements (assuming the child isn’t earning anything else). Since there is no limit on how this money gets used, this is a good but limited thing to do. The money does belong to the child and once he hits 18 can be spent on hookers and blow (or pizza and music downloads, for the college-bound).
529 Plan (preferably sponsored by your state of residence)–earnings are excluded from income for both federal and (usually) state tax purposes plus some states have an actual partial state tax credit. (This may not be an option if your state does not sponsor a plan or if it has lousy investment choices, but start there.) You do not need to commit to annual contributions; the contribution limit for IL is, I think, $100,000. We went directly to the plan-sponsor to avoid the broker fees you pay if you go through a bank/broker–but that means we had to make our own investment choices (off the available list).
If anyone here has started using 529 money for college, I would like to hear about how you manage the withdrawal paperwork, whether it is easy, etc.
So, we did 2 and 3–but without overfunding on the 529 because we wanted to be sure we could leave that money in for the duration to avoid the tax hassles and paperwork that would result if early withdrawals were needed for any reason or if he ends up at a cheaper school. We usually make an annual 529 contribution, and it seems to be working so far in that nothing is happening–we get quarterly earnings reports but no 1099 for the earnings and our tax guy shows the annual contribution on a line on our IL return that gives us a partial credit.
I understand that this money will count against need-based financial aid, but we will not likely be very eligible anyway and the tax benefit outweighed the negatives for us.
I just made my first withdrawal for tuition, and it was very easy. My plan ( NY ) allows online withdrawal and sends the payment directly to the college. No paperwork at all.
When I was in college, we got a preliminary financial aid/scholarship letter and then went and registered in person and paid at the end of the process–same day. I wrote the check from my very own checkbook, and then went and paid for my bus pass, books, dining hall card, etc. by more checks–not all of these vendors were the university itself. My first semester I paid for it all from my summer job money; when I couldn’t do all that on my own for second semester, my Dad would give me a check which I would deposit into my checking account.
Times have changed, obviously–student wages don’t go that far now and I have heard that there is such a thing as online registration–wow!
So, the 529 transfer goes directly to the school for tuition? What about books and the other stuff? Or if you intentionally haven’t funded the 529 at 100%, are you just paying tuition (plus room/board) and rationing the rest for the hard costs in later years/making the student fund the books etc.? I assume the IRS would not question a transfer made directly to a school, but can a student living in an apartment, for example, just take reimbursement for groceries out of the 529? How does one show the IRS that something like that is in lieu of room and board?
What kind of plan do you have? I think we’d like to look into the 529 and regular savings for now, but my father likes the idea of pre paying. I would love to be able to pay for her college and give her a nest egg when she gets out.
I have a credit card that applies a 2% rebate towards our 529 plan, rather than frequent flyer miles or some such thing. I’m not sure if I can say the companies, but I’ll give it a shot. MBNA provides the banking service, Fidelity the account, and AmEx the card. (I’m grandfathered in to a MasterCard, so I have a true, no annual fee credit card, not a charge card.)
Mrs. Slow is a little too effective at “saving” money with it though.
but Moon Unit definitely will be, so we need to work on this, well, YESTERDAY. Our current plan has been to max out our retirement savings figuring we can reduce that rate when the time comes, and pay many of the expenses out of current income; I do know that retirement savings aren’t figured into assets for financial aid calculations so we’re doing one thing right at least. We do have a bit put by for each kid, but not nearly enough at this point. And it’s in custodial accounts so would be hit by that 35% rule (but that’s what it’s intended for so that’s cool).