Alternatives to 529s for kids educations?

[hellodeli1]

The nice thing about 529 plans is the ability to change the beneficiary to any of the following:

A son or daughter, or a descendant of either;
A stepson or stepdaughter;
A brother, sister, stepbrother, or stepsister;
The father or mother, or an ancestor of either;
A stepfather or stepmother;
A cousin;
A son or daughter of a brother or sister;
A brother or sister of the father or mother;
A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; or
The spouse of the designated beneficiary or the spouse of any individual described in one through nine above.

So, even if your kids don't end up going to college, their kids, or any number of family members could stand to benefit from it. And, certainly anyone can appreciate the benefit of spoiling the grandkids!

musings on personal finance

 

[nphx]

I am researching opening a 529 for my godchild now... im in az and he is in nj. First what is the deal with the poor performing investment options in the 529? I was hoping it was like a brokerage account. In AZ I dont have a tax advantage as far as I know in contributing, can an IRA be opened in the kids name?

 

[growing_older]

One of the considerations that keeps me out of a 529 is what happens to the money if the college expenses don't use it all up - whether from less expensive schools than planned, less time in school than planned or (I should be so lucky) better investment returns than expected.

But now I'm thinking, if you can change beneficiaries as described above, maybe this becomes a whole different thing. What if it becomes a perpetual trust for the education of the kids and all their kids and all theirs and so on. If the time between generations is long enough the funds in the account could grow substantially to cover schooling for a long time. With relatively generous limits on contributions to 529, and enough years to contribute, this could become a substantial base of assets. Is there any provision in 529 rules that prevents this kind of multi-generation usage? I'm thinking this could last well beyond my lifetime.

 

[nphx]

Interesting... is there a way to do a "split" ? I thought you relinquish control to the account when the kid reaches legal age - how do you continue to dictate the percentages?

 

[jazz4cash]

- even if my kids don't get scholarships, there's alway the option of using subsidized loans with ridiculously low rates.

I am still anxious to hear details of these ridiculously low loan rates! Anybody know about these?

 

[SecondCor521]

I am still anxious to hear details of these ridiculously low loan rates! Anybody know about these?

For a few years, you could get government subsidized loans down in the 3-4% range, and then for some reason the lenders would give incentives that would lower the rate even further. When I was going through school from 2005-2007, the rates were going up. They're scheduled to continue to rise in the near future to nearly 7%, but Congress could change their minds again.

People considered needy according to their FAFSA forms can always get subsidized loans where the interest on the loan is paid by the federal government while they're in school (and for a short while after - 6 months?).

In my case I got a Stafford loan that I moved to Student Assistance Foundation at 4.5% with a rate drop to 3.5% after 18 months of on time payments. I have a graduated repayment schedule that is 15 years long, but because of the rate drop it will be paid off somewhat sooner than that.

2Cor521

 

[mb]

One of the considerations that keeps me out of a 529 is what happens to the money if the college expenses don't use it all up - whether from less expensive schools than planned, less time in school than planned or (I should be so lucky) better investment returns than expected.

.

I was kind of thinking of a semester abroad in Italy for dad and mom

 

[jazz4cash]

The Gov't loan programs we qualify for are in the 6.8% range. Private loans run 6.6 (variable) to around 8%. I guess I'll keep looking for something better, though. It seems the HELOC is a better option.

 

[DJScrib]

I never really bought into the 529 plans. I do agree that for most folks, it works out really well. But for someone who plans on being FIREd and continuing to LBYM when my kids are in school, the benefits peter out due to the low tax bracket. On top of that, education is one of those few things in life that are readily subsidized - even if my kids don't get scholarships, there's alway the option of using subsidized loans with ridiculously low rates. I decided that, worst-case scenario, I'd rather have my kids take out loans and make payments for them than do a 529 and pay up front. I will admit that I haven't really spent a whole lot of time thinking this through (it's more of a gut feel), so if anyone can point out obvious flaws in my thinking, feel free to post away!

Cheers,

If you are early retired, is their any way your children could possibly qualify for any of the need based loans (such as Subsidized Loans). From what I recall (as a subsidized loan recipient), is they look at income AND assets owned by the parents. I could be wrong, but it feels most of the people who are capable of retiring, are probably not within federal "needy" standards.

Lastly, when I went to college, the 5k or so stafford + the 2k perkins loans pretty much covered board/tuition/books. Fast forward 10 years later, and at my college (state school), you get basically the same aid amount from loans, but it now costs twice as much to go to school. Thus even if you qualify for aid, it may not cover everything.

Isn't the worst case for a 529 is that you withdraw the money for non-education expenses? So you're paying taxes, but it compounded tax free for all those years, so was still better than a standard investment vehicle. I've heard anecdotes of people who have maxed out their retirement contributions, stuffing money into 529's with no expectation of ever using the money for education.

 

[Art G]

I am still anxious to hear details of these ridiculously low loan rates! Anybody know about these?

I'm not sure what my rate of interest is, but there is no interest charged to me until my daughter graduates, so I'm currently paying zero. My plan is that when she graduates I'll just pay it off, (or let her pay it off if I feel she's taking too long to graduate).
My concern, which I'm now looking into, do I need to reapply annually or is it automatically renewed each year? If SLM gets into enough trouble, will most loans vanish?

 

[Art G]

I am researching opening a 529 for my godchild now... im in az and he is in nj. First what is the deal with the poor performing investment options in the 529? I was hoping it was like a brokerage account. In AZ I dont have a tax advantage as far as I know in contributing, can an IRA be opened in the kids name?

If you use an IRA, well first off, the child must have some sort of job that can be accounted for. Then, she can't touch it until she's 59 1/2.
I would urge everyone to set up a Roth IRA for their kid as soon as possible. Even if it's just $500, if left alone for 50 years can work out quite well for them. My grandfather set up an account when I was born for $600. It's now about $35k and I figure I'll see at least two more doubles before I hit 60. Had he been reinvesting for the first 21 years it would probably already be triple the value. Anyway, while it doesn't seem like a ton, at 60, I'm sure the extra $130k or so should come in handy.
With a Roth it would be tax free, or if not needed could be passed to the next generation.

 

[youbet]

can an IRA be opened in the kids name?

You can open a Coverdell Educational Savings Account, formally known as an Educational IRA. Contribution limit is $2k/yr and the money can be invested in almost anything, like an IRA.

 

[youbet]

I would urge everyone to set up a Roth IRA for their kid as soon as possible. Even if it's just $500, if left alone for 50 years can work out quite well for them. My grandfather set up an account when I was born for $600. It's now about $35k and I figure I'll see at least two more doubles before I hit 60. Had he been reinvesting for the first 21 years it would probably already be triple the value. Anyway, while it doesn't seem like a ton, at 60, I'm sure the extra $130k or so should come in handy.

Your grandfather was able to open a Roth IRA for you at your birth? I don't own a Roth so am probably wrong, but don't you have to have earned income to qualify for one?

 

[Art G]

Your grandfather was able to open a Roth IRA for you at your birth? I don't own a Roth so am probably wrong, but don't you have to have earned income to qualify for one?

Sorry I wasn't clearer. No, Roth's weren't around back then. Actually, he had a broker who recommended opening accounts for all the grandkids and keep the dividends for himself. He did this until I got married at 24, then gave me the stocks as a wedding gift (at that time it was worth around $3500). Since then it has had some pretty good years of growth. Of course the problem I have now is selling and paying the capital gains. A Roth now though, has the advantages of tax free growth.

 

[cute fuzzy bunny]

To open and contribute to a Roth for a child, the child must have earned income.

But there ARE ways to do that, as Nords can attest.

 

[youbet]

Roth's weren't around back then.

As a fellow geezer, I fully understand that concept!

 

[FinanceDude]

To open and contribute to a Roth for a child, the child must have earned income.

But there ARE ways to do that, as Nords can attest.

Doesn't Nords pay minimum wage, less an alllowance for room and board??

 

[youbet]

To open and contribute to a Roth for a child, the child must have earned income.

But there ARE ways to do that, as Nords can attest.

For an infant?

 

[Art G]

You can pay your kids for chores and whatnot, but I thought you had to file a tax form then on them?

 

[cute fuzzy bunny]

I dont believe paying for chores around the house fits the bill.

You ever see an infant get paid for modeling/photo shoots/advertising purposes?

 

[skyline]

If you are early retired, is their any way your children could possibly qualify for any of the need based loans (such as Subsidized Loans). From what I recall (as a subsidized loan recipient), is they look at income AND assets owned by the parents. I could be wrong, but it feels most of the people who are capable of retiring, are probably not within federal "needy" standards.

Lastly, when I went to college, the 5k or so stafford + the 2k perkins loans pretty much covered board/tuition/books. Fast forward 10 years later, and at my college (state school), you get basically the same aid amount from loans, but it now costs twice as much to go to school. Thus even if you qualify for aid, it may not cover everything.

Isn't the worst case for a 529 is that you withdraw the money for non-education expenses? So you're paying taxes, but it compounded tax free for all those years, so was still better than a standard investment vehicle. I've heard anecdotes of people who have maxed out their retirement contributions, stuffing money into 529's with no expectation of ever using the money for education.

It would seem, from the feedback of those more recently involved in security student loans, that my assumptions are off.

As I admitted, I don't have much recent experience with student loans - I do recall that when I was in school some 20 years ago, I had friends that got loans based on their own financial situation (i.e. didn't even consider parent's income/assets). These were usually around 5-ish percent, and usually didn't require payment until sometime after graduation.

Sounds like I need to do some more digging around to figure out what the situation is like now (and try to extrapolate what it'll be like in another 15 years).

Anyone else out there have recent college loan data they can share?

 

[DJScrib]

I'd really like to hear from someone who has faced the college issue recently, (ideally a state school), and what are the finance "traps" that you can be hit with. I've heard student's personal wealth is used for need based items, but also scholarships as well. And my experience has been that the parents wealth affects certain items as well, but not to what extent.

I just want to try making sure I don't spend the next 18 years pumping money into what turns out to be the completlely wrong vehicle and wind up ineligble for items I would have if I had chosen option B.

 

[Art G]

I'd really like to hear from someone who has faced the college issue recently, (ideally a state school), and what are the finance "traps" that you can be hit with. I've heard student's personal wealth is used for need based items, but also scholarships as well. And my experience has been that the parents wealth affects certain items as well, but not to what extent.

I just want to try making sure I don't spend the next 18 years pumping money into what turns out to be the completlely wrong vehicle and wind up ineligble for items I would have if I had chosen option B.

I'm dealing with it currently. I've got income, I've got savings, I've got a house paid for, I've got 529 plans and 401k's....I got two academic scholarships for my daughter, and was offered two loans. One interest free until she graduates, and the other interest accruing immediately (which I turned down). It may get more difficult in the very near future, but thus far I haven't seen the traps.

 

[jazz4cash]

I'd really like to hear from someone who has faced the college issue recently, (ideally a state school), and what are the finance "traps" that you can be hit with. I've heard student's personal wealth is used for need based items, but also scholarships as well. And my experience has been that the parents wealth affects certain items as well, but not to what extent.

I just want to try making sure I don't spend the next 18 years pumping money into what turns out to be the completlely wrong vehicle and wind up ineligble for items I would have if I had chosen option B.

Our #1 Daughter just graduated June'07 and #2 started in Sept'07. Here are just a few highlights of my experience:


FAFSA is more or less mandatory for any need based aid. The formula for Need= Cost Of Attendance (minus) Expected Family Contribution (minus) Scholarships. Scholarships offered by the school are usually not taxable. The EFC is a formula comprised of Family Income & Assets and Student Income & Assets. Primary Residence and Retirement assets like IRA's, 401k's, etc are not included in the formula. Student assets like 529's are heavily weighted. When FAFSA calculates income, it ferrets out untaxed income like 401k contributions. When they calculate NEED, most schools consider loans on par with scholarships, which is what trips up most parents. Loans are extremely easy to get, but currently run in the 6.6-8.5% range. There is an array of Federal Loan programs, but they are oriented to low income families. Do a search for 'efc estimator' and run some numbers.

IRA withdrawals prior to 59.5 are excepted from the 10% penalty when used for education (tuition) expenses for the taxpayer or thier dependents (and bypass the EFC calculation*). A diversified portfolio of education assets (i.e. 529, IRA, taxable, loans) would probably be flexible and meet any needs the best.

 

[Nords]

To open and contribute to a Roth for a child, the child must have earned income.
But there ARE ways to do that, as Nords can attest.

Painfully:
http://www.early-retirement.org/forums/f47/faq-archive-kids-iras-30729.html

But she's in her third year of contributions and should soon be above T. Rowe Price's nuisance fees.

When she turns 18 we'll roll it over to Fidelity, where as a "family member" she'll enjoy the same [-]hypercaffeinated day-trading bunny[/-] low fees as we parents.