Alternatives to 529s for kids educations?

[ChrisC]

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've had three kids go through this cycle, with the last one about to graduate this Spring. Here are a few points to keep in mind. First of all, FAFSA is not the only needs-based assessment tool that colleges use. While FAFSA is the determinant assessment for Federal financial student assistance, private colleges also use the College Profile system generated by the College Board to determine awards of financial assistance from their own resources, which could be quite substantial. And you might be surprised that in some instances, it might actually be cheaper for parents and students to attend a high school private college (supplemented by generous student financial assistance) than a low cost public college. Thus, one should not look solely at state colleges as the cheapest deal in town. There are major differences in how FAFSA and College Profile determine expected family contributions or need, but as I recall some of the salient differences are in the area of how the systems treat home equity and retirement accounts. Secondly, if the parents' income or resource levels are very high, FAFSA will likely result in an extremely high EFC and little or any federal assistance except for modest parent loans. Accordingly, if you make too much income -- fagedbout need-based student aid, unless you have more than one child attending college at the same time. Thirdly, if you title assets in your child's name, like those savings bonds, expect them to count more in the assessment of need, than if the assets were titled in your name. Fourthly, these 529 plans, especially those that lock-in state tuition, are pretty good deals -- at least that's been my experience for the state-sponsored plans in Virginia. I purchased one of these plans for my middle child who didn't need the plan and later dropped the plan to the youngest one. I think my rate of return has been around 8.5 percent and it covered 4 years of tuition at a state school. Finally, there's a lot of merit-based aid in both private and public colleges. One can really negotiate appropriate assistance for schools that have generous aid programs.

 

[Art G]

From what I found, it seemed to me that the more expensive schools were so, merely so they could be more selective. If the school wants your child, they will help find the funding for you. The schools that we applied to that advertised $20k more than the others, ended up being almost the same in cost after they "offered" us assistance.
My biggest mistake was in not applying to a couple Ivy League schools because of all the information I had read about how competitive they were. Most schools charge about $250 to apply, so you try to be more selective in your choices, however, if I could do it again (actually I'll have to in a couple years), I'll do it differently.
I'd suggest picking one "reach school" when you apply.

 

[ChrisC]

My biggest mistake was in not applying to a couple Ivy League schools because of all the information I had read about how competitive they were. Most schools charge about $250 to apply, so you try to be more selective in your choices, however, if I could do it again (actually I'll have to in a couple years), I'll do it differently.
I'd suggest picking one "reach school" when you apply.

Very selective schools are very selective and competitive, whether Ivy or state schools. One of the best deals on in-state tuition (as well as non-resident tuition) is UNC-Chapel Hill. However, out-of-state admission into UNC-Chapel Hill is just about as tough as any Ivy League college, especially since UNC-Chapel Hill restricts the number of out-of-state students. And I'm sure the same might be true for UC-Berkeley or UCLA. I know that UVa and William & Mary in Virginia are also tough schools for non-residents, though the tuition for these schools for non-residents is very high.

$250 for an application! That seems very high.

The conventional wisdom is that you apply to 6 schools; 2 reach schools; 2 within my range schools; and 2 safe schools. However, I've known people whose children sent in a dozen applications (they didn't appear to have any discerning scheme to the madness) and people whose children were extremely focused and sent in 1 or 2 applications (and early admissions procedures have now changed since when my kids first applied). I think you take the conventional wisdom with a grain of salt. However, if I had to pay $250 per application, I'd probably restrict the process to no more than 2 schools!

 

[Lusitan]

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.

Thanks Nords - I missed this discussion and it's very interesting. My kid is only 1 year-old, and while he's cute enough to be a model, I don't have any excuse to model him for anything - so he'll have to wait until he's old enough to actually do some chores for me to earn some income. But I'm sure by age 7 or 8 he'll be old enough to earn any income from helping out around the house. Or if we have a rental property by that point, he could help out with that. Interesting food for thought ...

 

[Art G]

Very selective schools are very selective and competitive, whether Ivy or state schools. One of the best deals on in-state tuition (as well as non-resident tuition) is UNC-Chapel Hill. However, out-of-state admission into UNC-Chapel Hill is just about as tough as any Ivy League college, especially since UNC-Chapel Hill restricts the number of out-of-state students. And I'm sure the same might be true for UC-Berkeley or UCLA. I know that UVa and William & Mary in Virginia are also tough schools for non-residents, though the tuition for these schools for non-residents is very high.

$250 for an application! That seems very high.

The conventional wisdom is that you apply to 6 schools; 2 reach schools; 2 within my range schools; and 2 safe schools. However, I've known people whose children sent in a dozen applications (they didn't appear to have any discerning scheme to the madness) and people whose children were extremely focused and sent in 1 or 2 applications (and early admissions procedures have now changed since when my kids first applied). I think you take the conventional wisdom with a grain of salt. However, if I had to pay $250 per application, I'd probably restrict the process to no more than 2 schools!

These state schools may be more selective, but if they want your kid, they'll make it easier. I found that out of state public schools waived the out of state tuition requirement as long as my daughter would maintain a certain GPA. It seemed to me that schools want to appear diverse and therefore welcome out of state kids. NC doesn't want 100% NC students, they want to attract those worldwide. Again, this was just what I gathered going through the process and talking to many schools.
FWIW, we applied to five schools, one being her "safe" school. One school waived the application fee as well, but called us on the phone first to see if we were serious about the school. The school only took 1200 freshmen per year though.

 

[ChrisC]

These state schools may be more selective, but if they want your kid, they'll make it easier. I found that out of state public schools waived the out of state tuition requirement as long as my daughter would maintain a certain GPA. It seemed to me that schools want to appear diverse and therefore welcome out of state kids. NC doesn't want 100% NC students, they want to attract those worldwide. Again, this was just what I gathered going through the process and talking to many schools.
FWIW, we applied to five schools, one being her "safe" school. One school waived the application fee as well, but called us on the phone first to see if we were serious about the school. The school only took 1200 freshmen per year though.

Actually, NC wants a bare minimum number of nonresident students -- I think it's capped at 18 percent at UNC-Chapel Hill, the flagship college in the state. And some of the "public Ivy colleges" like William & Mary might even have their own cap, as well. Yep, schools do want a diverse student population but state schools are also under political pressure to ensure that resident students get treated better than nonresident students in the application process as well as in paying for the cost of attendance. Some state schools provide a major cost differential between resident and non-resident tuition. At UVa, in-state tuition is $8690; it's $27,940 for non-residents. And I believe, the average SAT at UVa might be around 1220 for in-state residents, while it hovers around 1400 plus for non-residents.

Yeah, the state schools have lots of resources to attract quality students; for one thing, unlike the Ivy's, they do award merit-based aid, both to in-state and out-of-state residents, but the in-state folks generally have a leg-up. And there are a lot of highly selective private colleges that can dangle lots of merit-based aid before your child's eyes, if you're fortunate to have a very talented and gifted student.

 

[Art G]

College Search - University of North Carolina at Chapel Hill - UNC, - At a Glance

College Search - University of Virginia - UVA - At a Glance

Two pretty solid schools.

 

[podey]

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

Most of my friends who went to grad school in the 2001-2003 timeframe have consolidated student loans of around 3%. I went to grad school from 2005 to 2007 and my consolidated loan for both years is now 5.62%. Stafford loans are now 6.8%.

 

[Salaryman]

I have a few years before the kids go to college.
My plan of action boils down to these:

-max out 401k/403b contributions
-max out 529 every year (if my kids don't deserve them, we have plenty of nephews and nieces to help)
-quit working & FIRE a few years prior to first year of college to lower my income profile
-get a job in the college of my kid's choice....both to get employee discounts and to check up on what mischief JR is upto

Salaryman

 

[Spanky]

3. Tax-advantaging.

Money withdrawn from 529 to pay for education expenses is tax free. Another positive aspect of 529 is that you can withdraw an amount equaled to the total expenses (tuition, books, fee, room and board) even if they are covered by scholarship without any penalty.

 

[aida2003]

Another positive aspect of 529 is that you can withdraw an amount equaled to the total expenses (tuition, books, fee, room and board) even if they are covered by scholarship without any penalty.

You mean if a child gets a scholarship, you can use 529 earnings tax and penalty free in whatever way you please? That's new to me then.

 

[Spanky]

You mean if a child gets a scholarship, you can use 529 earnings tax and penalty free in whatever way you please? That's new to me then.

According to the IRS (Publication 970 (2007), Tax Benefits for Education), [FONT=&quot]you are eligible to take a penalty-free withdrawal from the 529 account up to the amount of the award. You would, however, have to pay federal and state income tax on the earnings portion of the withdrawal. [/FONT]

 

[retiringby50]

Wow, I feel fully educated now. I'm thinking of opening an ESA with Vanguard at the $2,000 max and then opening the 529. She attends private school now (in 5th grade), and we do plan to keep her there through high school. At "measly" $2,000/year maximum, I'm sure we'll be able to stop contributing in time in case we put her in public school earlier. Other info: I'm very sure she will not qualify for financial aid, so that's not really a concern. I'm a tiny bit concerned she won't attend college - it's something we talk about, but you never know when they suddenly decide to become a movie star or join a circus! I guess I would either take that trip to Italy as an exchange student or pay the 10% penalty. I do have questions:

Is there any reason to bypass the ESA and to do just the 529?

At her age, it's hard for me to see her potential in attending law school, being a doctor, or having the drive to obtain an MBA from Stanford, so I'm probably not going to put in $12K/year in the 529 - so far her only expressed ambition is to be an elementary school teacher . I'd "hate" to have too much money in there to find that she wants to go my alma mater, a state university, and then have $50K leftover... she's an only child, and all of her cousins are older than her and will probably be taken care of by the grandparents!

When choosing a 529, I read some language about it being tied to a "state," but I know she can attend any accredited school. I'm guessing we normally would just pick the state we live in, right?

Any other advice you can give? Or mistakes you've made that I can learn from? Thanks!

 

[Art G]

I'm wondering if someone may know the answer to this question.
If I remember correctly, if the beneficiary of the 529 plan doesn't use it by age 35 it becomes taxable, so what if part of it is used and then passed on? Does the age requirement then stretch out to the next person? I know you have to actually name a beneficiary, but can you just keep changing the name if say your goal is to leave the money for your yet unborn grandchildren? Let's say you put a large chunk into this plan, and 40 years later are forced to take it out and pay taxes and penalties, what are the odds it was still a financial success? Or would I be better off going to art or golf school in my twilight years?

 

[FinanceDude]

I'm wondering if someone may know the answer to this question.
If I remember correctly, if the beneficiary of the 529 plan doesn't use it by age 35 it becomes taxable, so what if part of it is used and then passed on? Does the age requirement then stretch out to the next person? I know you have to actually name a beneficiary, but can you just keep changing the name if say your goal is to leave the money for your yet unborn grandchildren? Let's say you put a large chunk into this plan, and 40 years later are forced to take it out and pay taxes and penalties, what are the odds it was still a financial success? Or would I be better off going to art or golf school in my twilight years?

You are incorrect, there is NO age limit on a 529 plan. Current laws allow you to give money all the way down to grandchildren.. Plus, if one of your kids quits school and becomes a bum, you can change the beneficiary to yourself or someone else, even go "up" to you parents if they want to go back to school.........

 

[Moemg]

I'm thinking of starting a savings for my grandchild . Which is better tax wise the 529 or ESA ?

 

[FinanceDude]

I'm thinking of starting a savings for my grandchild . Which is better tax wise the 529 or ESA ?

Hard to say since tax laws can change. However, the ESA must be used by age 30m or you have to cash it out, the 529 has no time limit.

One BIG advantage of an ESA is it can be used for private prep schools and elementary schools, whereas the 529 cannot. One BIG disadvantage of the ESA is a limit of $2000 a year..........WAY TOO LOW......

In effect, the 529 is a gifting mechanism whereby you can get money out of your estate.......to me that's a pretty big benefit............

 

[youbet]

Hard to say since tax laws can change. However, the ESA must be used by age 30m or you have to cash it out, the 529 has no time limit.

But you can transfer the ESA to another individual, like a 529b. Since you can use ESA money for almost any educational expense (grammar school, high school or prep school, trade school, college, grad school, random classes someone might want to take, tutoring, hardware like computers or widgets, etc.) and you can transfer it from one kid to another or one grandchild to another, it's hard for me to imagine having any trouble using the money for qualified reasons.

One BIG advantage of an ESA is it can be used for private prep schools and elementary schools, whereas the 529 cannot.

To me, this is the main reason why I do ESA's for the grandkids and why doing ESA's is a good idea even if you also do 529b's. When the child is very young, it's hard to know positively that the money might not be needed for grammar school or high school or related expenses such as a computer to use in high school. You don't have to use ESA dollars for these short of things, but you can if needed. Otherwise, just use the ESA dollars like you would 529b dollars.

One BIG disadvantage of the ESA is a limit of $2000 a year..........WAY TOO LOW......

Yep...... if you can afford more than $2k/yr, you'd also do a 529b. Well worth the effort to do both since the ESA is so much more flexible in both investing and spending options. Since the incremental effort of doing both is small compared to only doing one, I find it interesting that folks tend to argue for only one or the other.

 

[youbet]

I'm thinking of starting a savings for my grandchild . Which is better tax wise the 529 or ESA ?

Hmmmmm.....not an accountant or cpa here, so buyer beware, but I think that since you're in Fla with no state income tax, it's a draw, no difference. Both non-deductible, both grow tax deferred, both have tax free withdrawals if used for qualified educational expenses.

Anyone see it differently?

 

[Lusitan]

When choosing a 529, I read some language about it being tied to a "state," but I know she can attend any accredited school. I'm guessing we normally would just pick the state we live in, right?

Not necessarily. You probably want to pick the state that you work in. I guess for most people they are one in the same, but just thought I'd point that out.

The reason is because many states allow you to deduct contributions to their 529 plan from state income tax (sadly, the contributions are not dedictible for federal income tax).

In my case, I live in NJ but work in NY, and NY has a good 529 plan (with Vanguard) and allows for state income tax deductions of up to 10K/year into 529 plans.

 

[Art G]

Of course if you're in a state that has no income tax, you can pick any of the 50 plans.