Where to park college money

[harley]

DD called me yesterday. She's been saving after tax money for DGD's college education, and it's finally grown to an amount that makes it worthwhile to invest in something other than a savings account. DGD turns 10 the day after tomorrow. DD was thinking about a CD, but I told her I thought it would be a better idea to put it into a brokerage account and invest in the market. I was thinking Wellington (VWELX). She's nervous about the whole market thing, but I think it would be a good option for a 5-7 year range, before pulling it out and parking it in a CD in time for college. But then again, I have a pretty high risk tolerance.

So I thought I'd throw it out for discussion. What do y'all think, or do in this situation? Also, would you put the money in DGD's name? Or leave it in DD's?

In my case, I had invested DD's college money (in my name) directly in stocks, and made a ton off of it (in the 90s). Since she never went to college I've been using it to gift her money to fund her Roth IRA ever since she started working. Seems like a good use of the money, since it was originally earmarked for her anyway. If DGD doesn't go either, DD can do the same if she wants to.

 

[Texas Proud]

Go to Vanguard and look at the various investment options of a 529... might as well get that growth in investment tax free....



https://investor.vanguard.com/529-plan/

 

[TallTim]

+1 for 529s ... they are much better than they used to be.

We started when they were in their infancy and were tied to specific states, and/or had high fees. They still don't let you see the investments inside the plan, but now have a lot more flexibility and portability while retaining good tax treatment and preserving control of the investor in disposition of the funds. We used UGMAs, but if we had to start now, would do 529s

 

[2soon2tell]

With a 8 yr time horizon for some of the money IMO VG Wellesley would be a better choice.

 

[harley]

I looked at some older threads on the topic and went to 529.com from one of them. You're right, they are much better than they used to be. I found one in VA (DD's state) that has a nice Vanguard blended fund (60/40 stocks/bonds) for a decent overall fee (.31%). I never had one for DD because of the specific state limitations and the higher fees, but they look much better now. I sent her some information on the one I was looking at. She's not much at reading financial info, but I'll keep working on her. I think it's a better option than a regular investment account.


As far as Wellesley vs. Wellington, I've got a fairly high risk tolerance. DD not so much. But I think the blended fund should be a good match.

 

[DrRoy]

I would say that Vanguard, 529, and some money in the market are all good ideas.

 

[Urchina]

In terms of whose name to hold it in, DD or DGD, I think the prevailing advice out on the Internets is to hold it in the parent's name. In a 529 you name beneficiaries, but the ownership of the fund is whoever opens it.

Money in a kid's name affects their financial aid eligibility differently than money in a parent's name. Kids are expected to pay a higher percentage of their money for college than parents are. However, this is all probably going to change quite a bit before DGD hits college.

 

[Greencheese]

Depending on their mortgage I saw the idea of paying off one's mortgage and then cashflowing college over at the Bogleheads.

 

[Senator]

Do not put it in the DGD's name, as she may be eliminated for any college grants that are available. They will look for your DGD to spend that money, rather than keep it in savings.

I would avoid a 529 program, as at some point college may be free for her. Either through scholarships, grants, the military, or other program that she qualifies. Money in a 529 is not as good as a IRA.

If you do put it in your DGD name, You can put it in some sort of trust, that she cannot access until age 35 or so. That may keep her assets in a lower state to qualify for college grants. Or fund a Roth.

Once you fund the account, just put it in a S&P fund, there will be a lot of year between now and when she might need it.

 

[sengsational]

I'll comment on this 'second round' of college funding comments for harley...

A 529 or Roth would be better than a CD, that's for sure. DD would be completely giving up financial aid if she put the money in the DGD's name, even in a trust for her. If DD has most of her net worth in retirement accounts and has a modest income (ie stays comfortably within the 25% bracket or less), there is need-based grant money to be had based on the Federal financial aid formula. See the asterisks on this post to get a handle on EFC and compare that to the price of college to see if that could come into play. The difference between EFC and the price of college will be made up of grants and loans, with good schools making the level of loans very reasonable. Too bad you can't pay off loans with the 529 account though (without penalty).

 

[harley]

I'll comment on this 'second round' of college funding comments for harley...

A 529 or Roth would be better than a CD, that's for sure. DD would be completely giving up financial aid if she put the money in the DGD's name, even in a trust for her. If DD has most of her net worth in retirement accounts and has a modest income (ie stays comfortably within the 25% bracket or less), there is need-based grant money to be had based on the Federal financial aid formula. See the asterisks on this post to get a handle on EFC and compare that to the price of college to see if that could come into play. The difference between EFC and the price of college will be made up of grants and loans, with good schools making the level of loans very reasonable. Too bad you can't pay off loans with the 529 account though (without penalty).

Just out of curiosity, why would you get a loan if you have money in the 529? Seems to me you'd use up all available education-marked money before taking out a loan. That would be a last resort to me.

 

[Texas Proud]

Just out of curiosity, why would you get a loan if you have money in the 529? Seems to me you'd use up all available education-marked money before taking out a loan. That would be a last resort to me.

I will tell you.... no interest loans... if you qualify for federal subsidized loans there is no interest on the loans until after graduation... so no accrual or deferred interest...


Now, if the 529 has 100% of all costs of a college, then maybe it is not a good idea...

 

[sengsational]

Just out of curiosity, why would you get a loan if you have money in the 529? Seems to me you'd use up all available education-marked money before taking out a loan. That would be a last resort to me.

Yep, what Texas Proud said. The play is to withdraw an amount equal to the entire annual college budget (a figure supplied by the university) each year of college. That comes out penalty free, and so the gains (from age 10!) are not taxed. Once in college, you actually fork over budget minus grants minus loans, the rest can be tucked away in a taxable account until the interest begins (after graduation). Basically an interest-free loan. Don't get those very often, so I'd take it if I could get it.