Saving for education

[cute fuzzy bunny]

So I've looked at the 529's and ESA's. I like the idea of the ESA being able to be used on primary and secondary school, and even on education related items like buying a computer, although the $2k a year is pretty limiting.

After looking at 529's and seeing how low our tax profile is in the first place, i'm not sure its worth setting up a separate account for my sons possible college education. At least the ESA can be used for other stuff.

Still on the fence though...comments?

Whats definitely putting this on the back burner is the whole thing about the major changes or programs disappearing after 2010. Without congressional action, the ESA drops to $500 a year and cant be used for primary/secondary school right at the point in time when my kid will be going into first grade. Which takes a lot of the appeal out of that.

I know these guys hate putting in long term programs, cuz they dont get to play their politics again with that item as a piece of fodder, but not knowing how I can use the money set aside just makes these programs seem worthless to me.

Or is it a foregone conclusion that they'll extend the programs as they stand, or improved?

I heard the ESA has gone to vote already and been defeated by congresscritters that dont like the idea of helping people to take their kids out of public schools. :

Then of course theres the whole possibility that Gabe wont want to go to college or would rather start a business when he's 20.

Any thoughts?

 

[brewer12345]

You have pretty much gone down the same path I have. Thus far we have a modest UTMA account in our daughter's name and the rest is comingled in the taxable account.

 

[cute fuzzy bunny]

To tip my hand i'm sort of thinking of throwing 2k a year into the ESA through 2010 and just see what the politicians do. If they do something displeasing, oh well, its $10k I can probably find a way to use for some approved purpose.

On the other hand, thats such a small amount of money that it might not make much of a tax difference.

And what to invest in...? Time frame might be 5 years, might be 20...

 

[youbet]

I'm doing ESA's for each of the three grandkids.  More flexibility than 529b plans both in terms of how you manage the investments and how you spend the money.  $2K is all I can afford to contribute anyway.  If I could afford more, I'd open 529b plans and fund them after the ESA's.

I share the same concerns you do about the programs being extended, changed, modified, screwed up, etc.

 

[LOL!]

FWIW, we were reluctant to invest specifically for our kids' college education.  It just seemed that putting many into after-tax investments in a tax-managed way (ETFs that pay out minimal dividends) would cover the college education base pretty well.

We looked at 529 plans and an analysis showed that if the expense ratio of the underlying funds was above 0.85%, that if one invested outside the 529 and paid the cap gains taxes that one would come out ahead.

Nevertheless, a couple of years ago, we decided to open 529 plans for our kids anyways, since we had all our other bases covered multiple ways.  We chose the Utah plan which uses Vanguard funds (all stock index funds in our case) and has lower expenses than the 529 plan available directly through Vanguard.  The expense ratio is well below 0.85% as well.

Whether the tax-advantages are around when the kids go to college is another matter.  But I cannot imagine that it would be worse than paying cap-gains taxes anyways.

 

[justin]

Thus far we have a modest UTMA account in our daughter's name and the rest is comingled in the taxable account.

My current position as well. After looking at all the plans, it seems like keeping it in my name for the most part makes the most sense when considering flexibility, taxes, simplicity, stability, etc.

I initially thought I'd keep all college savings in segregated UTMA accounts. The downside is that a significant sum in UTMA accounts would hinder financial aid efforts. Financial assets in my name wouldn't have nearly as much effect on financial aid eligibility.

And in case junior doesn't go to college, it's there for new house/seed money for a business, or whatever.

Another consideration for me was that I'd proabably be ER'd for 5-10 years before college costs arise. I'll just include "college costs" in my budget and save/plan accordingly (pad the nest egg a little).

 

[cute fuzzy bunny]

Makes sense.

The TIAA-CREF 529's, if you live in california, have some pretty good ER's and a decent range of fund choices. I've recommended those to people who were hell bent on "doing something".

I hadnt even checked with vanguard to see if/how much more expensive funds in an ESA cost...I thought I saw that they just charged a low balance fee...but I only looked at it for a short time.

It gets weirder for us in a number of ways...we'll be in our sixties when our son starts looking at college (although we are strongly considering some paid primary/secondary options). Theres a chance we'll have social security coming in then for both of us, and we could deploy some of that to college.

I've also got the option of using some EE bonds that my dad might be "leaving" to us if he isnt around past the time Gabe decides to go to college. I'd rather he is, but he'd be in his mid 90's by then...

 

[Nords]

You have pretty much gone down the same path I have.  Thus far we have a modest UTMA account in our daughter's name and the rest is comingled in the taxable account.  

What he said.

We started with EE bonds for education in '92 and kept that up until the end of '95.  It seemed like a good Peter Lynch idea at the time and it's still probably good insurance, but tax rates were a heckuva lot higher and EE bonds paid a lot better then.

Then we started a UTMA with Tweedy, Browne and DCA'd to that through 2001.  Added a little Berkshire Hathaway at the bottom of 2002.  When everything recovered we backed off in a hurry and haven't added to it since.  We tell her it's for her house's down payment, and in Hawaii a UTMA pays out at age 21 so hopefully we'll have finished our college spending by then.  What she does with it after that is no longer a parental problem.

Any other college money is in Mom & Dad's account.  It seems to be better to spend it on SAT prep courses than on tax-avoidance schemes that may or may not be around in 2010.

Our tax returns in 2009 are going to look absolutely pathetic, just before we file our first FAFSA.  Then we'll ramp up the merit-scholarship applications.

Don't forget to start the Roth IRA as soon as he has earned income.  He's still big into mass-produced high-quality fertilizer production & small-scale demolition, right?

 

[laurence]

We are paralyzed on this issue. We have to wait and see how Tori does. We met a woman last week, spoke at a dinner. Age 28, had her degree, started a foundation, traveling speaker, swam the English Channel, oh yeah, and has Down Syndrome. Amazing and inspirational, but not all the stories turn out that way.

But don't these plans negatively affect financial aid? I mean, I thought I heard the best plan was just keep your money hidden in retirement accounts so it doesn't show up for financial aid, let them qualify for grants and loans, fill in the holes...

 

[cute fuzzy bunny]

After the hoo-hah with my wifes medical savings account last year, i'm further hesitant to engage in an activity that saves me a couple of bucks in exchange for hours and hours of hoop jumping.

Sounds like everyone else came to the same conclusion...good to know i'm not a complete idiot...

 

[REWahoo]

...good to know i'm not a complete idiot...

Slow, high and right over the plate...

 

[Nords]

Sounds like everyone else came to the same conclusion...good to know i'm not a complete idiot...

Maybe, maybe not, but you're in good company!

 

[LOL!]

But don't these plans negatively affect financial aid?  I mean, I thought I heard the best plan was just keep your money hidden in retirement accounts so it doesn't show up for financial aid, let them qualify for grants and loans, fill in the holes...

Well, I think no one should touch one of these plans (529, UTMA, UGMA, ESA) unless they have completely maxed out every 401(k), 403(b) and Roth for both spouses that they are able to.

 

[Nords]

Well, I think no one should touch one of these plans (529, UTMA, UGMA, ESA) unless they have completely maxed out every 401(k), 403(b) and Roth for both spouses that they are able to.

I'll go farther than that-- you shouldn't establish a college fund until you're on track for your retirement savings.

Kids will have the rest of their lives to figure out how to go to college, and they'll have many more options than 50-somethings trying to figure out how to catch up on their retirement savings.

 

[shiny]

What would be the best for gifts to kids (nieces and nephews) for their college accounts? We give I bonds now, but I don't know that it is the best strategy.

 

[laurence]

Slow, high and right over the plate...

Indeed, a hanging slider! 

 

[Sam]

CFB,

This might not be exactly what you're looking for.  Hopefully it's not too off topic.

In 1997, Texas created a Guaranteed Tuition Plan called The Tomorrow Fund.  Basically, it allows you buy any number of college credits at today's cost, to be used in the future.  The plan sounded too good me.  So I plunked down around 16K (I have to double check this number) to buy 8 years worth of college credits for my kids (4 yrs for each).

Sure enough, tuition cost has trippled in the last 9 years, and so did my investment.  But there's a catch:  When I filled out the Federal Financial Aids form last year, it specically asked if I own any prepaid tuition plan.  I did a little research, and found out that the financial aids awarded would be reduced by a certain percentage of the value of the prepaid tuition plan.  I was not happy at all.  Luckily, my daughter did not need any finanacial aids at all.

Anyway, be aware of the reduced aids created by the presence of tuition plans.

Sam

 

[JB]

I looked into 529 plans for my brother. I didn't recommend them because of the high expenses. At best you'll see .5% extra cost (in most cases more). In my view the extra cost and complexity offsets the tax benefits. For example, if the savings is outside the 529 you can offset gains with losses, or even write losses off. If your 529 loses value you can't take a loss.

 

[Papi]

My plan has been to use a combination of my Roth IRA and my substantial home equity.  For the first couple of years when my first of 3 kids starts college, I'll be able to pay for the costs out of my Roth IRA.  Then the plan is to downsize (way DOWNsize, our place is 5000sq ft!) and pocket up to 500,000 tax free.  So I viewed our residence as both a place to live AND as our kids future college funding.  As another poster pointed out, both of these investments are not considered by the financial aid application (could be different for private colleges).  

This plan will work for us if the kids go to a public institution.  If they want to go to a private collge, I think it would break my bank, especially if by some strange coincidence all 3 wanted to go to a private collge!!  The only way private collges will be feasible for us is if they get scholarships/grants/financial aid.  We have begun telling the oldest one that if they want more choices when they get to the college level, they need to do well in school.

 

[SteveR]

Well, I think no one should touch one of these plans (529, UTMA, UGMA, ESA) unless they have completely maxed out every 401(k), 403(b) and Roth for both spouses that they are able to.

We did.

And we have.

All 4 grandmonkies have a starter 529 (Utah) that we own.  Since our Fed. and Utah income taxes will continue at a brisk rate for the next several years we will enjoy the tax breaks for as long as we can get them.  The program here is not too bad from an investment standpoint and I believe it was the right choice for us and for the kids at this point in time.  We will see what happens in 2010.

 

[LOL!]

I looked into 529 plans for my brother.  I didn't recommend them because of the high expenses.  At best you'll see .5% extra cost (in most cases more).  In my view the extra cost and complexity offsets the tax benefits. For example, if the savings is outside the 529 you can offset gains with losses, or even write losses off.  If your 529 loses value you can't take a loss. 

The Utah plan has a 0.25% additional fee, not 0.5%  The  underlying fund expenses are those of Vanguard institutional shares which are not generally available to you.   From http://www.uesp.org/investmentOptions02.html those are 0.025% for the S&P500 index fund, 0.08% for the midcap and small cap funds, and about 0.5% for the international funds.


And SteveR makes a good point about the state income tax advantages for some folks.

 

[justin]

One more thing to add - scholarships. If your child is lucky enough to go to a cheap state school AND get merit scholarships, you may have a hard time using up the college-specific savings that require expenditure on qualified educational expenses.

What would be worse than saving a small fortune for college expenses then not being able to use it?!

 

[ats5g]

IIRC,

Most 529 Plans allow for no penalty withdrawals for the amount of the scholarship [but might want to check on that]. This would certainly make my ER all that much sooner.

We're going to wait on contributing to college for the kids until we're able to max out our retirement plans + Roth IRAs. I showed my wife a spreadsheet to show her how much we'd have to save for the next 25-30 years to retire

Until then, my parents began contributing to NY's 529 plan [only 0.50-0.56%], since PA's investment 529 suuuuucks and MD's 529 investment plan is too expensive. After we're able to contribute we'll probably do the Maryland Prepaid College Trust a bit. And if our kids dont' go to a MD state school, we can use that money at any US-accredited college.

It certainly does suck a bit that prepaid tuition plans usually count much more against you when applying for financial aid than 529 investment plans.

- Alec

 

[larry]

We did the UGMA thing many years ago and now we are doling out the money to her on a regular basis. Even though she's reached majority she's never questioned where the money is coming from (even though the checks are printed "FBO") and I endorse them and give them to her for deposit. I can see some problems going this way but the option wasn't available to us 20 years ago.

 

[poboy]

My brother lives in South Carolina and two of his boys have their tuition paid by the state lottery program. He told me they had to make an SAT score of 1100 to qualify. His third made 1090 and is going to retake. I know Georgia has a similar program for tuition.