Alternatives to 529s for kids educations?

[jazz4cash]

Quote:

Originally Posted by Art G No prob. At least I hope I'm remembering that right. Anyway, I just received a tax form regarding my daughter's scholarship, so I'm trying to determine whether or not I'm going to get hit for taxes now?

The scholarships granted by the school are usually not taxable. The form I get is a 1098-T and it supports the Hope Credit/Tuition Deduction, etc. Also, In my case it cancels the early withdrawal penalty for using my IRA funds. I also forgot to mention my little early withdrawal scheme escapes the FAFSA calculation as my retirement funds are excluded.

[skyline]

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,

[Art G]

Well first off, let me state that I mentioned the PELL scholarship as a must, but what I meant to say was that FAFSA was a must. What I've found is many schools will do the work for you and find you any scholarships that you may qualify for. In other cases I've found that the more expensive the school does not necessarily mean you'll be paying more money. It seems the better schools just want to control who they accept, so they have higher costs, but waive those if they want your child. I had read so many articles about how difficult it is these days to get accepted, and considering most schools charge $250 to send in applications, it really scares you off from applying to the best schools, but don't. My daughter received scholarships from every school she applied to (all partial unfortunately), but it made selecting a school much more dependent on where she wanted to go vs. the stated costs. Also, many scholarships are based on which college within the university you desire, so your child can always apply to a more limited college, then change after their first year there without losing their scholarship.

To skyline, I wouldn't be counting on subsidized loans. At least right now, Sallie Mae is getting much more strict on issuing loans, and I'd imagine in the future they're going to be more closely monitored. JMO.

[jazz4cash]

Quote:

Originally Posted by skyline ............ 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,

My experience has been drastically different with my two kids. Student loan rates run 8% and subsidies don't help much. The repayment terms are attractive though. Its a real sub-industry with little competition. In my situation living in an expensive east coast area you have to be fairly low income to get much based on need. I recall the EFC being on the order of 30% of taxable income for us.

Overall I think having a diversified saving plan and borrowing the rest is the way to go. Depends alot on the discipline of the borrower. I told my kids very early on that I was only paying two thirds and they would have to borrow/earn the rest, which discourage them from borrowing more than the really need.

[jazz4cash]

Quote:

Originally Posted by Art G Well first off, let me state that I mentioned the PELL scholarship as a must, but what I meant to say was that FAFSA was a must. What I've found is many schools will do the work for you and find you any scholarships that you may qualify for. In other cases I've found that the more expensive the school does not necessarily mean you'll be paying more money. It seems the better schools just want to control who they accept, so they have higher costs, but waive those if they want your child. I had read so many articles about how difficult it is these days to get accepted, and considering most schools charge $250 to send in applications, it really scares you off from applying to the best schools, but don't. My daughter received scholarships from every school she applied to (all partial unfortunately), but it made selecting a school much more dependent on where she wanted to go vs. the stated costs. Also, many scholarships are based on which college within the university you desire, so your child can always apply to a more limited college, then change after their first year there without losing their scholarship. To skyline, I wouldn't be counting on subsidized loans. At least right now, Sallie Mae is getting much more strict on issuing loans, and I'd imagine in the future they're going to be more closely monitored. JMO.

Gee...I can hardly find ANYTHING in your post that I agree with! I must be doing it wrong cause my experience is quite different. I am thinking seriously of foregoing FAFSA and just getting private loans. Maybe Im just paranoid, but I was selected for random audits two years in a row by FAFSA. The 'system' tries to convince everyone MUST do FAFSA, but I think the schools are just data-mining and profiling. I am sure the elite schools are different, but most of our (partial) scholarships were based on merit and the FAFSA was not required, but they let you think it is. I would urge starting early to identify a handful of good choices and try to meet with the folks in the Applications/Financial Aid offices as well as whatever department your student is majoring in. The finacial aid folks have LOTS of guidelines, but if you meet with them personally it gives them rationale to use thier Professional Judgement to be flexible with the guidelines.

I guess the one thing I do agree with is your comment about your intended major making a difference. If your student is in a high demand area math/science/engineering lots of aid opens up.

[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]

Quote:

Originally Posted by skyline - 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]

Quote:

Originally Posted by jazz4cash 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]

Quote:

Originally Posted by 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. .

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]

Quote:

Originally Posted by skyline 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]

Quote:

Originally Posted by jazz4cash 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]

Quote:

Originally Posted by 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?

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]

Quote:

Originally Posted by nphx 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]

Quote:

Originally Posted by Art G 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]

Quote:

Originally Posted by youbet 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.