College savings choices: 529 or cash flow?
October 15, 2018
Folks shared their plans for saving for their children’s educations over at Stacking Pennies’s post on saving for baby.
I’ve always felt uncomfortable with stocking up the 529 aggressively, or more aggressively than we have been doing. I simply don’t know what JB will choose when the time comes, going to college and graduating is a relatively new thing in our immigrant family. All of PiC’s family went to college and even went on to higher education. That was true even if you went back a generation.
In my immediate family, I’m the only college graduate. My parents went to college but didn’t have the time or money to graduate, they were already raising us by then. Grandparents? Hah. Grandma was smart as a whip and she used her natural intelligence to the fullest, parlaying a 2nd grade education into raising a huge family and running a tiny farm and growing it into something that sustained her into her 80s.
It always disappointed Mom that I didn’t go on to graduate school because she hoped for more, and better, for me, but that just wasn’t my path. Formal education, Asian though I am, simply wasn’t my forte. Working hard and smart was. I got my English BA and hit the working road hard. Honestly, there’s not much a Masters would do for me in my current line of work, I’d have to pursue a PhD to make any difference in my working path and even then I doubt it’d be worth the investment. The ego boost doesn’t seem worth the price tag, either.
Our current savings plan: We’ve been working on contributing $14,000 (the maximum for one parent) per year to JB’s college savings aiming to go north of $100,000 but … there are too many unknowns here for me to be really comfortable with that much or more.
I simply cannot predict JB’s interests and commitment to higher ed, and what the landscape of higher ed will be in 15 years. I’m tempted to forgo much more in the way of contributions to the 529 and simply invest in our brokerage toward our hoped-for early retirement and mortgage paydown, and plan to cash flow college should the expenses rise above the saved amounts. We’d be abandoning tax free growth but if ze didn’t use the money, there would be a penalty to get that money out as well.
:: Am I being too risk averse (avoiding that penalty) with that line of thinking? What would you do?
If I could go back, I would max out our retirement before starting to contribute to 529s. I wasn’t really thinking about financial aid concerns when we started. Though in the end, maybe we’ll be financial aid ineligible just by income alone. We’ll see.
In your case, if you’re trying to minimize college costs, you should do mortgage paydown before taxable brokerage. (Disclaimer: I am not a financial planner.)
I fully 100% expect my kids to go to college. We had been saving $500/month/kid until recently when we bumped it up to $750/month/kid. If we lived in California or Michigan I would have a hard time saving more than the expected cost of the flagship state school.
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We’d be pouring everything into both our retirements if I actually had a plan (still sad that I don’t have a good 401k) and the point would be moot on whether we should save more for JB’s 529. I’m pretty sure I EXPECT JB to go to college but I’m leery of committing to that outcome because my sibling has made me gunshy on *knowing* certain things about our kids.
Is your thinking that we should pay down the mortgage more because eliminating that expense would make cashflowing college more easily? Or that decreasing our expenses is more favorable to the equation rather than having more assets insofar as financial aid is concerned? I assumed that we would be ineligible for financial aid based on assets alone assuming current income and whatever the normal projected increase in our assets would turn out to be at the end of 15 years.
I don’t know why I post money posts on Monday when I’m too tired to fully mull over comments!
Financial aid. Though you are right that you could recast to help with cash flow. You can hide a lot of assets in places colleges don’t count in their calculations.
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I’m designating a portion of our brokerage accounts to future-kids’ schooling. I’ll save up enough for them to go to the flagship state school, but they can use the money however they want, e.g. start a business, buy a house, etc. I worry that financial aid departments will be biased to increase our EFC if the money were in a 529 since that was the practice when I went to college. I’d rather their EFC be lower, give them a better chance at need-based aid (I expect we’ll be FIRE by then), and let that savings go further. Who knows how it’ll actually pan out two decades from now, though.
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The 529 is treated the same as a taxable brokerage for the purposes of financial aid if they are administered by the parent(s). (529s administered by the kid are treated the same as taxable belonging to the kid, but I think it’s pretty difficult to have a minor administer a 529?) Retirement savings and most house equity are protected.
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I stand corrected! I thought 529 fell under category of student owned assets.
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I think a new post with this info is warranted – I should have taken the time to do a bit more research 😛
As I mentioned in my post, we’ve heavily prioritized retirement thus far, but most of that is in pre-tax space. We’ll shift priorities from pre-tax space to use a mega backdoor Roth to double as college/retirement savings. This isn’t really applicable broadly, since many people need the Roth space for retirement and don’t have access to as many tax advantage spaces as we do.
In your shoes, I’d probably place a bit more weight on the mortgage pay down and brokerage than the 529, but it would be a hard decision. It seems like you should be able to take money from a 529 if you agree to pay taxes on the earnings, but that isn’t the way it works!
We have a healthy amount in the 529 now so I would really LIKE to redirect our money to focus on both the brokerage and mortgage payment just to be sure we’re more able to be flexible when we need to pay for college and things.
We’re prioritizing retirement too, but we also contribute to our kid’s 529 plan. We frontloaded it a bit. Now, we’re at a pretty good spot with $70k and 10 years left until college. From now on, we’ll just contribute enough to maximize the tax deduction. I think that’s pretty good. Hopefully, he’ll get some financial aid and scholarship.
It’s not a big deal for us if he doesn’t go to college. We have nephews and nieces. Mrs. RB40 also might go back to get a PHD after she retires. It’s better to have more than you need, rather than less.
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I didn’t know that Oregon gave a tax deduction for contributions to a 529!
Yeah, it’s really helpful. The deduction is around $4,500/year. Not bad at all.
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We have 529s for Baguette (one set of grandparents established one; the other set had us establish another). But. We don’t know what her academic future holds. I don’t know what she’ll want to do. I don’t know what she’ll need to study to do it. I think she’ll do SOMETHING educational after high school, but what will it be? And for how long? And what will it cost?
What we do need is a safety net for middle school. And a 529 doesn’t help with that. So we have the “non-preferred” Coverdell fund, because we can use that prior to post-secondary. Except you know what those don’t offer? Time for growth.
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I thought Cruz’s 529 thing made it into the last tax bill? So you can use it for private school now? Is that wrong?
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https://thecollegeinvestor.com/21959/529-plan-private-school/
It looks like you can withdraw up to $10K per year for private school K-12, but I’m not sure if Tragic Sandwich was thinking about paying for private middle school or for supplemental services?
1) I am 99% sure I read somewhere that the opportunity cost of almost all PhDs overcomes the eventual earnings boost and 2) I mean, college may or may not be useful but any grad (not professional!) program worth going to will pay YOU, not the other way around.
I think it’s reasonable to put some amount into the 529, but not all the money, because what if they become an electrician or something that requires some money but not all the money? (We are doing more or less the same thing.)
1) I believe that
2) See, this is a thing that, as a class jumper, I never knew!
I agree with you, the conclusion is save some of the money in the 529 and not all of it.
It’s not 100% for graduate Master’s level programs (occasionally it might be worth it to… get a MS in biology or something? I don’t know- as separate from, like, an architecture master’s or a MSW or an MBA or something, which are professional degrees) but good PhD programs offer a stipend, and if someone can’t get into one that has a stipend, I’d recommend rethinking a PhD at all. (Some people go to a PhD program and leave with a master’s on purpose, to avoid paying for it; I leave the ethics as an exercise for the reader.)
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My husband and I think that college might not be as much of an automatic decision for our kids as it was for us, so we’re focusing on flexibility in our own cash flow & building (small) general savings accounts for them. Maybe they’ll need money for a car so they can get to a good job in a rural area, maybe they’ll do a trade apprenticeship, maybe they’ll need seed money to start their own small business – or maybe they will in fact go to college and we’ll need cashflow to cover the EFC. A 529 is really really good at saving for college and really really lousy for anything else, so we are choosing flexibility. Especially in your situation, you need to put your own oxygen mask on first; JB can take out student loans if zhe needs to but zhe can’t borrow to fund your medically-forced early retirement!
Too true. I do tend to forget that loans ARE a possibility even though I never forget that we can’t get loans if I’m forced to retire early. TSK.
$14,000 per year sounds pretty amazing to me! Unless JB goes to a private college or an Ivy League school, that should do the trick. If ze does go for more expensive post-secondary, ze will have the opportunity to pay for some of it. My parents paid for everything for me, but I honestly think I would have been better served by being obliged to pay for a certain portion of it myself. (As you know, my financial management was non-existent when I was younger.) Our daughters have had to pay for a portion of their post-secondary, and they are much, much better financial managers than my husband and I were at their age. All this to say, you’re doing JB a wonderful thing by putting this money aside for zir post-secondary education. I vote for putting anything extra towards retirement and against the mortgage. If ze needs more than you’ve saved, you and ze will likely both be in a position to fill in the gaps in a team effort.
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It’s such a tough balance figuring out how much ze should be responsible for and at what age – I want zir to be sent off to college already knowing how to budget and spend wisely, and how to earn zir own way to some degree but I also don’t want to put the burdens I trundled under on zir back either.
It’s nice to have the option for ze to go to school. $100K sounds like a very reasonable amount! I don’t know how the 529 plan works and if it is similar to a TFSA up here in Canada.
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I keep thinking this is plenty, but then I worry it’s not enough! I think we might be better off concentrating our efforts on our passive income so that we can cash flow the costs.
I do have a 529 for BwC but we are prioritizing retirement planning above it. So right now we are only contributing $3K a year in his 529 and we do plan to get more aggressive to his contributions when he starts kindergarten in a few years. We do expect him to attend college but if that does not happen, we have other family members that can use that money or if we have another kid we transfer it.
Going above $100K is a great goal for JB’s 529 and should cover a nice portion of his college expenses.
We’ve saved about $50k for each kid, and would like to get to $100K/per kid. (We are also maxing out on retirement savings, including a “catch up” max for my husband, as he’s over 50). We feel well positioned for retirement, so are turning to college savings & mortgage paydown. A lot will change when I go part time and/or quit, so we want to tackle the big things with college. I don’t think our kids will qualify for financial aid regardless, so we will plan to cash flow some, use the 529, and then have them work part time as well
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