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To Fund or Not To Fund a 529 College Savings Plan

Submitted by gkmoffat@gmail.com on 6 July 2009 - 8:41pm

I have talked with several people who specialize in helping students get college aid and they have said that they are hesitant about recommending funding a 529 plan for some kids because it gets in their way of receiving assistance and need based scholarships.

I am an older parent and when my daughter enters college in 12 years I will be on a fixed income and she will probably be a good candidate for aide and assistance.

When I run the 529 modeling it does benefit us to save into a 529 plan but I'm wondering if any of you have had experience with weighing the opportunity costs of 529 investments or if you had other interesting ideas for creative funding of these expenses?

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Submitted by Dan Royer on 6 July 2009 - 9:31pm.
1

I don't know about the interference with need based scholarships. She may not qualify anyway. But also consider the ROTH. Although the earnings are not tax free, you can withdraw the principal without penalty for education purposes. Leave the earnings alone and use for your retirement. The ROTH also gives you the flexibility to not use if she ends up with scholarships and doesn't need it all. I've modeled this and come to the same conclusion as you. But I think the investment options for 529s are pretty clumsy and awkward--and you generally have to use a broker like Fidelity etc. which takes their expense ratio. And states make it more difficult by insisting that only *their* plans get the state tax deduction. You can avoid a lot of that nonsense by using the ROTH, but, the earnings do get taxed. That said, I used the 529 though I never accumulated large sums there.

dan

Submitted by gkmoffat@gmail.com on 6 July 2009 - 10:03pm.
2

Thank you - that is great insight

Submitted by neal@the-patric... on 11 July 2009 - 8:28am.
3

One other possibility - a grandparent can be the custodian of a 529, which eliminates it (at least for today) from consideration for Financial Aid.

I agree with Dan that the investment options are not great, but you can invest with any state (e.g., we live in Nebraska, but the children's grandparents live in Ohio; the contributions go to an Ohio 529, since they get a tax deduction - we could have set it up with any state...just losing out on the deduction).

Challenge with a Roth - limits on how much you can contribute per year.

Good luck...we have two kids who we expect to go to college, and we're already picking out our future cardboard box to live in!

Submitted by gkmoffat@gmail.com on 19 July 2009 - 11:37am.
4

Thank you that is helpful and thoughtful. Would the same apply to a brother as custodian of the 529?

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