"Why 97% of People Don't Use 529 College Savings Plans."

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letsgobobby
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by letsgobobby » Thu Sep 11, 2014 12:45 am

cheesepep wrote:I will never use a 529 plan because of simplicity. Imagine I have two kids so I have two 529 plans, a 401K (at least 1), a ROTH, HSA, taxable (maybe more than 1), etc. Too much for me. I like simplicity .

I like to have as few accounts as possible. It keeps my money more focused.

I'd rather have more money in more accounts, than less money in fewer accounts.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Leesbro63 » Thu Sep 11, 2014 1:25 am

letsgobobby wrote:
cheesepep wrote:I will never use a 529 plan because of simplicity. Imagine I have two kids so I have two 529 plans, a 401K (at least 1), a ROTH, HSA, taxable (maybe more than 1), etc. Too much for me. I like simplicity .

I like to have as few accounts as possible. It keeps my money more focused.

I'd rather have more money in more accounts, than less money in fewer accounts.


Our tax code effectively pays you to give up some simplicity. Keeping it simple is a good overall goal, but, in this case, for many of us, a little extra complication is handsomely rewarded.
Last edited by Leesbro63 on Thu Sep 11, 2014 9:08 am, edited 1 time in total.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Leesbro63 » Thu Sep 11, 2014 1:30 am

bsteiner wrote:529 plans don't work well for people who expect to pay estate tax. They use up the annual exclusion. If you have a taxable estate, you can give the student $14,000 a year ($28,000 for a married couple with gift-splitting) and also pay for college (or pay for tuition for a grandchild).


So you're reinforcing my tweak of EmergDoc's comment that 529s are really a tax break for the group just below rich. These have drawbacks for the truly rich and those at the other end who otherwise might get aid or just can't afford to fund one.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by letsgobobby » Thu Sep 11, 2014 1:46 am

Leesbro63 wrote:
bsteiner wrote:529 plans don't work well for people who expect to pay estate tax. They use up the annual exclusion. If you have a taxable estate, you can give the student $14,000 a year ($28,000 for a married couple with gift-splitting) and also pay for college (or pay for tuition for a grandchild).


So you're reinforcing my tweak of EmergDoc's comment that 529s are really a tax break for the group just below rich. These have drawbacks for the truly rich and those at the other end who otherwise might get aid or just can't afford to fund one.

Can't you do both? Put money in a 529, and then pay for tuition directly. Eventually that money will get used... perhaps 25 or 30 years later when the now college student grows up, has kids who grows up, and needs to pay for them to go to college... all tax free.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by cheesepep » Thu Sep 11, 2014 2:50 am

letsgobobby wrote:
cheesepep wrote:I will never use a 529 plan because of simplicity. Imagine I have two kids so I have two 529 plans, a 401K (at least 1), a ROTH, HSA, taxable (maybe more than 1), etc. Too much for me. I like simplicity .

I like to have as few accounts as possible. It keeps my money more focused.

I'd rather have more money in more accounts, than less money in fewer accounts.


Not to me. If I have the money consolidated in fewer accounts, it keeps me more focused instead of having different funds for different accounts since the 529 plan limits you to only certain funds. And I have done well for myself, personally.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by munemaker » Thu Sep 11, 2014 9:43 am

cheesepep wrote:I will never use a 529 plan because of simplicity. Imagine I have two kids so I have two 529 plans, a 401K (at least 1), a ROTH, HSA, taxable (maybe more than 1), etc. Too much for me. I like simplicity .

I like to have as few accounts as possible. It keeps my money more focused.


While tax advantaged accounts (Roth, 401K, 403b, 457, 529, HSA) add complexity, as compared to keeping all your money in a single taxable account, the benefits are worth it to me.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by thx1138 » Thu Sep 11, 2014 10:14 am

cheesepep wrote:I will never use a 529 plan because of simplicity. Imagine I have two kids so I have two 529 plans, a 401K (at least 1), a ROTH, HSA, taxable (maybe more than 1), etc. Too much for me. I like simplicity .

I like to have as few accounts as possible. It keeps my money more focused.


I can completely understand that perspective, but at the same time for me personally I've found in an odd way lots of accounts has made me *more* aware of the common focused goal of savings and investment.

One behavioral error savers and investors can fall into is a "bucket" mentality - this money is for this thing, and this money is for this other thing and so forth. This can lead to odd behaviors like investing before paying off credit card debt or haggling over the price of a $20 shirt while not refinancing a mortgage to a significantly lower rate. In a backwards way having had a whole bunch of different accounts "forced" on me because of dual income and employment history has resulted in me having a far more holistic view of our finances. For me there simply are too many buckets to make any sense of and as a result the only thing I can do is properly view everything as a whole.

So in that vein, despite the fact it was slightly annoying to setup and where we live the tax deduction is per person such that there are separate accounts for both me and my spouse to contribute to in the end the math was simple. The 529 plan has a reasonable ER world stock index fund and we save about $400/yr on state taxes by contributing. It takes about 30 minutes total to make the contributions and enter them on the tax forms and I'm quite happy to be paid $800/hr for the task. It of course also expands our tax advantage space and will thus also lower our future tax burden a bit. But I don't really think of it "for college" nor do I invest it as such. It is just another part of our portfolio, a tax advantaged part that also comes with a state tax credit worth taking the time to harvest.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Thu Sep 11, 2014 10:21 am

@thx1138, that's an interesting take on the multiple accounts story. Thanks.

I often translate tax savings in terms of sushi lunches. So $400 in saving is about 40 to 50 sushi lunches which means about one more sushi lunch per week every year.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by oragne lovre » Thu Sep 11, 2014 11:03 am

JustinR wrote:I'm in California. I haven't read very much about 529 plans, is it worth pursuing if you've maxed out all your other retirement funds?


It's worth it. I use Vanguard age-based portfolios for my children.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by BillyG » Thu Sep 11, 2014 11:24 am

529 saving plans can help behaviorally and force good discipline especially if using automatic investments. That's one of the benefits of 401(k)s as well, in addition to the tax benefits. The withdrawal penalty can be a blessing (to reinforce discipline) or a curse (if you really NEED to get to the money).

You cannot consider investments without also considering behavior. I realize in a theoretical world everyone is super disciplined etc., but in the real world that's not the case.

Most 529 plans automatically adjust asset allocations (without any tax hit) as the child nears college age.

As for the comment about multiple accounts, one child's 529 can be used to pay for a different child's education so there is no complex accounting here.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by FS51 » Thu Sep 11, 2014 11:24 am

My wife is currently pregnant with our first and I've been researching 529s a bit and have a quick question. I believe I understand many of the different opinions of a 529 vs maxing out retirement accounts first, however, I do have a quick question...

The wife and I are currently maxing our 401k's and we have Roth's that over the years we have contributed to but the last few years have put on hold and have not maxed them out... Our state does provide a state tax benefit up to 10k for the two of us. Wouldn't it make more sense to take the tax deduction in the form of a 529 contribution as opposed to an after tax contribution to our Roth's?

Also, the 529 in our state allows a tax deduction for anyone making a contribution, not just the account holder. Wouldn't opening a 529 make sense, if for no other reason but to give a tax advantage to our in-state relatives who would like to give birthday presents, holiday gifts, etc, in the form of college tuition as opposed to a toy?

Thanks in advance!

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by JonnyDVM » Thu Sep 11, 2014 11:49 am

livesoft wrote:@JonnyDVM, It is relatively rare to have hundreds of thousands of dollars of loans for an undergraduate degree, but perhaps you meant in aggregrate. My son's college education (4 year degree) will not cost 6-figures.


I was alluding more to 4 years at public university then graduate school but four years at a state school with room and board is easily 40-50k. A private school or out of state tuition? Forget about it. I think you would be surprised at how many people are walking around (or on track to be walking around) with 200k+ worth of student debt. A very disturbing trend that will limit ones ability to get a mortgage and save for retirement.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by troglodyte » Thu Sep 11, 2014 12:34 pm

I have used 529 plans since they were offered and I am very happy with them. To me it was llike setting up your 401k. Once you were signed up it was automatic and I never had to mess with again. I used a age based index option. My particular mutuall fund company that it is with fees are fairly low.

Are they perfect. No. But for many people I work with ( Some high income earners) they are still procrastinatiog and doing nothing ! For those who dont have much in disposable income you can constribute as little as 15 doallrs a month just to get your feet wet.

Withdrawing money from these accounts are easy also. It is not covering all my college costs( 3 kids) but it covered more than half for each child. Thats not bad. All the other money strategies mentioned here I also employ but the 529 is just another tool I think is worth using.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by lolbatross » Thu Sep 11, 2014 12:46 pm

What % of people could accurately describe what a 529 is? I imagine the majority of the 97% could not.

Here would be my filter for 529s:

If you understand what a 529 is then should you 529?
1.) have kids?
2.) have money (excess of 401k max)
3.) state offer incentive
4.) do you want to pay for some portion of your kids college
5.) can you accept risk (market & child)

If the answer is yes to all of these questions then you are the 3% or at least could be!

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by jumppilot » Thu Sep 11, 2014 1:21 pm

I opened a 529 plan when I started dating my now wife, with myself as the beneficiary. I knew my life was going to change, as I moved out of the "lets party!" mindset and into the "I'm going to get married someday" mindset.

We've had it for 4 years, with continuous monthly contributions, and are expecting our first child in April. Once that child is born, I'll open a second one for the future child we want to have.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by letsgobobby » Thu Sep 11, 2014 1:37 pm

cheesepep wrote:
letsgobobby wrote:
cheesepep wrote:I will never use a 529 plan because of simplicity. Imagine I have two kids so I have two 529 plans, a 401K (at least 1), a ROTH, HSA, taxable (maybe more than 1), etc. Too much for me. I like simplicity .

I like to have as few accounts as possible. It keeps my money more focused.

I'd rather have more money in more accounts, than less money in fewer accounts.


Not to me. If I have the money consolidated in fewer accounts, it keeps me more focused instead of having different funds for different accounts since the 529 plan limits you to only certain funds. And I have done well for myself, personally.

Don't think you're catching my drift. Would you rather have:

a. $50,000 each in 5 different accounts or
b. $200,000 in 1 account?

For me that is easy. I'll take more money over less money any day.

We have been using 529s for 7.5 years. We have approximately $100k in gains that will not be taxed, ever. That is worth at least $25,000 to me, and that does not include the benefit of tax-deferred growth. Has it been worth $25,000 to me to maintain our 529s? Yes it has. With average market returns that gain to me should approach $100,000 before the funds are completely disbursed. That's a college degree, free (to me). The work required is nominal, especially since changes are only permitted once per year. I check statements quarterly. What else is there to do?

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Thu Sep 11, 2014 2:35 pm

JonnyDVM wrote:
livesoft wrote:@JonnyDVM, It is relatively rare to have hundreds of thousands of dollars of loans for an undergraduate degree, but perhaps you meant in aggregrate. My son's college education (4 year degree) will not cost 6-figures.


I was alluding more to 4 years at public university then graduate school but four years at a state school with room and board is easily 40-50k. A private school or out of state tuition? Forget about it. I think you would be surprised at how many people are walking around (or on track to be walking around) with 200k+ worth of student debt. A very disturbing trend that will limit ones ability to get a mortgage and save for retirement.

I'm sorry, but your numbers are so off the wall, that I have to respond. Here's a web site to look at: http://projectonstudentdebt.org/state_by_state-data.php with real data.

Average student loan debt is under $30,000 per person and no where near 6-figures. Yes, 4 years at a state school with room and board is more than 40-50k. It is probably about $80K to $100K for all those 4 years combined. See the web site I just linked. I am paying for 2 young adults at universities at this moment. I know how much college costs.

I would definitely be surprised at how many people are walking around with $200K+ worth of student debt. They would be very uncommon. Perhaps you can start a poll here to show that. You and your friends may have lots of debt, but I think you would be rare.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by thx1138 » Thu Sep 11, 2014 3:40 pm

livesoft wrote:I'm sorry, but your numbers are so off the wall, that I have to respond. Here's a web site to look at: http://projectonstudentdebt.org/state_by_state-data.php with real data.


It is certainly possible to load up on a whole lot of debt with private schools and an extended graduate degree (with no tuition waiver). But getting to $200k is hard. Another link:

http://www.sheeo.org/sites/default/files/College%20Affordability%20and%20Student%20Debt%20Thursday-1p-plen-combined.pdf

On page six the distribution of debt is broken out (2012 data). Debt greater than $200K is < 0.5% and debt greater than $100k is 3%.

I think we need to remember that newspaper and magazine reporting these days always requires a narrative wrapped around a particular anecdote. Usually the subjects of these narratives are near worst cases. So if you read a lot of news articles about student debt these days it is easy to get the impression the amount of debt for most people is really high, when in fact the median and even start of the upper quartile is quite a bit lower. To make news articles interesting always report on the tails of a distribution :)

Which is not to say college is expensive and there is a heck of a lot of student debt around.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Lysander » Thu Sep 11, 2014 5:40 pm

$200k of student debt is rare now. But upper middle-class and up parents paying $200k for a bachelors degree is not rare at private schools, especially if they qualify for no need-based aid.

Furthermore, I am looking at paying for college 20 years in the future. Unless the higher education bubble bursts by then, paying $300k-$400k is totally realistic.

If the cost of a college education increases by 6% annually, and your child enters a private college in the 2022–2023 academic year, the estimated tuition will be $76,333. Based on the projections below, a four-year education would cost approximately $305,000.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Thu Sep 11, 2014 5:43 pm

In 20 years, the limit for 401(k) annual contributions will be $100K a year, so just cut back on your contributions when the time comes (your salary will be $800K anyways) and you will be able to afford a college education. That's how it worked out for us (we paid for one of those $200K+ college educations).
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Lysander » Thu Sep 11, 2014 5:51 pm

livesoft wrote:In 20 years, the limit for 401(k) annual contributions will be $100K a year, so just cut back on your contributions when the time comes (your salary will be $800K anyways) and you will be able to afford a college education. That's how it worked out for us (we paid for one of those $200K+ college educations).

Even if wage inflation will track college cost inflation, that raises the question if other asset classes will. If education prices continue to inflate faster than prices in the rest of the economy, merely as a result of mass psychology or artificial professional barriers (and there's a whole lot of that regarding college) rather than value added, then at some point in the future it may make sense to forgo college and invest the money elsewhere that can redound to your child's benefit.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Thu Sep 11, 2014 5:54 pm

Yes, possibly, but it is probably just better to die and let your children inherit your assets.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by thx1138 » Thu Sep 11, 2014 5:55 pm

100k in twenty years when the limit is 17.5k now? 9% inflation! Load up on TIPS! :happy

I think most people's concern about the future is that college costs have been increasing substantially above inflation for quite some time. Since 401k and IRA contributions (not to mention wages in all likelihood) scale with inflation but college goes faster that implies things would be significantly different in 20 years in real dollars if college cost increases continue at their current pace. Of course continuing the cost trend line indefinitely into the future rarely works out to be very accurate, but it is the CBO's favorite forecasting technique :happy.

That uncertainty is another reason I treat our 529 as part of the total portfolio and only contribute up to the point we get a state tax break. If the 529 doesn't cover all costs oh well, if it is worth more than costs then it becomes legacy for the next generation or else gets pulled out as a longevity "emergency" fund.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by letsgobobby » Thu Sep 11, 2014 5:56 pm

college is very worthwhile though one could reasonably ask if a private college vs a good state school really is. The difference might be 50% or more ($100k vs $250k in today's dollars) and what would $150k be worth in 40 years? $1,000,000 real at 5% real growth, maybe enough to pay for half of retirement expenses for a well off middle class person. If a good state school will meet one's needs, the value add of even an elite private school is in doubt at current prices. None of that obviates the benefit of 529s for upper middle class folks, at least to the point that they have saved adequately for state school.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by trueblueky » Thu Sep 11, 2014 6:07 pm

cheesepep wrote:I will never use a 529 plan because of simplicity. Imagine I have two kids so I have two 529 plans, a 401K (at least 1), a ROTH, HSA, taxable (maybe more than 1), etc. Too much for me. I like simplicity .

I like to have as few accounts as possible. It keeps my money more focused.

You can fund two, or more, students from a single 529. When one student graduates or drops out to start the next Microsoft or is appointed to West Point or gets a full ride to dot the I in Ohio, you can change to another. There's a lot of flexibility. You can transfer a 529 from being for your kids to your grandkids too.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Thu Sep 11, 2014 6:27 pm

thx1138 wrote:100k in twenty years when the limit is 17.5k now? 9% inflation! Load up on TIPS! :happy

Don't forget that in 20 years, one will probably be older than 49, so one will have a higher contribution limit. And your spouse will be working and contributing, too.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by JonnyDVM » Fri Sep 12, 2014 7:44 am

livesoft wrote:
JonnyDVM wrote:
livesoft wrote:@JonnyDVM, It is relatively rare to have hundreds of thousands of dollars of loans for an undergraduate degree, but perhaps you meant in aggregrate. My son's college education (4 year degree) will not cost 6-figures.


I was alluding more to 4 years at public university then graduate school but four years at a state school with room and board is easily 40-50k. A private school or out of state tuition? Forget about it. I think you would be surprised at how many people are walking around (or on track to be walking around) with 200k+ worth of student debt. A very disturbing trend that will limit ones ability to get a mortgage and save for retirement.

I'm sorry, but your numbers are so off the wall, that I have to respond. Here's a web site to look at: http://projectonstudentdebt.org/state_by_state-data.php with real data.

Average student loan debt is under $30,000 per person and no where near 6-figures. Yes, 4 years at a state school with room and board is more than 40-50k. It is probably about $80K to $100K for all those 4 years combined. See the web site I just linked. I am paying for 2 young adults at universities at this moment. I know how much college costs.

I would definitely be surprised at how many people are walking around with $200K+ worth of student debt. They would be very uncommon. Perhaps you can start a poll here to show that. You and your friends may have lots of debt, but I think you would be rare.


I’m not exactly sure what we’re arguing about but since I have some down time at work and have an interest in the subject I’ll post again. My 40-50k thrown out estimate did not consider room and board. Obviously that is a pretty necessary part of the educational process. I looked up a few schools to see exactly where we are at with college costs. Ohio State University estimates tuition + room and board at $21,700 for this academic year. My Alma mater Miami University $24,600. Figure a slight increase annually and 80k -100k for an undergraduate education at public school is about right. That IN STATE TUITION! How about a private school? Emory University estimates the cost this year for tuition and room and board at $57,700 :shock: . Obviously four year will run over 200K.

What if your kid is driven and wants to go to professional school after? The Ohio State College of Medicine has an estimated cost of about 50K this year (in state). Do you think people are walking around with a lot of loans? In my class (DVM 2008) maybe 1/3 of the class didn’t have to take out any loans. The rest of us ended up at around $150k. That was back when tuition and interest rates were jumping. My wife graduated two years later from medical school with 165k all at 6.8%. That was even with quite a bit of generosity from her parents. Tuition has continued to increase since then. My friends? Yes they do have quite a bit of debt. Off the top of my head. $250k (MD U-Mass), $300k (MD Missouri), one couple with > 500k (MD’s Geoprgetown), another couple (DVM’s Ohio state + some undergrad ~350k). Three other DVM’s that I know also about $150k. A few of our friends had parents pay their entire private school undergrad education and medical school education. So they have quite the head start when it comes to savings. Pretty much anyone that recently attended, or is currently attending, professional school without wealthy parents has significant student debt.

Why don’t I do a poll? Unfortunately, most with professional degrees are pretty financially incapable. I wouldn’t expect a ton of young professionals perusing this site. That would be like polling how many people shop at Costco. I think the poll results would be a little skewed. I have a little interest in finance and like most everyone else on this site prefer to "do it myself". Most of my MD friends have financial people constantly harassing them trying to take advantage of them. I recently had to throw myself in front of one of my golfing companion who was about to get talked into a whole life policy by his trusted advisor.

I guess the greater question is why should anyone on this site care? It’s not their debt. Here’s the thing- Right now there are financial experts walking into professional schools like my Alma mater and lecturing students that their only possible means of survival with their tuition payments is through PSLF(Public student loan forgiveness or IBR (Income based repayment). If you are not familiar with these programs basically for PSLF you pay a minimal amount work in some sort of public service for 10 years and your debt is wiped out. IBR you pay a small amount based on your income for 25 years and then your balance is forgiven. There are a lot of people coming out of professional school doing this. I recently worked with a guy who told me without IBR he wouldn't be able to eat. His compulsory loan payment would be just under his net pay. WCI posted a blog about the moral hazard of borrowing 600k of government and having no incentive to pay it back and immediately got attacked by several commenters for just pointing out how absurd this whole concept is. This is a lot of our tax money at stake here.

So who’s taking advantage of 529’s? Probably my friends whose parents picked up their entire tuition used them. I’ll use them. What about kids from the middle class? Sorry they are SOL. They get to enjoy a lifetime of crushing student debt burden. The system as currently constructed cannot continue.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by chrischris » Fri Sep 12, 2014 7:59 am

I am not a wealthy man. I don't max out our retirement accounts due to limited income.

I opened up a 529 account for my infant daughter because I like the idea of allocating an entire account for her education. When she graduates from high school I want to be able to provide her a dedicated amount that has been set aside for her. I don't want to drain my retirement assets to pay for her college but I can afford to set aside a little each month for her.....

For me a 529 account is more about simplicity by separating/dedicating my assets. Is this a bad plan?

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Grt2bOutdoors » Fri Sep 12, 2014 8:02 am

JonnyDVM wrote:
So who’s taking advantage of 529’s? Probably my friends whose parents picked up their entire tuition used them. I’ll use them. What about kids from the middle class? Sorry they are SOL. They get to enjoy a lifetime of crushing student debt burden. The system as currently constructed cannot continue.


While I agree with some of the things you've written, I don't believe kids from the middle class are SOL (I grew up in a lower middle class home so I know what I'm talking about, college then cost plenty, borrowing $40K or even $10K was high back then and jobs if you could get one in a recession were paying peanuts) - there are institutions of higher education that do not cost an arm,leg and kidney per year, but then again, there are institutions that will rob you, your parents and the estate blind if you fall for the "attend my institution because a degree from XYZ in accounting, computer science, math, education, pick your degree are highly coveted by those firms whose compensation offers are only $5-$10K higher than Joe down the Block who went to the local regional college that cost 1/3 of ours is offered. Whoops! :oops: The math simply doesn't compute.

Do you also apply your logic to the middle class and the use of IRA's? Vanguard just released a short article on the use of IRA's and the income bands which utilize such accounts - I think you'll be surprised. https://personal.vanguard.com/us/insigh ... ion-092014
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Grt2bOutdoors » Fri Sep 12, 2014 8:03 am

chrischris wrote:I am not a wealthy man. I don't max out our retirement accounts due to limited income.

I opened up a 529 account for my infant daughter because I like the idea of allocating an entire account for her education. When she graduates from high school I want to be able to provide her a dedicated amount that has been set aside for her. I don't want to drain my retirement assets to pay for her college but I can afford to set aside a little each month for her.....

For me a 529 account is more about simplicity by separating/dedicating my assets. Is this a bad plan?


No! It's a great plan and I'm sure your child will be very appreciative that you made the effort. :sharebeer
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by LongerPrimer » Fri Sep 12, 2014 10:06 am

Getting to 200k in student loans is fairly easy. In our day, we did 80% student loans not only because we had to because of 9/11, but because of the spreads between the interest on the loans VS ROI was too great. These past three years and may be 2014, the spreads have been extremely favorable to use loans over equity.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Rodc » Fri Sep 12, 2014 10:29 am

LongerPrimer wrote:Getting to 200k in student loans is fairly easy. In our day, we did 80% student loans not only because we had to because of 9/11, but because of the spreads between the interest on the loans VS ROI was too great. These past three years and may be 2014, the spreads have been extremely favorable to use loans over equity.


Easy perhaps but not at all necessary.

State schools are far less than $200K as many have pointed out. Indeed with a part time job one should have no trouble staying under $100K.

If one does two years at the local community college and transfers to a state school, it would be well under $100K.

Work part time work might cover all of living at home and going to the local community college, or at least close. Two years at State U might be $40K to $50K depending on the state, but if you work part time you would not have to borrow that much.

One can wait to save up for graduate school, or at least pay off undergrad first.

Going into debt to the tune of $200K is done, but rarely makes sense and is not necessary. I just don't understand the mindset that would do such a thing.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by CMartel2 » Fri Sep 12, 2014 10:30 am

I would definitely be surprised at how many people are walking around with $200K+ worth of student debt. They would be very uncommon.


This is now the norm for almost any professional degree student--be the degree in medicine, law, dentistry, and even physical therapy school is getting expensive. I did better than most in my med school class 5-years ago and escaped with a "mere" 130k. Tuition at my school in the past 5-years has since increased for in-state students by 63%. How about them apples? :annoyed

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by LongerPrimer » Fri Sep 12, 2014 10:46 am

The IBR program is great. The structure is such that most of the loan is paid in 25 years and the maximum consolidated taxpayer guaranteed loan is 25 yr amortization anyway. For consolidated direct student loan the max is 20 yrs which is 10 years more than a non-consolidated loan- which means actual interest paid is far more than original loan.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by bigred77 » Fri Sep 12, 2014 11:08 am

Full time Law students, MBAs, and MDs routinely rack up 6 figure debt loads. It is now the norm. if you have 30-50k from undergrad its not that hard to sneak up around 200k. It just is what it is.

Its part of the reason i did a PT MBA program at a less prestigous school than I could have gone to. My employer paid for it and I could keep working and making a salary. It made sense for my particular situation but others have their reasons for going full time. My brother lucked out for med school (doctors need to look up in state medical tuition for Texas med schools, its insanely low compared to any other state) and he will finish with about 50k in debt and he financed all his tuition after grants and scholorships.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by livesoft » Fri Sep 12, 2014 11:15 am

CMartel2 wrote:
I would definitely be surprised at how many people are walking around with $200K+ worth of student debt. They would be very uncommon.

This is now the norm for almost any professional degree student--be the degree in medicine, law, dentistry, and even physical therapy school is getting expensive.

Professional degree students are not the norm at the moment. They might be the 0.5% noted in the Federal Reserve link contributed by thx1138 earlier in this thread.

I will agree that finding professional degree students at medical schools and dental schools is the norm. Duh!
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by LongerPrimer » Fri Sep 12, 2014 12:58 pm

Rodc wrote:
LongerPrimer wrote:Getting to 200k in student loans is fairly easy. In our day, we did 80% student loans not only because we had to because of 9/11, but because of the spreads between the interest on the loans VS ROI was too great. These past three years and may be 2014, the spreads have been extremely favorable to use loans over equity.


Easy perhaps but not at all necessary.

State schools are far less than $200K as many have pointed out. Indeed with a part time job one should have no trouble staying under $100K.

If one does two years at the local community college and transfers to a state school, it would be well under $100K.

Work part time work might cover all of living at home and going to the local community college, or at least close. Two years at State U might be $40K to $50K depending on the state, but if you work part time you would not have to borrow that much.

One can wait to save up for graduate school, or at least pay off undergrad first.

Going into debt to the tune of $200K is done, but rarely makes sense and is not necessary. I just don't understand the mindset that would do such a thing.


When the odds are in your favor, you take the better odds.
Grad school he was on academic fullride. Made money on the forex. :annoyed
You are probably correct in saying that it is rarely makes sense but sometimes it makes great sense.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by dodecahedron » Fri Sep 12, 2014 1:14 pm

I am using the NY 529 plan for my own (late in life) grad school studies. I can get a state tax break for running money through the 529 plan even if I immediately take the money out a few weeks later to pay for tuition or textbooks.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by dodecahedron » Fri Sep 12, 2014 1:18 pm

LongerPrimer wrote:
Rodc wrote:
LongerPrimer wrote:Getting to 200k in student loans is fairly easy. In our day, we did 80% student loans not only because we had to because of 9/11, but because of the spreads between the interest on the loans VS ROI was too great. These past three years and may be 2014, the spreads have been extremely favorable to use loans over equity.


Easy perhaps but not at all necessary.

State schools are far less than $200K as many have pointed out. Indeed with a part time job one should have no trouble staying under $100K.

If one does two years at the local community college and transfers to a state school, it would be well under $100K.

Work part time work might cover all of living at home and going to the local community college, or at least close. Two years at State U might be $40K to $50K depending on the state, but if you work part time you would not have to borrow that much.

One can wait to save up for graduate school, or at least pay off undergrad first.

Going into debt to the tune of $200K is done, but rarely makes sense and is not necessary. I just don't understand the mindset that would do such a thing.


When the odds are in your favor, you take the better odds.
Grad school he was on academic fullride. Made money on the forex. :annoyed
You are probably correct in saying that it is rarely makes sense but sometimes it makes great sense.


Even with a full academic ride in grad school, I believe he could use 529 plan fund withdrawals for living expenses as long as he is enrolled fulltime or close to it. (If he is in offcampus housing, the qualified withdrawals for living expenses would be limited to the amount computed in the university's financial aid official figures for offcampus students rather than actual living expenses.)

Also, I don't know all the details, but I believe there is some provision that you can make tax and penalty free withdrawals in the amount of any scholarships your child has earned. (Not sure if that is just for undergrads, though.)

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by bobbun » Fri Sep 12, 2014 1:38 pm

Regarding 529's being for the wealthy...

I'm sure this is a narrow case, but it looks to me like if one of your goals for retirement was to get that degree (second degree, etc.) that you always wanted--presumably for personal reasons, since we're talking about after retirement--then a 529 might be a way to get some additional tax-deferred space that is effectively for retirement. Consider the education being what you prefer to do rather than travel in retirement. It's not clear to me that it beats a taxable account in this regard, though. Even though you will have qualifying educational expenses, you'll pay ordinary income on the withdrawal. On the other hand, it may beat a traditional IRA in some respects--no RMD's.

I think it's going to boil down to individual circumstances. The wealthy will be more likely to have favorable circumstances, but it's not the same sort of huge and obvious win like tax deferred retirement savings.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by AustenNut » Fri Sep 12, 2014 2:24 pm

chrischris wrote:I am not a wealthy man. I don't max out our retirement accounts due to limited income.

I opened up a 529 account for my infant daughter because I like the idea of allocating an entire account for her education. When she graduates from high school I want to be able to provide her a dedicated amount that has been set aside for her. I don't want to drain my retirement assets to pay for her college but I can afford to set aside a little each month for her.....

For me a 529 account is more about simplicity by separating/dedicating my assets. Is this a bad plan?


Like chrischris, we don't max out our retirement accounts, but we're looking to open up a 529 for our 8-week old. Much of the reasoning is the same. Our state uses Vanguard and gives a tax deduction for contributions, so it's a very respectable option. At the moment we're just planning on putting gifts from family into the 529, but once our child is out of day care, we plan to put a small amount in monthly. Though we don't max out our retirement accounts, we should be okay between our pensions, Roths, and 457. And I know that the 529 money will be held sacred, so no matter what else happens to extended family and their wishes to get money from us, our child's educational fund will remain untouched. Should college not be in his future, the 10% penalty can be paid and it can be used to start a business, buy income property, etc.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by JonnyDVM » Fri Sep 12, 2014 2:33 pm

LongerPrimer wrote:The IBR program is great. The structure is such that most of the loan is paid in 25 years and the maximum consolidated taxpayer guaranteed loan is 25 yr amortization anyway. For consolidated direct student loan the max is 20 yrs which is 10 years more than a non-consolidated loan- which means actual interest paid is far more than original loan.


Disagree with the entire IBR premise. The solution to giving out too much in loans that the borrower cannot realistically pay back is to just shrug it off in 25 years? How about lending out an amount commiserate with salaries in the first place? That overhanging student debt also makes it rough to get a mortgage and generally stresses people out. 50k per year for professional school is practically extortion.

Edit: And let me answer the next question that is surely forthcoming- with a "because you are a dumb 22 year old that always wanted to be a doctor or a lawyer or a vet or whatever and you don't know any better!" You have no appreciation whatsoever for how 200k of debt at 6.8% interest will affect your life.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Rodc » Fri Sep 12, 2014 2:46 pm

LongerPrimer wrote:
Rodc wrote:
LongerPrimer wrote:Getting to 200k in student loans is fairly easy. In our day, we did 80% student loans not only because we had to because of 9/11, but because of the spreads between the interest on the loans VS ROI was too great. These past three years and may be 2014, the spreads have been extremely favorable to use loans over equity.


Easy perhaps but not at all necessary.

State schools are far less than $200K as many have pointed out. Indeed with a part time job one should have no trouble staying under $100K.

If one does two years at the local community college and transfers to a state school, it would be well under $100K.

Work part time work might cover all of living at home and going to the local community college, or at least close. Two years at State U might be $40K to $50K depending on the state, but if you work part time you would not have to borrow that much.

One can wait to save up for graduate school, or at least pay off undergrad first.

Going into debt to the tune of $200K is done, but rarely makes sense and is not necessary. I just don't understand the mindset that would do such a thing.


When the odds are in your favor, you take the better odds.
Grad school he was on academic fullride. Made money on the forex. :annoyed
You are probably correct in saying that it is rarely makes sense but sometimes it makes great sense.


That is not a case of being burdened by debt. If I take out a load to buy a car because the rates are lower than I am making on cash in the bank, that is far different from taking on a car loan because I don't have the funding. I don't think that this example has anything to do with anything regarding debt load of students or anything to do with any of the normal questions around the burdens of student debt. If I have $100K in cash/investments and $100k in debt, my net position is $0: that does not represent a meaningful burden.

Not to mention your post does not in the least address the point I made: it is not necessary. I did not say there were no corner cases where it might make sense. And I would be open to amending to there may be corner cases where it makes sense because there are no other good options and the salary it enable is high enough; there are a few of those cases as well.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by MKP » Fri Sep 12, 2014 5:57 pm

I have maxed out my 401K, two roths, my wife's small business 401K, and a family HSA. I am planning to do a 529 when my child is born in January. I will probably do another $400 a month or so ($5K per year) because I dont want to have to worry about college for my kid and have no idea where else to save/invest the money. I have decided on the Utah plan due to the low fees.

Should I maybe use a taxable account instead? I dont really have the money in the budget for a taxable account until 2016.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by letsgobobby » Fri Sep 12, 2014 6:20 pm

MKP wrote:I have maxed out my 401K, two roths, my wife's small business 401K, and a family HSA. I am planning to do a 529 when my child is born in January. I will probably do another $400 a month or so ($5K per year) because I dont want to have to worry about college for my kid and have no idea where else to save/invest the money. I have decided on the Utah plan due to the low fees.

Should I maybe use a taxable account instead? I dont really have the money in the budget for a taxable account until 2016.

Depends on your tax bracket, how you invest, how much you invest, etc. If you only save $400 per month and plan to be in bonds and are in a low tax bracket, there's no advantage to owning a 529. if you save $1000 per month and plan to stay in stocks long term and are in a high tax bracket and there is a state tax benefit for 529 investing, a 529 would be advantageous.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by MKP » Fri Sep 12, 2014 7:17 pm

letsgobobby wrote:
MKP wrote:I have maxed out my 401K, two roths, my wife's small business 401K, and a family HSA. I am planning to do a 529 when my child is born in January. I will probably do another $400 a month or so ($5K per year) because I dont want to have to worry about college for my kid and have no idea where else to save/invest the money. I have decided on the Utah plan due to the low fees.

Should I maybe use a taxable account instead? I dont really have the money in the budget for a taxable account until 2016.

Depends on your tax bracket, how you invest, how much you invest, etc. If you only save $400 per month and plan to be in bonds and are in a low tax bracket, there's no advantage to owning a 529. if you save $1000 per month and plan to stay in stocks long term and are in a high tax bracket and there is a state tax benefit for 529 investing, a 529 would be advantageous.



interesting. I am in the 25% bracket in Florida, so we don't get the deduction for state tax. I would do an 80/20 portfolio to start and then ratchet down the stock allocation 10%-15% over every 5 years. By the time the funds are withdrawn I expect to be in the 28% or higher bracket.

I also have family that would I expect would contribute a few thousand per year to the 529 as well.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by Prudent Saver » Sun Sep 14, 2014 6:35 pm

Kevin M wrote:
Beliavsky wrote:I have never understood how stable value funds can offer liquidity, a stable NAV, and yields much higher than money market funds.

Because the insurance companies offering the SV funds take much of the risk; i.e., they invest in riskier assets, like longer-term bonds, expecting higher returns in the long term, and willing to fund the difference if they lose short-term. Also, most SV funds do limit liquidity, especially inside 401k/403b plans. In 401k/403b plans, they typically do not allow direct exchanges to/from competing products like money-market funds. There also typically are terms that may restrict withdrawals in the event of company-specific events that would result in mass withdrawals. So there are some risks.

I think the limited liquidity and expectations that most people won't do lots of withdrawals in 401k/403b plans is why SV funds aren't offered outside of retirement plans (and 529 plans).

Beliavsky wrote:When in a few years short term rates have risen above the yield offered by the stable value fund, can you transfer the money from the stable value fund to the Direct Portfolio?

Sure. You can change your investment options (or plans) once per year. This is answered in detail in the FAQ page of the CollegeInvest web site: What is a 529 Plan? College Savings FAQ | CollegeInvest.

Kevin


The first risk bearers in an SV fund are participants in the SV fund. They bear this risk via reduced future crediting rates if the fund has experienced losses. The NAV may stay at $1, but reduced future crediting rates are absolutely losses and shouldn't be discounted.
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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by ChosenGSR » Mon Sep 15, 2014 9:30 am

I'm a little confused regarding financial aid consideration. It seems to me the vast majority of people with 529s probably have enough income not to qualify for any financial aid to begin with? Maybe things have changed but middle class income basically rules out any financial aid.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by medinme » Mon Sep 15, 2014 9:55 am

General rule of thumb is to invest in retirement accts first then 529/ Coverdell. In terms of saving priorities your personal retirement first/ college second.

529's generally have higher fees and more restricted investment options than 401K and IRA'S. Also these accts are only able to change investments 1X/year though I heard they are looking to revise in future. That being said the power of compound interest in the market and the tax benefits are still beneficial for many to invest in 529's if you have the funds to do it.

I have 4 kids under 5yrs so I am funding 2 529's with roughly $15-20K/yr after maxing out 401K/IRA's. Once I get the accounts combined to @150-200K I will likely back off a bit. I estimate the total I will contribute 100K-150K each child's education. Other than that they can look for loans/ scholarships to make up the difference. I want them to have a stake in contributing to their own education through work-study/ or scholarships / or working while in college so they know the value of a degree and won't take it for granted.

If one decides to not go to college then I will still have some ability to shift to the other 3.

There are calculators to estimate college costs but I treat them as a guide since there is no telling how college costs will change over long term with internet and new technology allowing for more degrees from home at lower cost.

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Re: "Why 97% of People Don't Use 529 College Savings Plans."

Post by FS51 » Mon Sep 15, 2014 1:55 pm

FS51 wrote:My wife is currently pregnant with our first and I've been researching 529s a bit and have a quick question. I believe I understand many of the different opinions of a 529 vs maxing out retirement accounts first, however, I do have a quick question...

The wife and I are currently maxing our 401k's and we have Roth's that over the years we have contributed to but the last few years have put on hold and have not maxed them out... Our state does provide a state tax benefit up to 10k for the two of us. Wouldn't it make more sense to take the tax deduction in the form of a 529 contribution as opposed to an after tax contribution to our Roth's?

Also, the 529 in our state allows a tax deduction for anyone making a contribution, not just the account holder. Wouldn't opening a 529 make sense, if for no other reason but to give a tax advantage to our in-state relatives who would like to give birthday presents, holiday gifts, etc, in the form of college tuition as opposed to a toy?

Thanks in advance!


I posted the above question earlier but it didn't get any response so I thought I would try again on just the most specific question I have 😃.

Wouldn't contributing to a 529 plan in a state that gives a tax deduction make more sense than a Roth IRA post taxes? Granted you have less control over the 529 but for the tax benefit alone wouldn't it make sense to go 529 over the Roth assuming 401ks were being maxed out?

Thanks!

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