College funding

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MP173
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Joined: Fri Dec 07, 2007 6:03 pm

College funding

Post by MP173 » Tue Mar 24, 2015 4:46 pm

We have a one year old granddaughter and the parents are asking me how to save for college.

Just to get things straight, they are not asking for financial help (tho that might be a gift down the road), but are wanting to know the best avenue for investing. With my two sons years ago, I set up a UGTM account and funded it in that manner, but I understand there are now better methods...529 plans.

What should parents be looking to do?

Thanks,

Ed

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TomatoTomahto
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Re: College funding

Post by TomatoTomahto » Tue Mar 24, 2015 5:04 pm

MP173 wrote:We have a one year old granddaughter and the parents are asking me how to save for college.

Just to get things straight, they are not asking for financial help (tho that might be a gift down the road), but are wanting to know the best avenue for investing. With my two sons years ago, I set up a UGTM account and funded it in that manner, but I understand there are now better methods...529 plans.

What should parents be looking to do?

Thanks,

Ed
To some extent, it depends on the state you live in. Personally, in NJ, I stopped contributing to the 529 and added to a UTMA.
Okay, I get it; I won't be political or controversial. The Earth is flat.

Jack FFR1846
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Re: College funding

Post by Jack FFR1846 » Tue Mar 24, 2015 5:10 pm

If they're able, put any extra money into tax advantaged retirement accounts first. Other means like 529 will count against the kids when the FAFSA is filled out, reducing possible aid. FAFSA (today, anyways) doesn't look at retirement accounts. Even CSS schools don't (supposedly) look at retirement accounts as a first cut. They do ask about them.
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Middle
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Re: College funding

Post by Middle » Tue Mar 24, 2015 5:25 pm

Actually, true, they do look at 529 accounts but only assess them at a 5.64% maximum rate towards the Expected Family Contribution whereas the UTMA and UGMA accounts have a 20% maximum. So it appears to me that the 529 is the better option for the parents. Note that there is different treatment for 529s that are under the parents name than a 529 plan that is the grandparents name.

DaftInvestor
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Re: College funding

Post by DaftInvestor » Wed Mar 25, 2015 8:12 am

Middle wrote:Actually, true, they do look at 529 accounts but only assess them at a 5.64% maximum rate towards the Expected Family Contribution whereas the UTMA and UGMA accounts have a 20% maximum. So it appears to me that the 529 is the better option for the parents. Note that there is different treatment for 529s that are under the parents name than a 529 plan that is the grandparents name.
Just for clarification: The above analysis is only for parents that will qualify for financial aid. If the Expected Family Contribution is likely to be less than the cost of tuition - which it will be if the parents are high-income earners - the 5.64% versus 20% analysis doesn't matter.

Grt2bOutdoors
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Re: College funding

Post by Grt2bOutdoors » Wed Mar 25, 2015 9:01 am

What state do they reside in? Some states like NY offer a tax deduction or credit on state income tax returns up to a specific dollar limit.
A 529 plan is preferable to the extent that retirement accounts are fully funded especially if you can receive a state tax benefit, or you have 18-20 years before needing to use it. Tax-free compounding can be a very powerful instrument. I use a combination of 529, UTMA and taxable accounts (if needed). The real issue is "how much to fund it with" and which plans to use if a state plan is not cost effective. Will the child attend 2 year, 4 year public, 4 year private, 4 years Ivy. Too early to tell.
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YDNAL
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Re: College funding

Post by YDNAL » Wed Mar 25, 2015 9:14 am

MP173 wrote:We have a one year old granddaughter and the parents are asking me how to save for college.

Just to get things straight, they are not asking for financial help (tho that might be a gift down the road), but are wanting to know the best avenue for investing. With my two sons years ago, I set up a UGTM account and funded it in that manner, but I understand there are now better methods...529 plans.

What should parents be looking to do?

Thanks,

Ed
Florida has a prepaid College plan. How about the State where your granddaughter lives?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

Beliavsky
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Re: College funding

Post by Beliavsky » Wed Mar 25, 2015 9:17 am

MP173 wrote:We have a one year old granddaughter and the parents are asking me how to save for college.

Just to get things straight, they are not asking for financial help (tho that might be a gift down the road), but are wanting to know the best avenue for investing. With my two sons years ago, I set up a UGTM account and funded it in that manner, but I understand there are now better methods...529 plans.
I don't disagree with the math behind contributing to 401(k) and IRA accounts before 529s. There may be a non-monetary benefit to 529 plans. Our three children know that they have college savings accounts that their parents and grandparents have contributed to, although they don't know the amounts. Those accounts are a sign that we are all committed to their educations, and that they should be too. Some research has found that existence of 529 accounts is correlated with college attendance, although this is only partly cause-and-effect.

College Savings Plans Network 529 Report
529 plans were designed as a way to encourage people to save for college for their children or
grandchildren (or any other beneficiary), and statistics show that students with any amount saved for
higher education are six to seven times more likely to attend a four-year institution than those without
any savings.

Topic Author
MP173
Posts: 2013
Joined: Fri Dec 07, 2007 6:03 pm

Re: College funding

Post by MP173 » Wed Mar 25, 2015 7:23 pm

They reside in Indiana and while I am not privy to their financial situation, they both have very good paying jobs, my guess is they will be on track in 18 years for their daughter not to be eligible for financial aid.

Ed

nps
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Re: College funding

Post by nps » Wed Mar 25, 2015 8:02 pm

Jack FFR1846 wrote:If they're able, put any extra money into tax advantaged retirement accounts first. Other means like 529 will count against the kids when the FAFSA is filled out, reducing possible aid. FAFSA (today, anyways) doesn't look at retirement accounts. Even CSS schools don't (supposedly) look at retirement accounts as a first cut. They do ask about them.
However withdrawing from those retirement accounts to pay for educational expenses would be counted as parental income on the following year's FAFSA, also reducing possible aid. I'm not familiar enough with the percentages for expected family contribution to know if that's a wash or not.

2stepsbehind
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Re: College funding

Post by 2stepsbehind » Thu Mar 26, 2015 7:39 am

MP173 wrote:They reside in Indiana and while I am not privy to their financial situation, they both have very good paying jobs, my guess is they will be on track in 18 years for their daughter not to be eligible for financial aid.

Ed
Indiana has a great tax credit offered (20% of contributions to a CollegeChoice 529 account, up to $1,000 credit per year). They should contribute to that.

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