Start College Savings Tips

[liloca]

I though this was a good place to post this. I just had a baby and I am going to start saving for college so I have been researching but I am afraid that most of this articles/blogs I have been reading are being paid by the companies they are recommending.

I believe that here I will be able to hear real opnions. So please tell me what you think is the best way to save/invest for college?

 

[JeremyGNJ]

The 529 plans are good...but not necessarily great.

They are good because they're simple, but not always the best investment you can make for decent gains, and usually have high "fees". A standard mutual fund account is usually better. But if you don't know much about investing, the 529's generally have pretty "safe" options.

That said, I DO use a 529 because the New Jersey 529 plan gives a $2500 scholarship if the child goes to college in-state. (which I'm expecting she'll do even if only for the first 2 years). Now that I've locked in that "free" 2500, ive moved to investing additional money in a mutual fund.

 

[havaneselover]

The 529 plans are good...but not necessarily great. They are good because they're simple, but not always the best investment you can make for decent gains, and usually have high "fees". A standard mutual fund account is usually better. But if you don't know much about investing, the 529's generally have pretty "safe" options. That said, I DO use a 529 because the New Jersey 529 plan gives a $2500 scholarship if the child goes to college in-state. (which I'm expecting she'll do even if only for the first 2 years). Now that I've locked in that "free" 2500, ive moved to investing additional money in a mutual fund.

I did a prepaid 529 in VA. Everything I put in ($90k or so) was free of state income tax ($5k savings). I also have a 529 for room and board as prepaid only covers tuition. Luckily in Virginia we have a lot of very good state schools so it makes sense for my solidly middle class family.

 

[Marionnette]

We have/had educational IRAs for our kids. The state 529 plan was a very new idea when our kids were young and in all honesty, we just didn't trust them. In the long run, it worked out better for us. Even though tuition hikes outpaced inflation, we were still ahead by having the money growing in the IRAs.

 

[crisi]

529s are pretty good, they are flexible. You can use any states 529 (you aren't restricted to your own) and some states have lower fees than others - do your research - Utah used to have a good one, I don't know any more. We use our own states because I was concerned about states removing the tax benefits from other states 529s.

The most important thing is to save regularly and starting now. With a baby, you have a long horizon and can be a little more aggressive early, then move to safer investments in late elementary school and again in middle school. The 529 we use does this for us based of the kid's age.

 

[Jeff_G]

Check out http://www.savingforcollege.com/ Lots and Lots of good information on the various college savings options.

 

[DVCcurious]

I have a 4 year old and 2 year old and I've done a lot of reading about this and here is what I'm doing, and what I believe the best advice is.

First it depends on how much you make. If you are in the 15% tax bracket or lower then it's pretty simple. Do your 401k up to the company match, then max out Roth IRAs. If you still have money left over you can do a 529. But if you are in the 15% bracket then chances are you won't have much left over after putting $11,000 away in Roths.

Now if are in the 25% bracket the same rules apply, but slightly different. 401k up to the match, Roth IRA, then you put extra money into your 401k until it's maxed, then save in a 529 or education IRA if you still have money left over.

Now, let me explain why. The college aid forms ignore the parents retirement savings, but they include everything in a 529. So if you have money in a 529 it will count against you, but if it's in a ROTH it will not count as an asset you can use to pay for college. So if you have money in Roths and 401ks you will qualify for more aid.

If you are in a higher income tax bracket (like me) the strategy is to fund Roths and 401ks to the max. Then you get the maximum number of subsidized student loans you can get. Then you liquidate your Roth to pay for everything above subsidized student loans.

When your child graduates and it's time to pay back the student loans you take out a home equity line and use that to pay off all of the loans. Then you use your 401k to pay off your house once you've retired and you are in a lower bracket.

This strategy minimizes the taxes you will pay over your lifetime but if it's too much of a hassle you can just put after-tax money in a 529. But for me I pay 6.45% New York State tax and 28% Federal tax. So it's worth it to me to max the 401k and save 35% in taxes vs funding a 529 with 65% less money.

 

[TLuvsD]

Get a copy of Paying for College without Going Broke from your library, lots of information on how different savings options impact financial aid, etc. Not shady at all, it's from Princeton Review (annual editions, anything in the last couple of years should be fine).

Congratulations!

 

[liloca]

Thanks all for your help!!! I will look at the info you posted .

 

[Mrs. Ciz]

I did a prepaid 529 in VA. Everything I put in ($90k or so) was free of state income tax ($5k savings). I also have a 529 for room and board as prepaid only covers tuition. Luckily in Virginia we have a lot of very good state schools so it makes sense for my solidly middle class family.

We also did the Virginia Prepaid Tuition 529 plan for both our kids. We paid for two years for each child outright (with tax refunds, the kid's savings accounts, & inheritance money) and have been paying the other two years for each child monthly. We love knowing that our tuition and mandatory fees are all paid for. Virginia is very lucky in that some of our public universities rank in the top 40 nationally. We did not do 529 plans for the room & board (good idea though b/c this can run $10,000 per year). We are paying private high school tuition for our oldest and that money will then go to room & board for college. The two years when DS16 and DD14 overlap in college will be a little rough - no vacations during those years.

 

[lisaross]

But if u take the money out of the roth won't that be counted as earned income the next year on your financial aid form?

I have a 4 year old and 2 year old and I've done a lot of reading about this and here is what I'm doing, and what I believe the best advice is.

First it depends on how much you make. If you are in the 15% tax bracket or lower then it's pretty simple. Do your 401k up to the company match, then max out Roth IRAs. If you still have money left over you can do a 529. But if you are in the 15% bracket then chances are you won't have much left over after putting $11,000 away in Roths.

Now if are in the 25% bracket the same rules apply, but slightly different. 401k up to the match, Roth IRA, then you put extra money into your 401k until it's maxed, then save in a 529 or education IRA if you still have money left over.

Now, let me explain why. The college aid forms ignore the parents retirement savings, but they include everything in a 529. So if you have money in a 529 it will count against you, but if it's in a ROTH it will not count as an asset you can use to pay for college. So if you have money in Roths and 401ks you will qualify for more aid.

If you are in a higher income tax bracket (like me) the strategy is to fund Roths and 401ks to the max. Then you get the maximum number of subsidized student loans you can get. Then you liquidate your Roth to pay for everything above subsidized student loans.

When your child graduates and it's time to pay back the student loans you take out a home equity line and use that to pay off all of the loans. Then you use your 401k to pay off your house once you've retired and you are in a lower bracket.

This strategy minimizes the taxes you will pay over your lifetime but if it's too much of a hassle you can just put after-tax money in a 529. But for me I pay 6.45% New York State tax and 28% Federal tax. So it's worth it to me to max the 401k and save 35% in taxes vs funding a 529 with 65% less money.

 

[MrsPete]

The important thing is not HOW you save but THAT you save.

It's easy to say, "Oh, we'll start saving once I'm back to work" . . . "Once he's out of diapers" . . . "Once he starts school" . . . and then suddenly he's a teenager, college is just around the corner, and the time has fled. Just save. We have money saved in various places /various investments, but we don't have one specifically marked "College".

It's wise to keep the money in your own name. I have two responsible teens, and still I wouldn't like to turn over 18 years of savings to them -- I didn't scrimp and save and do without so they could have a great car or a vacation, and even the most responsible teen isn't as forward-thinking as the parents who've saved that money.

However, I don't put much stock into the oft-repeated concerns that if you have any savings, you won't get any financial aid. You're probably not getting any anyway. My husband and I aren't high wage earners (probably low end for this board), but we weren't even close to getting a single penny of aid.

 

[3boymthr]

While I did not do the actual saving I will say that if you think your child will go to one of the schools on the list that Penny for Penny, the prepaid tuition plan is the best investment. My parents invested $20,000 ($5,000 for each year of school) in the prepaid tuition plan for each child when they entered 1st grade and the next year they invested an additional $10,000 for each child into a 529 plan. The prepaid tuition is guaranteed to not loose money unless some how, some way college tuitions start going down ( ) and the value of the tuition is now worth $32,000 (so a $12,000 return on investment) for oldest DS and the 529 plan (not guaranteed to be worth as much as it is driven solely by the stock market and if stocks loose money the 529 looses money) is now worth $12,500 - so only a $2,500 return on investment.

The big caveat on the prepaid tuition plan though is that the value of the tuition is as of the last day that you invest money so if you make the last payment the last day your child is a junior in HS you loose all that extra value you gained when the child was in 1st grade.

ETA - you can also get FREE money for college - UPromise. It's kind of like ebates only the money has to be designated as being for a child. There are some savings opportunities that are available if you tie your credit cards to the plan and if you shop at certain grocery stores and tie your store card to Upromise. I haven't accumulated a ton of money but I have accumulated about $500 in free cash toward DS' college expenses.

 

[tvguy]

It can be as easy as telling grandparents that one less toy at Christmas and birthdays, and a $50 savings bond instead can go a long way to starting a college fund.

My kids were lucky, they got a $1,000 savings bond for each birthday and Christmas from one grandmother from birth until age 18. In our youngest case, grandma stepped up and paid her first year tuition and room and board.

 

[Brancaneve]

I have a 4 year old and 2 year old and I've done a lot of reading about this and here is what I'm doing, and what I believe the best advice is. First it depends on how much you make. If you are in the 15% tax bracket or lower then it's pretty simple. Do your 401k up to the company match, then max out Roth IRAs. If you still have money left over you can do a 529. But if you are in the 15% bracket then chances are you won't have much left over after putting $11,000 away in Roths. Now if are in the 25% bracket the same rules apply, but slightly different. 401k up to the match, Roth IRA, then you put extra money into your 401k until it's maxed, then save in a 529 or education IRA if you still have money left over. Now, let me explain why. The college aid forms ignore the parents retirement savings, but they include everything in a 529. So if you have money in a 529 it will count against you, but if it's in a ROTH it will not count as an asset you can use to pay for college. So if you have money in Roths and 401ks you will qualify for more aid. If you are in a higher income tax bracket (like me) the strategy is to fund Roths and 401ks to the max. Then you get the maximum number of subsidized student loans you can get. Then you liquidate your Roth to pay for everything above subsidized student loans. When your child graduates and it's time to pay back the student loans you take out a home equity line and use that to pay off all of the loans. Then you use your 401k to pay off your house once you've retired and you are in a lower bracket. This strategy minimizes the taxes you will pay over your lifetime but if it's too much of a hassle you can just put after-tax money in a 529. But for me I pay 6.45% New York State tax and 28% Federal tax. So it's worth it to me to max the 401k and save 35% in taxes vs funding a 529 with 65% less money.

Brilliant!!

 

[aprilgail2]

I don't care what you put it in, as long as you save something its better than nothing- a simple 25.00 a week will become 23,400 plus interest by the time the child is 18! I started a 529 the month my daughter was born and have had the money going in there taken directly out of my paycheck each week since then so there is no saying "oh I won't put the money in this week, I will skip a week". My brother also has a 529 for my daughter though he puts in a lot more than I do-originally he was giving me the money and having me put it in mine but I suggested to him that if he opened his own then he would get the tax write off and if for some reason she did not attend college the money would still be his.

 

[3boymthr]

I have a 4 year old and 2 year old and I've done a lot of reading about this and here is what I'm doing, and what I believe the best advice is.

First it depends on how much you make. If you are in the 15% tax bracket or lower then it's pretty simple. Do your 401k up to the company match, then max out Roth IRAs. If you still have money left over you can do a 529. But if you are in the 15% bracket then chances are you won't have much left over after putting $11,000 away in Roths.

Now if are in the 25% bracket the same rules apply, but slightly different. 401k up to the match, Roth IRA, then you put extra money into your 401k until it's maxed, then save in a 529 or education IRA if you still have money left over.

Now, let me explain why. The college aid forms ignore the parents retirement savings, but they include everything in a 529. So if you have money in a 529 it will count against you, but if it's in a ROTH it will not count as an asset you can use to pay for college. So if you have money in Roths and 401ks you will qualify for more aid.

If you are in a higher income tax bracket (like me) the strategy is to fund Roths and 401ks to the max. Then you get the maximum number of subsidized student loans you can get. Then you liquidate your Roth to pay for everything above subsidized student loans.

When your child graduates and it's time to pay back the student loans you take out a home equity line and use that to pay off all of the loans. Then you use your 401k to pay off your house once you've retired and you are in a lower bracket.

This strategy minimizes the taxes you will pay over your lifetime but if it's too much of a hassle you can just put after-tax money in a 529. But for me I pay 6.45% New York State tax and 28% Federal tax. So it's worth it to me to max the 401k and save 35% in taxes vs funding a 529 with 65% less money.

This is true but it's not. As long as you plan on using this money to pay for college AFTER all four years of college are completed then you'll be okay (as long as you don't have to take out loans that start accruing interest on day one this would be fine). BUT if you use it to pay for college while your child is in college then while you don't have to report it the first year you DO have to report it the second third and fourth years under "other funds available to be used for college."