What's Fair?

[MarkBarbieri]

We have two kids (4th grade and 2nd grade). We set up a 529 college savings plan for each kid about the time they were born. The plans automatically shift their investment allocation over time. As a consequence of fluctuations in the market and their different allocations, they'll probably have a significant difference in their savings by the time they hit college. In addition to that, inflation will make college cost more for the younger child.

So what's the fair thing to do? Do I just let the chips fall where they may? Do I re-balance and give them equal amounts? Do I estimate the cost difference caused by inflation and give the younger child a slightly larger piece of the pie?

 

[npmommie]

my opinion..........

you save for your retirement first, making sure that is well taken care of..........then.........you contribute to each childs 529 and let the chips fall where they may.
just my 2 cents

 

[Carly_Roach]

We have two kids (4th grade and 2nd grade). We set up a 529 college savings plan for each kid about the time they were born. The plans automatically shift their investment allocation over time. As a consequence of fluctuations in the market and their different allocations, they'll probably have a significant difference in their savings by the time they hit college. In addition to that, inflation will make college cost more for the younger child.

So what's the fair thing to do? Do I just let the chips fall where they may? Do I re-balance and give them equal amounts? Do I estimate the cost difference caused by inflation and give the younger child a slightly larger piece of the pie?

I'm presuming that you've already planned for your own retirement so my first suggestion is to take the kids college money out of accounts that depend on the stock market for tremendous growth and find something safer like CD's. Your money won't grow as fast, but then you won't lose it all if/when we get another year like 2008.

Playing the stock market is like playing the slots at Vegas: you wouldn't gamble your kid's college money in Vegas hoping to increase it so why would you gamble your kids college money in the stock market? What would be incredibly unfair would be if one kid had college money but the other didn't because the market crashed between kid #1 and kid #2.

Since your kids are only two years apart, there's not going to be THAT much difference in the costs of their education if they both go to the same school. Balance them out and allow for inflation for the second kid. The only major differences would be if one went to a more expensive school than the other.

 

[brockash]

I'd do #3, I think it's the fairest. I'd rebalance the accounts when they're older and give child #2 a little larger amount based on your estimate of inflatiion at that time. That's what we plan to do as well.

 

[SaraJayne]

my opinion..........

you save for your retirement first, making sure that is well taken care of..........then.........you contribute to each childs 529 and let the chips fall where they may.
just my 2 cents

 

[clh2]

I am also thinking you've taken care of your reitrement first...

And a big congrats to you for starting these when your kiddos were babies.

I, however, would not "let the chips fall where they may" in regards to the projected balances when they hit college.

Why would it be fair for 1 child to have an extra "stash of cash" than the other child? It's not like one child made bad investments etc.

 

[Minniemama350]

Child#2 is likely to have inflation to deal with in terms of cost. Something to consider. Balancing may not be exactly the right way. Maybe you could think in terms of percentage as opposed to lump amount? Perhaps you'vealready considered this? The chips falling where they may does not make sense to me.

 

[BriarfoxinWA]

Well here is my situation, my DS's are 13 and 19. Older DS is a sophmore in college. We started their college funds when each of them were around 3 years old. DS #1's mutual fund has tanked. They didn't have 529 plans when he was little and frankly I wasn't sure if he would want to co to college or not. So... I haven't touched his college fund yet, right now it has less in it that the actual amount that I had invested over the years. He had several savings bonds he'd gotten as Christmas and birthday gifts and I had quit investing in the mutual fund about 2 years prior to his starting college. I put the money in CD's instead. So far we've been able to either pay out of pocket or use his savings to cover his college costs - he worked all summer too to pay for his college apartment.

My younger DS's mutual fund has significantly more in it just due to the timing and I'm still investing in that one. I'm not going to rebalance those accounts. Maybe if we couldn't afford to pay his tuition out of his savings and some of ours I might. The point is, I would only rebalance if I absolutely had to in order to pay his (#1's) costs. As long as he is working, helping to pay for it, and getting decent grades I'll keep contributing. #1 wants to go to law school and I really would like to get him through his first 4 years with no student loans. Law school he's going to have to pay for himself...

 

[MarkBarbieri]

my opinion..........

you save for your retirement first, making sure that is well taken care of..........then.........you contribute to each childs 529 and let the chips fall where they may.
just my 2 cents

I've got the retirement thing covered. I've been paying into Social Security for years, so I should be safe, right? Seriously, I've got a good pension, a 401K, a couple of IRAs, a Roth 401K, a couple of Roth IRAs, etc. We're also debt free, have a healthy emergency fund, a reasonable amount of disability insurance, and plenty of life insurance. I'm just pondering the question of "fairness" in saving for the kid's college.

I'm presuming that you've already planned for your own retirement so my first suggestion is to take the kids college money out of accounts that depend on the stock market for tremendous growth and find something safer like CD's. Your money won't grow as fast, but then you won't lose it all if/when we get another year like 2008.

Playing the stock market is like playing the slots at Vegas: you wouldn't gamble your kid's college money in Vegas hoping to increase it so why would you gamble your kids college money in the stock market? What would be incredibly unfair would be if one kid had college money but the other didn't because the market crashed between kid #1 and kid #2.

Since your kids are only two years apart, there's not going to be THAT much difference in the costs of their education if they both go to the same school. Balance them out and allow for inflation for the second kid. The only major differences would be if one went to a more expensive school than the other.

We'll probably always disagree on the appropriateness of equity investments for college savings. My current savings plan started almost entire in an S&P 500 fund. Now it has shifted much of that money to a bond fund. As college gets closer, more of that money will move to a money market fund.

With a long enough investment horizon, I think that stocks are a good investment. I don't seem them being like Vegas at all. CD's are by no means risk free either. With a large national debt, large annual deficits, and a declining dollar, I think that inflation is a significant risk. CD's would leave my savings completely exposed to inflation risk.

My current approach to college savings is to calculate the cost of 5 years at Texas A&M and the University of Texas (we're in Texas and I think that they represent the best value in a college education here). I figure out how much I'll need to save each month for the kid's to have enough money to pay for the five years. Of course, I have to estimate college cost inflation and my investment returns. Each year, I recalculate what we need to save each month to add to our current savings so that it will cover the costs.

Because I increase or decrease our annual contribution based on the expected cost, I am eating any stock losses, not the kids.

Child#2 is likely to have inflation to deal with in terms of cost. Something to consider. Balancing may not be exactly the right way. Maybe you could think in terms of percentage as opposed to lump amount? Perhaps you'vealready considered this? The chips falling where they may does not make sense to me.

I like this. I think I'll keep my current approach and just continue it all the way through their college years. I'll replace my estimates for expected college costs with actual costs as they get there. I'll make sure that each kid gets five years worth of whatever the actual costs are when they are in school.

 

[The Mystery Machine]

We have no savings for college and my oldest is a college freshman. However this is what the scenario is....maybe it will inspire you.

My oldest wanted to go out of state, which would have added 20,000+ to the college bill which obviously we cannot afford. We told her that she has to get scholarships and grants to pay for it. She did not so she is going to a state school. However she can still figure this out by applying for scholarships, grants, working, etc....

My youngest who is in 7th grade also wants to go out of state to an IVYish school that specializes in writing, business or journalism. Obviously she is in 7th grade and still figuring this out.

She knows we have no savings for college and is aware that she has to make up the difference with scholarships.

She is busting her butt now, taking the ACT in Dec., and trying to get into a Young Scholars Program in college for this summer. She wants contacts, looking for writing programs, etc...Now I will admit she is talented in this area which my oldest is not.

So I am saying that grants, scholarships etc...will come into play with each kid and nothing will ever be "equal" as hard as you try. I hope that makes sense.

 

[SpecialK]

I actually stopped contributing to my kids' 529 last year and started funding with my investment guy. Our funds tanked after some bad investment choices on the part of our fund sponsor and I no longer trust the system here. I did look into the pre-paid tuition plan our state offers. If my kids were younger, I would have jumped at it. Does TX offer anything like that?

 

[wdwfan16]

I would keep contributing as I am. When they enter college I would compare the costs and balance it then.

 

[MarkBarbieri]

We have no savings for college and my oldest is a college freshman. However this is what the scenario is....maybe it will inspire you.

My oldest wanted to go out of state, which would have added 20,000+ to the college bill which obviously we cannot afford. We told her that she has to get scholarships and grants to pay for it. She did not so she is going to a state school. However she can still figure this out by applying for scholarships, grants, working, etc....

My youngest who is in 7th grade also wants to go out of state to an IVYish school that specializes in writing, business or journalism. Obviously she is in 7th grade and still figuring this out.

She knows we have no savings for college and is aware that she has to make up the difference with scholarships.

She is busting her butt now, taking the ACT in Dec., and trying to get into a Young Scholars Program in college for this summer. She wants contacts, looking for writing programs, etc...Now I will admit she is talented in this area which my oldest is not.

So I am saying that grants, scholarships etc...will come into play with each kid and nothing will ever be "equal" as hard as you try. I hope that makes sense.

I used to debate the merits of having the kid's fund part of their education. I've read several studies that show that, on average, kids that pay for their education take it more seriously and outperform those that do no. On the other hand, my education was fully funded, so I feel a personal obligation to fund my kid's.

The approach that I'm taking is to fund 5 years at a good state school. If they want to go to a private school, it will be up to them to make up the difference in loans, grants, or scholarships. If they want to go to a cheaper in-state school, I'm pocketing the difference. If they go to a good in-state school and get through spending less (scholarships, graduating early or even "on time", or just keeping costs down), I'll let them keep the excess. I'm hoping that dangling the carrot of getting the extra money will make them treat it as real money, not just their parent's money.

I actually stopped contributing to my kids' 529 last year and started funding with my investment guy. Our funds tanked after some bad investment choices on the part of our fund sponsor and I no longer trust the system here. I did look into the pre-paid tuition plan our state offers. If my kids were younger, I would have jumped at it. Does TX offer anything like that?

Our fund sponsor uses Vanguard index funds, which is where my non-529 plan money is invested. We have no state income tax, so there was no incentive to use our own state's mediocre 529 plan.

Our state does offer a pre-paid tuition plan and I've considered it as a supplement. It wouldn't substitute completely because it doesn't cover costs like room, board, and books. I haven't done it because the returns are terrible if you end up not going to an in-state public university. While I think that the better in-state universities in my state offer a great education value, I don't want to bet too heavily that my kid's won't want to go to private school. I think that the 529 plan that I'm using offers a reasonable compromise.

 

[sunnyday123]

I am also thinking you've taken care of your reitrement first...

And a big congrats to you for starting these when your kiddos were babies.

I, however, would not "let the chips fall where they may" in regards to the projected balances when they hit college.

Why would it be fair for 1 child to have an extra "stash of cash" than the other child? It's not like one child made bad investments etc.

I totally agree. My parents did this ( they also invested way better fro my brother ) and the end result was me struggling and notfinishing college because I couldn't afford tuition. 100 years later, I still hold a grudge. I think the end result for both should be the same.

 

[aprilgail2]

I would just give them an equal amount and not wory about inflation. Anything you give them will help out and get them on their way. I started my daughters 529 as soon as she was issued a social security number as an infant and my brother also took one out for her in which he contributes way more into his than I do into the one I have-I put money in every single week but he is single, childless and makes double what I do so he manages to put 100 a week in for her right out of each paycheck. They did get hit a bit in the past few years but I am confident that they will rebound by the time she is ready for college- I would rather take the risk than put it into a CD where they pay you 1.5 percent. I just got my 401K quarterly statement and I made 27.78% this year so far--not a bad deal. I don't have to rely on Social Security since I have never paid a penny into that system, I will collect more than I would have on social security and I also have a company paid pension so my retirement is pretty much taken care of- the least I can do is put what I can into a fund for my daughters college....she already knows that if she choses not to go to college all the money in there reverts right back to me, its not party money for her (other than my brothers money, he of course keeps that-though knowing him he would give it to her anyway, he already signed over his half of our parents house to her...)

 

[golfgal]

I would have started one fund, not two, and when your oldest started college that child got 1/2 of what was in there, the rest stayed in the account for your second child to use -changing the beneficiary when the time came. We are not of the same philosophy that we need to fund our kids' schooling 100%, they are responsible for as much as they possibly can come up with, savings, scholarships, loans, etc. and we will do the rest.

If your children are good students, 3.5 and above, you can expect significant scholarships (providing they put the work into applying). Typically a private school ends up costing about the same as a public school for good students because of the scholarships available at private schools.

Keep in mind that if your child gets a scholarship you can withdraw funds from a 529 plan equal to that scholarship amount, in the year in which they get the scholarship, without penalty. I would take that money out if you come across that situation and put it into one of your own funds. If one of your children is a better student then the other I would plan for this withdrawal. If your oldest is your better student I would plan to take as much money out of the 529 plan as you can for future use.

I am not a huge fan of 529 plans. They serve a purpose but there are just too many restrictions on how and when and for what you can use the money. We have our college savings in other vehicles that did NOT tank and I am happy we didn't go the 529 route.

(not to be taken for financial advice-just plain old this is what we do advice).

 

[npmommie]

I've got the retirement thing covered. I've been paying into Social Security for years, so I should be safe, right? Seriously, I've got a good pension, a 401K, a couple of IRAs, a Roth 401K, a couple of Roth IRAs, etc. We're also debt free, have a healthy emergency fund, a reasonable amount of disability insurance, and plenty of life insurance. I'm just pondering the question of "fairness" in saving for the kid's college.

Social Security.....hahahahahaha

house paid off too?

 

[MarkBarbieri]

Social Security.....hahahahahaha

house paid off too?

Yep. Did that this summer. It was a tough call. I was very tempted to refi and invest the money in relatively secure corporate bonds. A large mortgage makes a good inflation hedge.

As for SS, I think it will still be there. We'll tweak it and adjust it - higher retirement age, smaller increases, remove the tax cap, and make it means adjusted. I don't know that I'll get much of it, but I think the basic safety net will still be there.