College Savings

Good Evening SNH’ers,

This is more of a user feedback post. I am debating about the best strategy to help my kids with funding for college. I know that I cannot fully fund their college activities, but I do want to have some money reserved to give their first year a start. I have seen several strategies available each with their pluses and minuses.

Method #1 – 529 Plan

  • Pros
    • Can generally put in as much or as little as you want.
    • It is shielded from the fafsa form as counting against your child’s available funding.
    • It is valid in any state.
    • If funded in your local state, may have tax exemptions or deductions.
  • Cons
    • Funds must be used for education or a penalty is assessed.
    • Usually pretty low growth fund opportunities (sub 6%).

Method #2 – Prepaid Plan

  • Pros
    • Generally gets a better forward interest rate by committing funds at current rates.
    • Generally exempt from federal taxes
    • You will have a predefined amount of tuition you have paid for in advance.
  • Cons
    • Can typically only be used in the state at public universities.
    • Usually structured payment plans that may or may not fit well with your current financial plan.
    • Not all states offer these plans.
    • Not transferable outside of the state, though some states have made allowances for “equivalent in state value.”

Method #3 – Parent funded investment account

  • Pros
    • Unlimited fund options with a private broker
    • Larger growth opportunity
    • No restrictions on how the money is used
    • If no college is planned, money can be reserved for other uses
  • Cons
    • There is no guarantee that the market was favorable to your investments
    • There may be capital gains taxes you may have to pay

Within this list, I don’t currently favor the prepaid option. While the savings are great, I am not in position to commit any of my kids to an in-state public school. I like the 529 plans because you can transfer them to another child and you have a low risk investment that generally stays above inflation from the data that I have seen. Method 3 looks great on paper, but you really have to watch the market carefully, and I am not too good at picking funds that are so stable that I could count on an ROI each year.

There may even be a 4th strategy to combine a 529 plan with an investment account funneling off dividends to the 529 plan and committing to regular contributions to both the 529 and the investment account.

Let me know what your thoughts are, I would love to see what you think is the smarter way to save for college expenses.

Photo by JESHOOTS.COM on Unsplash