A while back, a financial follower friend asked for college savings advice and I’m finally turning it into a blog post!
Q: Talk to me about parents and paying for their kids college. Ways to save some along the way, and some evidence why I shouldn’t have to foot the bill! I know many people who pay for their kids education and I just cannot wrap my head around that. I had some loans and a job and I feel it gave me responsibility. I want the same for my kid, within reason.
A:I’m with you. It is a tough topic. I was fortunate enough to have scholarships and my parents paid the rest and yet I still think that kids should have some kind of loan so they appreciate school and don’t goof off.
Problem is, if school rates keep rising 5% per year, our kids’ college costs could be hundreds of thousands of dollars! I really hope they reform that system before then, but who knows. I want to help offset that but I remember Suze Orman talking a lot about how you have to take care of yourself first!
So here’s what we’re doing. Not saying it’s the best thing but I feel like it’s kind of a compromise half way point.
- We make sure we meet all our savings goals – contributing up to the point of the match in a 401k, fully funding Roth IRAs and then various savings like vacations, cars and house maintenance.
- Then we save $100/month for college.
- Extra windfalls go straight to the college fund. Christmas and Birthday monetary gifts for sure (don’t get me started on how I’d rather people give money toward this then buy toys and things kids barely use…). We also contribute portions of tax refunds, bonuses, extra paychecks, dependent care FSA reimbursem*nts, etc.
- For now, this money is going into a Vanguard S&P Index Fund so it can grow and compound. The plan would be to start taking it out and securing it several years before college starts to ensure market fluctuations don’t decimate the fund just when it’s actually time to use it.
I feel like my goal is just to offset the ridiculous school costs and between scholarships, loans, work study, etc I hope the rest will be made up.
529 Plan: I chose not to contribute to a 529 plan because I don’t like that it HAS to be used for education. If I only have one kid that never goes to college and we never want to go to grad school or anything I want to have full control of that money to do what I want with it. I also don’t love the limitations regarding state or out of state schools. If you have more than one kid and feel confident that the money will be used on a state school education than I think it’s totally worth it for the tax benefits.
Put Yourself First: Obviously the sooner you can put away anything and invest it, the more time it will have to grow, but if you’re still working on your own savings goals then you need to put yourself first! Getting out of YOUR debt and saving for YOUR retirement should be prioritized over saving for your child’s college costs.
Suze would often pose this scenario: parents that give every last cent to their kids – pay for their Ivy League education, give them money whenever they ask, etc – and never plan for their own retirement will then have to burden their adult children to take care of them in their old age. Even if you can’t pay for a child’s schooling, if you make sure that you’re providing for yourself, you’re doing them a favor in the long run! It’s not selfish to take care of yourself first.
I developed pretty strong views about college after I graduated. I had very little loyalty to the school. I didn’t feel like one college was sooo different from another that it warranted paying tens of thousands more dollars (ahem, Ivy League and out of state schools). Even with scholarships and such, I felt it was an expensive way to get a piece of paper that allowed me to get a full-time job. Having a Bachelor’s is a prerequisite for a lot of jobs these days, but as you get into your career it often does not matter what the degree is in or where it came from.
Community College. With that in mind, why not encourage your child to start with community college? Tuition is cheaper but you also save on room and board. Kids don’t really know what they want to major in when they graduate high school anyway. Let them take a few years getting the Gen Ed courses out of the way cheaply. Then they can transfer to a 4 year school and live on campus (because I do believe that living away from home and taking care of yourself is an important life experience for everyone). The Bachelor’s degree will be from the 4 year school and the student can put that on his or her resume. My husband actually took this route, and he wanted to add that with this plan, you don’t need to take the SATs! Plus, community college classes are often smaller than those at a big university so if your child requires a little more attention or will get lost in a sea of students, this is a great option.
College Loans for Parents: Suze Orman would often speak against cosigning college loans for your children (well, really, cosigning loans in general is a big no-no for her). Do you want to be on the hook for that money should your child default? If your children can’t get enough loans on their own to cover the costs, are they maybe biting off more than they can chew? Maybe they need to consider a cheaper school.
Bottom line: You have to do what’s right for you and your child. You should take care of your own finances before saving (or going into debt) for your child’s college education. If you can’t help pay for college, you certainly won’t be the first or only parent in this boat! You will more likely do them a favor if you force them to figure it out on their own.
Do you have any thoughts on this topic? Share them in the comments below!
FAQs
You can call your plan administrator, make a request online, or submit a withdrawal request form. The plan can send withdrawals by check to the account owner, the beneficiary, or the school. You can transfer the money to yourself or the beneficiary electronically and then make payment to the school.
What happens if I don't use all my 529 money? ›
Penalties for Unused 529 Funds
In some cases, unused 529 funds are subject to both federal income tax and a 10 percent penalty fee. There's an exception: If part of those funds go untouched because your child received a scholarship, you won't have to pay any penalty on funds equal to the amount of the scholarship.
How can I spend my 529 money? ›
Your ScholarShare 529 funds can be used at any accredited university in the country—and even some abroad. This includes public and private colleges and universities, apprenticeships, community colleges, graduate schools and professional schools. Up to $10,000 annually can be used toward K-12 tuition (per student).
How can I withdraw money from my 529 without penalty? ›
Withdraw for Qualified Expenses Without Penalty
Funds for qualified expenses can be withdrawn from your 529 account without penalty. These include tuition and fees, room and board, textbooks and lab fees, special needs equipment, some study abroad programs, and technology required for coursework.
Can I withdraw all my 529 money? ›
The maximum you can withdraw each year is the difference between the school's cost of attendance and any grants, scholarships, and tax-free assistance. The earnings portion of non-qualified withdrawals is considered taxable income and could incur an extra 10% penalty.
How long does money have to be in a 529 before withdrawal? ›
529 plans do not have specific withdrawal deadlines. A 529 plan account owner is not required to take a distribution when the beneficiary reaches a certain age or within a specified number of years after high school graduation, and funds can remain in the 529 plan account indefinitely.
What is the 529 loophole? ›
The grandparent loophole allows grandparents to use a 529 plan to fund a grandchild's education without affecting the student's financial aid eligibility. Previously, withdrawals could have reduced aid eligibility by up to 50% of the amount of the distribution.
What happens to 529 when a child turns 18? ›
In most states, that means age 18, though in some states the age threshold may be higher. The custodian can't change the beneficiary or account owner. Once the account owner/beneficiary becomes an adult, they assume control over the 529 plan.
Can I convert my 529 to a Roth IRA? ›
With the new regulations, 529 plan account owners or beneficiaries can roll over 529 funds into a beneficiary-owned Roth IRA tax-free and penalty-free as of January 1, 2024, subject to the limitations described below. If you qualify, this can be a great way to help kick start a beneficiary's retirement savings.
Can you use a 529 for something other than college? ›
529 plan funds can be used to pay for trade or vocational courses as well, as long as the school or teaching institution is eligible for federal student aid. You can check online to see if the school participates in the U.S. Department of Education's federal student aid program.
So, if your child opts out of college, you can name a younger sibling or even a niece or nephew or potentially another relative. And you can even name you or your spouse as the beneficiary if you're interested in furthering your education.
Can I use my child's 529 for myself? ›
Your 529 can be used for student loan repayment up to a $10,000 lifetime limit per individual. Up to $10,000 annually can be used toward K-12 tuition (per student). You can transfer the funds to another eligible beneficiary, such as another child, a grandchild, yourself or a friend.
Can I buy a computer with 529 funds? ›
If you have a 529 savings plan, you have an advantage: you may withdraw contributions tax-free to pay for “qualified education expenses.” Qualified expenses include not only tuition and fees, but also room and board, books and supplies, computers and software, as well as other materials directly related to school.
Do I need to report 529 distributions on taxes? ›
If you contributed to the 529 plan, you will be able to claim a subtraction from income. If you withdrew money from your 529 plan, you may have to add the withdrawal back to your income, if it was not used for educational purposes.
What happens to 529 when a child turns 30? ›
There are no time or age limits on using a state 529 college savings plan. Money can be kept in a 529 plan indefinitely. 529 plans can be used for graduate school, not just undergraduate school, and can be passed on to one's children. There is also no age limit on contributions to a 529 plan.
Who owns 529 parent or child? ›
A 529 plan must have an owner (such as a parent or grandparent) and a beneficiary (the student). The owner controls the contribution level, investment allocation and how and when to disburse funds. The owner also can change the 529 beneficiary.
Do 529 accounts have routing numbers? ›
The 529 plan will also need the bank routing number and account number for your account and a voided copy of a preprinted check or preprinted deposit slip. Some 529 plans, including the California ScholarShare 529 plan, can set up automatic contributions through payroll deduction from participating employers.
Can parents access 529 plan? ›
529 plans are considered assets of the account owner, which is often a parent. The 529 plan account owner may change the beneficiary or take a distribution at any time for any reason, whether or not it is in the best interest of the original beneficiary. In most cases, parents appreciate this flexibility.
Who controls 529 withdrawals? ›
The account holder maintains ownership of the funds
Unlike other college savings vehicles, such as custodial accounts, 529 plans allow the funds to remain under the account owner's control, meaning you can withdraw the money at any time (though taxes and penalties may apply; more on this below).
