Saving for college

[MeDebtFree]

I cannot state strongly enough that this was NOT how our personal experience went.  Just for kicks I went to

http://www.finaid.org/calculators/scripts/quickefc.cgi

and put in our info.  When I removed my assets (leaving all other parameters the same), my EFC dropped from over 31k to 9k.  So don't tell me that assets don't mean much.

It's not me ...

Sorry, Gumby.  My "... don't tell me ..." frustration comment was directed at "the system" and "the man", not anyone on these boards (I LOVE YOU GUYS/GALS!).

That explanation suggests that a child's assets have a much bigger affect on aid than a parent's assets do. Is it possible your income level in combination with your children's assets were the main problem?

We were aware of the child asset thing and got all their money out of their names (which was only a few k each) .  The biggest hitter for us was clearly the assets we had built up through saving and investing.  So we did all the hard work and took all the risk and then still  got slammed for it.

Appears to me that the recommendation by others in this thread that you use a Roth and then pull the contribution, if needed, is the way to go.

[Lone Wolf]

I cannot state strongly enough that this was NOT how our personal experience went.  Just for kicks I went to

http://www.finaid.org/calculators/scripts/quickefc.cgi

and put in our info.  When I removed my assets (leaving all other parameters the same), my EFC dropped from over 31k to 9k.  So don't tell me that assets don't mean much.

My spouse is an accountant and met with financial aid admins from several different schools of various size and caliber.  Leaving no stone unturned, my spouse researched the fancy federal formula, asked every question, and evaluated every option.  Assets do count and count in a big way.  End of story.

Yeah, that calculator definitely backs up what you're saying.  Why the discrepancy?  Mark Kantrowitz is the guy who founded finaid.org... which is where the calculator comes from!  His statement is thoroughly confusing to me.

The more detailed explanation does help a bit but seems to imply that basically nobody has any savings whatsoever.  The implication is that once you set aside primary residence, small businesses, and retirement accounts, only 4% of households have a savings level greater than $50,000 when you include all investments?  At age 48?  Come on!  4%?

I do like the idea of doing away with the asset questions entirely.  Those are very intrusive (and, as you said, punish savers.)

[Storm]

Yeah, here is the discrepancy.  The algorithm excludes 401Ks, IRAs, and home equity.  However, those of us that have saved often have many taxable accounts that are counted as assets.  In other words, I don't just depend on my 401K and IRA to handle my retirement.  In fact, most of my assets are outside of this.

By the age of 50, I expect to have well over $1 mil in taxable accounts which directly count as assets.  This bumps up my EFC according to the calculator by over $100K.

This is a direct penalty on saving.  I think the lesson here is to buy a lot of physical gold and bury it in your back yard...    Just kidding.

[Lone Wolf]

Yeah, I think that is right, Storm.  I guess what he is saying is "See, you will still have more money if you save than if you don't!"  But this doesn't debunk the "myth" that savers are punished.  The saver sacrificed present desires in order to build the savings used in these calculations.  This person, after putting off these desires, then pays a significantly higher price than the non-saver as their "reward".  I see that as punitive.

I guess he is trying to answer a different question.  He's trying to say that a saver still winds up with more money at the end of the day and thus you should save.  I'm a saver, so I'm inclined to agree.  However, the "myth" (aka completely factual statement) is that savers pay a higher price for college and thus get the shaft.  To me, that's undeniable.

[moda0306]

Roth IRA's are a huge help.

You are allowed to withdraw contributions after 5 years tax/penalty free.  So for tax/FAFSA purposes you could have hundreds of thousands of dollars in there by the time your kids go to college that you can actually use if need be.

Now, if you're maxing out IRA's and 401(k)'s every year, along with HSA's and college savings plans, etc, and can't seem to use gold and stocks in your taxable funds to avoid/defer a lot of the taxes on gains every year, then maybe you are being punished, but at that point you've taken such solid advantage of our tax code's preference of investment/retirement income (as opposed to wages getting knocked 25-35% federal, 5-10% state, and 7.65% FICA/medicare (not to mention the employer's half) that I can't feel too bad.

[Lone Wolf]

Moda, the saver has paid the same income tax rates as the spender all along.  The difference is that savers have deferred their consumption.  Essentially, they have produced without consuming in order to build a more secure future for their children and retirement for themselves.

Such saving leads to a higher price for college.  When your neighbor instead buys himself a boat, he pays less.  That's what seems so "off" about this policy.

[moda0306]

Having a military disincentivises saving and preparing for an uncertain future and learning to defend one's self.  But despite it being about twice as big as it should be, I'm not about to constantly rag on it as an entity or what it does or acknowledge the benefits I received from it.  Many of us came from humble beginnings, and it was likely FAFSA-esque liberal redistribution policies that helped us graduate in something less than a mountain of debt.

Plenty of things the government does disincentivise saving on your own, but if you look at the alternative, and carry it to its logical conclusion, then you usually get to a place that's pretty unfavorable.

For instance, w/o earnings & asset-based college aid, we'd have little to no equality of opportunity in the United States.  The gap between the rich and the poor would continue to grow at a faster pace, and the financial education of the lower/middle class would end up even worse than it is today.  I don't prefer that outcome on a societal level.  Similarly, as much as I hate Social Security on some levels, would you really want someone w/o proper disability insurance having to live in poverty and shame due to an unforseen accident?  We have to have the full breadth of the conversation and not just talk about it in narrow terms like "punishing savers," and ignoring all the social consequences. 

That said, the FAFSA calc. is probably unfair at certain points, and I'm mostly playing devil's advocate to get people to admit to the full implications of what they're suggesting and not pretend that lazzais-fair policies breed the best results and always put peoples' priorities in the right place, and to the other side, that they have any constitutitonal or moral authority to take what isn't theirs based on the fact that there's more of them than us.

[Lone Wolf]

I don't think we really need to answer the "big question" of whether such government intervention is net positive or net negative.  Your views seem well-considered but are quite the opposite of my own.  No problem there.

MeDebtFree's main point was that the system penalizes savers.  It seems that all available evidence points to this being true and thus it's probably best for savers (most of this board, I'd guess) to prepare accordingly.

[Gumby]

MeDebtFree's main point was that the system penalizes savers.  It seems that all available evidence points to this being true and thus it's probably best for savers (most of this board, I'd guess) to prepare accordingly.

Ok then.. We're all savers here. So, how do we become savvy savers? The PP strategy seems like a solid choice for college savings, but the only concern I can think of is the tax consequences when it comes time to cash it all in. Using a 529 would be a nice way to reduce owed taxes but the investment options for 529s are limited (no Gold, no LT Bonds, no easy way to rebalance all assets to other investment options). Perhaps using an inexpensive 529 for a small Total Stock Market allocation would be useful?

Vanguard just stopped accepting new (ESA) Coverdell IRAs due to the uncertainty of the future tax law. They are now recommending people sign up for their 529 plans.

Gifts from grandparents and relatives tend to gravitate toward UTMA/UGMA account or a 529. Is there some combination of retirement, UTMA/UGMA and 529 accounts that would work well with a PP approach (or PP/VP approach)? I'm sure others here have been giving this some thought. I'd love to see if we can come to some consensus for maximizing the PP approach.

[MediumTex]

Whether the Coverdell account limit is $500 or $2,000 per year, I think maxing out this vehicle should be the first step for anyone just starting out with college savings.

I have PRPFX Coverdell accounts for each of my kids.

[moda0306]

If the 529 plans are so bad, maybe there's a way of developing a quasi-allocation from what's available.  If they offer a total bond fund, which I believe is mostly government bonds, usually, then you could look at the average duration and weight it between your LT Bonds and ST bonds PP allocation accordingly.

Unless you're obsessed with having each account you own have its own PP, then I think trying to "do the best with what you have" could help you structure the rest of your portfolio accordingly and get similar results.

[Gumby]

Whether the Coverdell account limit is $500 or $2,000 per year, I think maxing out this vehicle should be the first step for anyone just starting out with college savings.

I have PRPFX Coverdell accounts for each of my kids.

I would love to open a Coverdell IRA. Unfortunately, Vanguard doesn't allow you to open Coverdell IRAs anymore.

Note: To open a new ESA, your form must be postmarked by December 31, 2010. Beginning on January 1, 2011, Vanguard will no longer open new ESAs (this includes any new accounts that would be established by an asset transfer). However, we will continue to maintain and allow contributions to existing ESAs

https://personal.vanguard.com/us/whatwe ... anguardesa

Now what? Seems like that's not really an option anymore (unless other firms are still offering Coverdell IRAs).

[MediumTex]

Open one directly with PRPFX.  I believe there is a $1,000 minimum, so save up two years of Coverdell contributions at a bank and roll it over directly to PRPFX.

[Gumby]

Open one directly with PRPFX.  I believe there is a $1,000 minimum, so save up two years of Coverdell contributions at a bank and roll it over directly to PRPFX.

Ah brilliant! I didn't realize that you meant it was directly with PRPFX. I'll call them and find out if I can still open one and contribute for 2010. Thanks!

EDIT: Yep. They're still accepting new applications and 2010 contributions. Thanks again.

[MediumTex]

I love it when things work out.

[Gumby]

If the 529 plans are so bad, maybe there's a way of developing a quasi-allocation from what's available.  If they offer a total bond fund, which I believe is mostly government bonds, usually, then you could look at the average duration and weight it between your LT Bonds and ST bonds PP allocation accordingly.

Unless you're obsessed with having each account you own have its own PP, then I think trying to "do the best with what you have" could help you structure the rest of your portfolio accordingly and get similar results.

I agree there must be a way to achieve this, so I think it's best if this conversation continue...

Hypothetically, I was thinking something between IRAs and 529s. It's absolutely impossible to achieve any semblance of a PP in any single 529, so obsession isn't even an option.

The iShares 529 plan from UPromise seems to have TLT as one of the options:

https://ishares529.s.upromise.com

...but I'm unclear as to what the overall final expenses would be over the long run.

I was thinking that one could feasibly hold one iShares 529 for LT Bonds and another separate 529 (say, from Ohio) with Total Stock Market. Then you could use iBonds for Cash and transfer them into either 529 as necessary. That just leaves gold bullion (as coins or in an IRA). However, it's possible that the separation of assets would still make rebalancing pretty difficult.

The Coverdell is certainly easier to say the least. Although, the only catch with the PRPFX Coverdell is a possibility for 3rd party mismanagement.

[Lone Wolf]

Hypothetically, I was thinking something between IRAs and 529s. It's absolutely impossible to achieve any semblance of a PP in any single 529, so obsession isn't even an option.

The iShares 529 plan from UPromise seems to have TLT as one of the options:

https://ishares529.s.upromise.com

...but I'm unclear as to what the overall final expenses would be over the long run.

I had more or less thrown in the towel on ever being able to do much in a 529.  Some good thoughts here, thanks!

If you do wind up investigating the iShares 529 plan, I'd be interested in hearing how your experience goes.  I'll post something up when I talk to them.

[MediumTex]

MT, what advantage does the Coverdell have over a 529?  The ability to invest in PRPFX?  I'm currently using the Oregon 529, and holding a combination of TSM and Cash.  I just include the 529 asset balances in our family's total portfolio when calculating the PP asset percentages.  Does this make sense, or do you think the Coverdell option offers an advantage?  Thanks. 

A Coverdell account allows you to invest in anything, sort of like an IRA.

A 529 plan locks you into whatever crappy funds a company was able to sell to a state.

529 fund lineups are getting better after a wave of lawsuits over high fees the last few years, but a self-directed Coverdell account is obviously a better choice, though the higher contribution limits of a 529 plan are appealing (but IMHO only after you have maxed out your Coverdell for the year).

I am also a HUGE fan of state-sponsored prepaid tuition plans.  If the plan is well designed (as the ones in Texas are), it is a beautiful way to hedge rising tuition costs and it's also sort of a bet that the government subsidized portion of higher education expenses will decline in the future (IMHO, a very safe bet).

I bought a four year tuition contract for my daughter in 2000 for $18,000.  Four years of tuition and fees at any public university in Texas is covered.  If she goes to a private school or out of state, we will be reimbursed based upon the prevailing state tuition rate at the time she is attending college.  It's the best $18,000 I ever spent.  Every time I think about it it makes me happy.  This program was closed in 2001.

Texas rolled out a successor plan to the one described above a couple of years ago that is not as well designed.  I bought my other two kids two year contracts under the new program and I am putting additional college savings for them in Coverdell accounts.

Look into prepaid plans sponsored by the state.  There are some good ones out there.

[Lone Wolf]

I bought a four year tuition contract for my daughter in 2000 for $18,000.  Four years of tuition and fees at any public university in Texas is covered.  If she goes to a private school or out of state, we will be reimbursed based upon the prevailing state tuition rate at the time she is attending college.  It's the best $18,000 I ever spent.  Every time I think about it it makes me happy.  This program was closed in 2001.

Texas rolled out a successor plan to the one described above a couple of years ago that is not as well designed.  I bought my other two kids two year contracts under the new program and I am putting additional college savings for them in Coverdell accounts.

Congratulations on getting into the original "Texas Tomorrow" fund.  Am I jealous?  Deeply.  That really was a superb deal.  Essentially, it was an opportunity to invest in tuition inflation, no matter where the student decided to go to school.  (I am completely unsurprised that this program was discontinued as it sounds like the proverbial free lunch.)

Now the newer "Texas Tuition Promise Fund" sounds fantastic if your child attends a public college.  In this case, it again seems like a perfect hedge against tuition inflation.  But from what I gathered, if your child attends private school or an out-of-state school, all you get back is what you put into it plus any "earnings" that the money had during this time period (based on investments that the fund uses which are outside of my control.)

This just seems like nowhere near as good of a deal.  I've had little success getting a straight answer from my son during diaper changes as to which type of college he plans to attend!  I feel like I face less uncertainty just grinding it out in a conventional 529.

I think this plan is much better designed from a sustainability point of view as families that go outside the public university system bear the fund's investment risk.  I simply don't want that to be me.

Do you think I am missing the point of the plan's benefits?

[MediumTex]

I actually bought one year of senior college prepaid credits and one year of junior college prepaid credits in the new plan for each child.  Total cost for the two years in these plans was around $8,500.

I think this combination of prepaid credits in the new plan will provide some good versatility and options.

It's not nearly as good a deal as the old plan.

[Lone Wolf]

I actually bought one year of senior college prepaid credits and one year of junior college prepaid credits in the new plan for each child.  Total cost for the two years in these plans was around $8,500.

I see.  You know, a cool thing about what you did here is that you get "full value" of your investment if your children go to a year of public college and transfer into private college (if they want to do so and "prove themselves" in public college.)

[Lone Wolf]

If you do wind up investigating the iShares 529 plan, I'd be interested in hearing how your experience goes.  I'll post something up when I talk to them.

I called up the iShares 529 plan to ask a few more questions (most of which I already pretty much knew the answer but I was hoping for some kind of revelation.)  Yeah, you really do have to go through an advisor to use them.  The assumption in most 529 plans seems to be that investors will have no idea what they are doing.  This means that even the relatively benign set of individually-choosable investments available in this plan have to be chosen by an advisor, not by some schmo (such as myself.)  That means additional fees and hassle.

It didn't seem to matter how much I reminded the gentleman that I spoke to how much I looooooove iShares for creating TLT and really, really want a way to buy long-term US Treasuries.  The issue is that the IRS seems to be concerned that people will "put their eye out" if allowed to choose their own investment options.  Too bad there's not some kind of "I troll investment forums and think I know what I'm doing" waiver that I can sign so I can build a 529 out of a menu of iShares ETFs.  This would be superb.

I'm thinking about just stuffing this year's contributions in Ohio's Vanguard "Moderate Growth" allocation (basically 40% total stock market (VTSMX), 10% developed international stock (VDMIX), and 50% total bond market (VBMFX)) and just leaving it at that.

Ah well.  If anyone has any suggestions or better ideas of what to do with a 529, I'm all ears.

[Greg]

A biased article, but the comments section is quite interesting on whether saving for college and going to it is better than dropping out and starting work with a good idea.

http://www.nytimes.com/2012/12/02/fashi ... neral&_r=0