Gyroscopic Investing

There was a thread a couple years ago called "Saving for College": http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3

I looked into some of the options today, thinking that I might be able to use them to defer some extra income for tax purposes.  I learned a lot in that thread and a few others on this forum!

Apparently most every way to save for education involves post-tax dollars.  Sometimes you can get a state income tax deduction, but I'm in Texas with no state income tax.  The tax advantage is that growth is tax-free (if the money is spent on education as intended).

It seems the general options are:

* ESA (Coverdell) - restrictive contribution limits, but VERY free as far as investment options.  Also this is the one plan where money can be used for pre-college education.  This seems to be on the way out, with the contribution limits getting even more restrictive, and brokers not bothering to deal with it anymore.

* 529 - There are many, many plans out there (something like 80?), most of which are associated with state governments.  The trouble here is that the investment options are very limited.  It seems that recently (since the last thread) a number of 529 plans have started to add more ETF options, and the iShares plan has ETFs appropriate for the PP except for gold.  It seems that expense ratios for funds inside one of these plans are higher than outside.  (And for the iShares one, I believe you have to go through an advisor to get in at all.)

* Prepaid tuition - MediumTex mentioned this in one or more of the older threads.  Apparently we've missed the boat on a giveaway deal with the original Texas Tomorrow Fund, which they've stopped offering.  With the new plan, I can lock in today's tuition+fee prices (at least for public colleges in Texas).  I believe I could lock in immediately and get on a payment plan, so I don't even have to pay now for the current lock-in.  Other states might have similar plans.

The big question is: is it worth doing any of these?  The tax-freeness of growth is nice, I suppose.  I don't like the investment options of the 529s, and with prepaid tuition, the worry is that the tuition bubble (and it IS a bubble!) will burst between now and then and I'll get the short end of the stick and then some.

It just doesn't seem like a very good deal.  Maybe I'd save some in taxes, but I wouldn't get to invest the way I wanted, and also if things don't turn out exactly as planned in a number of different ways, then I'm really in trouble.  Isn't a good old taxable savings account better?

Then there's MeDebtFree's harrowing story in the linked thread about being viciously punished for having saved anything at all.  That just makes me want to quit.

We went through the same thought-flow here a few years ago. Ugh...the whole friggin' system is rigged to benefit the irresponsible.

For our situation, asset placement is key. The more we can stuff into 529/Coverdell/IRA/401k the better our chances for financial aid.

The tradeoff is the lack of investment options in the 401k and 529s.

We decided to do a bit of everything (including taxable) and make it all one big-ole portfolio. Use the cheapest funds in each.

Vanguard's Nevada 529 plan is OK. Expense ratio's are higher than normal but pretty low compared to other plans. For PP purposes, there's cash and stocks in there. Be sure to research how your state handles out of state 529 asset protection though -- in terms of creditor protection and such.

Yeah, stinks that the Coverdell is in danger of changing. Would be nice to choose Coverdell and have the same contribution amounts as 529s. Looks like Vanguard stopped taking new applicants for Coverdells.

We looked into our state's guaranteed prepaid plan. Active management and guarantees...ummm...nothanksgetlost...   But your state's guaranteed plan may differ.

Oh, where to begin? Where to begin? My wife and I graduated in 2009. I would like to share some of the money-related things we learned from the experience.

1. Do your research, because things change. I feel like one of the biggest problems is baby boomers encouraging their kids to follow the college paths they took during a time when the entire environment was different. The way it is today is probably not the way it will be in 20 years. When the time nears, ask people who have direct experience or have just emerged from the other side. Not newspaper articles or publications in college journals; real people. Ask people who are happy what they did right. Ask people who are unhappy what they would do over again if given the chance. The rest of what I'm going to write applies to the way things are right now, but again, this could all be obsolete in a decade or so.


2. Never leave any assets in taxable investments, cash, or in a child's name. You have to disclose these assets and the colleges will happily take them all. My parents made this mistake, and because they were frightened of the stock market, they mostly saved using savings accounts, taxable money market funds, and college savings plans in my name. The result: all those assets are now gone, and it still wasn't enough to pay the full price so I had to take on debt anyway.

My wife's parents chose more psychically satisfying but lower-paying professions, so they didn't have any liquid non-retirement assets to pony up when the time came to pay the tuition bill. So the college just paid it for them! How nice of them.

Hide your liquid assets in any legal way you can! It really matters.

3. If you are expecting your child to receive need-based financial aid, do not apply to poor private schools. Private schools with smaller endowments may not cover all of the cost, even if your child gets lots of financial aid. My wife and I went to a poor private school and while she got a full tuition scholarship, it didn't cover room and board, so she graduated with about $50,000 of debt anyway.

There's a hidden bonus here: if a private school has a smaller endowment, that generally signals that most grads don't make a lot of money. Yet another reason to avoid these schools.


4. Encourage your child to take advantage of high-impact, low-risk opportunities to reduce the costs. At my school for example, you could get free room and board for being an RA. Being an RA can suck, but the free room and board amounted to about a $13,000 gift. If my wife and I had done this for all three years we had been eligible, I would have graduated debt-free and she would have graduated with a little over 10k. Your child will even get lots of fun stories out of the experience!

Corollary: work-study jobs are useless make-work programs that pay minimum wage and teach your child how to slack off, how to conceal doing outside tasks on someone else's dime, and what it's like in an inefficient bureaucracy where everyone realizes they're useless drains on someone else's resources. It took me a while to unlearn these lessons that college work-study taught me, and the money was paltry. Encourage your child to get a real job from someone who actually values their labor or expertise.


5. If you have a high-performing child, aim a tier or two below the top schools. The dirty little secret of college in America is that nearly all schools will provide an excellent education to a bright and motivated student. If your child is good enough to be accepted into Harvard, Yale, Princeton, and Brown, also apply to slightly lower-tier yet still wealthy schools like Bates, Brandeis, Smith, Harvey Mudd, and the like. Your child is highly likely to receive extremely generous merit aid at these lower tier schools, because they are engaged in an elaborate academic dick-waving competition with other schools that strongly incentivizes them to seek high-performing students they can write articles about in their alumni newsletter.

I have a friend who was accepted to Harvard but went to Brandeis instead. His parents were rich, but he got a totally free ride because they wanted a student of his caliber so badly. He graduated debt-free and his parents kept a $250,000 chunk of change that Harvard wold have otherwise gobbled up. My friend still received an amazing education, and upon graduating was immediately hired by a medical research lab.


6. Don't pay for the college education of a child who doesn't appreciate the gift, has poor grades and work ethic, etc. You're basically setting money on fire. Going to college will not solve any of these problems. It will simply provide several years of fun and further delay the development of the good life skills that actually needing to survive in the real world will impart. "But everyone needs a college degree these days!" Yes, but that degree has to signify something. Sending an academically adrift student to college is not a boon to them. My parents are both college professors and they have to deal with the tragic cases of these kids every year. Most of them don't graduate, and those who do gain no advantage from their degree.

Wait until your kid is ready, or have them go to a trade school or something. There's always a demand for plumbers, electricians, and welders. They make pretty good money. Community college can work well, too.


7. Don't pay for the college education of a bright but directionless child. This one is usually more controversial. "People often reply, "You can really discover your passions in college!" Yes, that's true, and I sure did. But it's a very expensive way to discover your passions. And looking back, the experiences that helped me to discover what I wanted to do with my life in no way required a collegiate environment. I recommend that these kids take a year off and live in the real world on their own for a while (so you need to kick them out of the house). At the very worst, they'll be in the same place they were a year ago, but with some money in their pocket and more life experience in their head. And they may discover that life without a college degree sucks, which will give them the motivation they might have spent the first two expensive years of college looking for, thereby saving you or their future selves tens or hundreds of thousands of dollars.

Pugchief, I believe the what the law prescribes and what is ethical are often very different things. Therefore, if the law gives one the opportunity to shelter income in a manner that harms nobody, helps you, and avoids contributing to a social problem, I think you should do it.

Specifically, I'm talking about strategically using your Roth IRA, contributing the max to other retirement funds, temporarily gifting liquid assets to trustworthy relatives, etc. Burying gold coins in the ground isn't required.  It's probably illegal to not disclose covered assets. That's why you should strategically move your assets out of the account types that get counted against you. There's nothing illegal about following the law!

MangoMan wrote:

Pointedstick wrote:
Hide your liquid assets in any legal way you can! It really matters.

PS- Except for this one line, your advice is beyond excellent. Perhaps you could elaborate on how you can use both 'hide' and 'legally' [ethically?] in that sentence? For instance, buying a crap-load of gold coins and hiding them in a safe-deposit box and then not reporting that on FAFSA would certainly be questionable, would it not? Not judging, just wondering what you were thinking here.

I think it's the same as saying everyone has the right to avoid taxes, but not to evade them.

By the way, does the FAFSA count any kind of collectibles (gold or otherwise) against you?

This is from the paper-based FAFSA application. No mention of collectibles.

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Investments include real estate (do not include the home you live
in), trust funds, UGMA and UTMA accounts, money market funds,
mutual funds, certificates of deposit, stocks, stock options, bonds, other
securities, installment and land sale contracts (including mortgages
held), commodities, etc.

It does mention "commodities"...