529 Plans?

[solascriptura]

The thought of "paying" for 4 college tuitions has been on my mind lately.  I'm sure that many of you have already gone down this path.  While I know that money can be a sensitive subject, may I ask a question?  If you did invest in 529 plans for your college kids, did your investment actually grow?  A few of my IRL friends have shared that they lost money during downturns and that thought scares me.  I need to hear some stories where people actually saw a future benefit from using these plans.  Interesting enough, my IRL friend, who is a financial advisor, does not recommend the 529.

 

Stories anyone?

 

 

[historically accurate]

My mother set up 529s for my children in early 2008 (who were at the time ages 6, 3, & 1). She put in contributions during 2008. The accounts haven't been touched since then. All of them are approximately double the original contributions; the oldest's is a little less than double, other two have made more than double. The 529s are through Utah state, and they are all in an age-adjusted program. They automatically shift to safer investments over time.

 

Edit: What does your friend recommend? 

Edited March 30, 2017 by beckyjo

[Sneezyone]

My state had/has a prepaid tuition model that guarantees that your investment will not lose value as it's pegged to in-state tuition and fees at the state flagship. I purchased three years of prepaid tuition to use with both kids (in addition to GI bill) and when the program reopens this summer, I will purchase two or three more (the overage can be used for books, room or board). I know ppl who did strictly 529 savings accounts but I was uncomfortable with that approach then (and a bust occurred two years after we set up acts) and I'm uncomfortable with that approach now for the same reason.

Edited March 30, 2017 by Sneezyone

[MrSmith]

I started a 529 when my kid was born. Since that time the value has doubled. But that's probably largely because we are in the middle of one of the longest bull markets in history.

 

Since a 529 is basically a mutual fund that is tax free for educational use, if your portfolio can earn more after tax return per annum then it is suboptimal. Without a lot of luck or sophistication it is not likely that any retail investor will consistently beat the general market return.

[Lori D.]

We started with educational savings bonds just before each DS was born. When Coverdale ESA accounts became available to us, we switched to those. The Coverdale ESAs are a 530 plan, not a 529 plan, so while there are similarities, there are also differences.

 

With the economic downturn in roughly 2008-2010, we lost a lot of the ground we had made with interest on the ESAs over the ten years or so that we had been investing into the ESAs. The bonds were not affected.

 

Fortunately, after graduation both DSs started at the much cheaper local CC (one DS in 2011, the other in 2012), and they each earned some scholarships there, so we were able to leave the ESA accounts largely untouched, and the accounts ultimately ended up adding about 25% to our total accumulated savings in the ESAs by the time we needed to start using the funds for real in 2013.

 

While it was extremely frustrating to have the market blow up just a year or two before needing those funds, and watching the gain on our investment drop dramatically so that we ended up with a much more modest increase in our investment than we originally thought we would, at least we had *something* we could contribute towards college. And we also were able to find other opportunities (starting with the community college, living at home, and transferring; scholarships; AmeriCorps volunteering for tuition credit...) to make our "pittance" (lol) go further.

 

 

One thing to consider is in whose name the assets are placed. When doing the financial aid part of applying for college, you put in your FAFSA (Federal Application For Student Aid), which calculates an EFC number (Estimated Family Contribution) -- what the government and colleges believe your family should contribute towards the cost of college. This EFC number is calculated on family finances, in this order, with the first item mostly heavily weighted, and the last item least heavily weighted:

 

1. Student income

2. Student assets

3. Parent income

4. Parent assets

 

So if there is a college savings plan in the student's name, it is the student's asset, and the EFC number will be calculated to be higher than if the college savings plan is in a parent's name.

 

Check out this article for a description of the various types of college savings plans: "Nerd Wallet: College Savings Strategies".

 

And this article on "Are Pre-Paid College Plans a Good Idea?"

 

BEST of luck as you research and decide on what's the best way to prepare for college finances for YOUR family! :) Warmest regards, Lori D.

Edited March 30, 2017 by Lori D.

[Julie of KY]

Why does your financial adviser recommend against them?

 

529s are investments and subject to risks. There are certainly good and bad investment choices and some are riskier than others, as well as good and bad years. Generally an investment can double in 7-10 years. Mine have more than doubled. I would definitely back off to low risk stuff right before college.

[solascriptura]

Why does your financial adviser recommend against them?

 

529s are investments and subject to risks. There are certainly good and bad investment choices and some are riskier than others, as well as good and bad years. Generally an investment can double in 7-10 years. Mine have more than doubled. I would definitely back off to low risk stuff right before college.

Actually, he's a friend who happens to be an advisor. I had asked him for advice and said that he does not have one for his three kids. He said that most 529s have a lot of hidden fees that eat into any returns.

[Sneezyone]

We started with educational savings bonds just before each DS was born. When Coverdale ESA accounts became available to us, we switched to those. The Coverdale ESAs are a 530 plan, not a 529 plan, so while there are similarities, there are also differences.

 

With the economic downturn in roughly 2008-2010, we lost a lot of the ground we had made with interest on the ESAs over the ten years or so that we had been investing into the ESAs. The bonds were not affected.

 

Fortunately, after graduation both DSs started at the much cheaper local CC (one DS in 2011, the other in 2012), and they each earned some scholarships there, so we were able to leave the ESA accounts largely untouched, and the accounts ultimately ended up adding about 25% to our total accumulated savings in the ESAs by the time we needed to start using the funds for real in 2013.

 

While it was extremely frustrating to have the market blow up just a year or two before needing those funds, and watching the gain on our investment drop dramatically so that we ended up with a much more modest increase in our investment than we originally thought we would, at least we had *something* we could contribute towards college. And we also were able to find other opportunities (starting with the community college, living at home, and transferring; scholarships; AmeriCorps volunteering for tuition credit...) to make our "pittance" (lol) go further.

 

 

One thing to consider is in whose name the assets are placed. When doing the financial aid part of applying for college, you put in your FAFSA (Federal Application For Student Aid), which calculates an EFC number (Estimated Family Contribution) -- what the government and colleges believe your family should contribute towards the cost of college. This EFC number is calculated on family finances, in this order, with the first item mostly heavily weighted, and the last item least heavily weighted:

 

1. Student income

2. Student assets

3. Parent income

4. Parent assets

 

So if there is a college savings plan in the student's name, it is the student's asset, and the EFC number will be calculated to be higher than if the college savings plan is in a parent's name.

 

Check out this article for a description of the various types of college savings plans: "Nerd Wallet: College Savings Strategies".

 

And this article on "Are Pre-Paid College Plans a Good Idea?"

 

BEST of luck as you research and decide on what's the best way to prepare for college finances for YOUR family! :) Warmest regards, Lori D.

For the record, the WA state plan retains the same value whether the child uses it at an in-state, out of state, public or private school.

[Julie of KY]

Actually, he's a friend who happens to be an advisor. I had asked him for advice and said that he does not have one for his three kids. He said that most 529s have a lot of hidden fees that eat into any returns.

 

 

OK, that makes some sense. There are a wide variety of plans from state to state, but you may be limited to one with crazy fees or rules.

[solascriptura]

OK, that makes some sense. There are a wide variety of plans from state to state, but you may be limited to one with crazy fees or rules.

Beyond the fees paid to the 529, there are fees going to the fund managers of the mutual funds.

[Julie of KY]

With any investments, you have to take into consideration the costs of fees. I don't like paying out much of any fees so I look for ways to invest without paying out fees.

[Mom22ns]

We started with educational savings bonds just before each DS was born. When Coverdale ESA accounts became available to us, we switched to those. The Coverdale ESAs are a 530 plan, not a 529 plan, so while there are similarities, there are also differences.

 

With the economic downturn in roughly 2008-2010, we lost a lot of the ground we had made with interest on the ESAs over the ten years or so that we had been investing into the ESAs. The bonds were not affected.

 

This was us precisely. We maxed out the yearly contribution to the Coverdale for both kids from the time they were toddlers, and both of our kids accounts still ended up around double what we actually put in. 

 

I read a lot of mixed reviews of 529 plans. Our state's was fairly highly rated, but we still didn't go there. We just stuck to the Coverdale and it worked out very well for us. 

[Arch at Home]

Our experience with 529s has been similar to SeekinhHim45's. We started DCs' 529 accounts shortly after birth and have consistently monthly made deposits. Our 529 account is the difference between DD being able to attend an LAC and a state school. 529 made it easy for my brother-in-law, in lieu of giving gifts to each niece or nephew, to make deposits into 529 accounts for each child. I am don't know whether we will end up shifting money from student to student but the ability to do so has always been seen as a benefit. All in all the 529 program has been beneficial for my family.

[RenaInTexas]

We've had our 529s (with UTAH) for a couple years and they have gained 8-12%. 

 

It is true that SOME 529s have excessive fees, but the UTAH 529 has low fees; almost as low as any investment you would make elsewhere given that all mutual funds have fees. The very small additional fee is more than covered by the tax-free growth and tax-free withdrawals offered by a 529. With grandparents contributing as gifts and our contributions, a Coverdell just wasn't an option.

 

BTW, you do not have to live in Utah to open a 529 with them.

[DawnM]

We did not have one.  We started a mutual fund of another sort instead.

 

There are risks.  And fees.  And what if your kids don't end up going to college?  Or get scholarships?  Or, or, or. 

 

We didn't want something specifically designated that may or may not be utilized for its intended purpose.

 

I wish I had done the pre-paid option back when it was available though!  I just wasn't sure we were staying in CA.  And we didn't.  But now we are talking about going back and my kids WANT to go to school in CA.

 

Oy.

 

It will be ok.  

[Miss Tick]

Many states offer a tax break for some contributions. That makes it worthwhile for us to invest up to that limit per year.

[madteaparty]

Many states offer a tax break for some contributions. That makes it worthwhile for us to invest up to that limit per year.

This. And if your plan offers index funds, I think those are lower cost.