529 savings plan


Written on Thursday, May 01, 2008 by Jessica

I feel somewhat like a responsible parent today, as I have just opened a 529 college savings account for Seth.

We went with Michigan's plan because it has low fees and for the tax advantages. It wasn't among Morningstar's top-five plans, but they did commend it for low fees and reasonable performance. Because we're Michigan residents, it tax deductible at the Federal and state level and we're also entitled to a small state match.

We thought hard about Michigans prepaid tuition plan (where you buy tomorrow's tuition at today's rates), but that limits Seth to a Michigan college and university. What if my little prodigy wants to go to MIT?

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  1. Unknown |

    You are thinking ahead! Yay you!

  2. Joanne |

    There are pros and cons to the plan. We were so on the fence about it and in the end decided to open a savings account instead.

    If your child decides not to go to college or gets a full scholarship and would rather use the money for something other than education then you pay taxes and penalties to get the money back. It also counts against any financial aid that your child could/may receive.

    It's matter of personal opinion but I just thought I'd throw those things out there in case you hadn't thought of them. It's awesome you started saving though!

  3. Jessica |

    Thanks, Joanne. We did think about all those things.

    Actually, if he gets a scholarship, there's no penalty:

    "Penalty-Free Withdrawals - In the event of a death, disability or scholarship of the beneficiary, money from the plan can be taken out with no penalty to the beneficiary....The beneficiary will not be penalized if he/she should obtain a scholarship. You can take out as much money that the scholarship is worth with no penalty."

    Even if he does get a full scholarship, he'll have expenses beyond that, so the savings can be used toward those expenses.

    In terms of financial aid, the money is considered a parental asset. But any type of investment vehicle that is owned by the parents -- whether it be a savings account or a Roth IRA or a CD -- is considered a parental asset. (Well, maybe not a Roth IRA.) So yeah, any money we save is going to impede our ability to get need-based assistance. I guess the current economic climate has made me realize that I don't want to have to depend on financial assistance for college. When I was in college, anyone could "afford" college simply by getting a loan. Today, even the loans are drying up. I'm reading about kids who really can't find the money to pay for college. If possible, I want to avoid that scenario in our life.

    And if the little turkey just plain doesn't go to college, I imagine we'll choose another beneficiary, hopefully a sibling. Maybe he'll skip college in order to join the NBA draft and become a millionaire rookie. In that case, the sting of those tax penalties won't be so bad. :)

  4. Joanne |

    That's interesting. Thanks for the info. How did I miss the scholarship thing?

    I also want to be sure James can pay for college. In NY state students were also eligible for free money that did not need to be paid back. (based on income, parents income, etc.) I was able to get between $800-3000 of free money a semester. I also had subsidized loans. I hope that still remains available.

    Do you think it will be as crazy as they project it to be in the future-like tuition being $100,000 a year? That seems ridiculous to me. How could it possibly get that high? What is changing to warrant that?

  5. Jessica |

    Tuition keeps rising way faster than inflation, and I'm not totally sure why. I know that the state of Michigan has but back on college funding in recent years, so schools are raising tuition to compensate. $100,000 tuition does seem crazy, but once upon a time, you could buy a gallon of gas for fifteen cents. Rising costs eventually make everything seem crazy expensive. :) That's the main reason why I wanted something more aggressive than a savings account, even at the risk of paying a penalty someday if Seth doesn't go. Savings accounts don't even keep up with inflation, let alone tuition inflation.

    What I did is a real risk, though. I've always read that the stock market never loses over a 25 year period, which makes a good vehicle for retirement savings. But saving for college is a shorter period than that. We're in a downturn right now, and for all I know, it will stay that way for years and years to come. (What's more, the era of cheap energy is over. I wonder how financial markets will handle that. Maybe that "rule" of never losing over 25 years will be hogwash in the future.) In any case, the 529 account could very well do much worse than inflation -- in which case, Seth better hope the gov't still makes loans. :)

    Currently, Michigan gives all students a certain amount of money for the first two years, but the funding comes from the tobacco settlement, and I expect the money to be all dried up by the time Seth is ready for college.

  6. Jessica |

    Oh, yeah. You can get around the financial aid penalty buy asking your parents to open the 529 account. Their income and assets will not be considered toward the family contribution when James goes to college. The disadvantage is that they will be the ones who control the money, not you. I've always wondered if I might be a little bit of a control freak, but now I'm sure I am because I decided against that plan. :)


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