College savings, where?

I have a son that is a Junior in HS. Tonight my wife and I attended a program at the school about college applications, scholarships, etc. One thing that caught my attention is that we were told the expected family contribution basis (the US govt calculation based on assets and income) excludes pre-tax savings. This was news to me - I thought 401k money was considered an asset for college planning. 

We're not blue bloods but we make a good income and won't likely qualify for need based grants. We've been saving money in a 529 plan for several years - using after tax money. Based on the paragraph above, it seems like the 529 savings plan might not be a great place to save money for college, if the goal is to qualify for grants or private school gift money. 

I'm sure some dorks have been down this road before. Where should we be saving this money?

In for knowledge.

I'm planning to stage  my own murder for the life insurance so if there is an alternative I'm listening.

My understanding is that there's no real way to "win" at the saving for college game. You can either keep your assets and income low and hope that you get aid, or your can buck up and save and accept that fact that being responsible will reduce potential aid. In the end everyone gets hosed. The benefit to the 529 is long term tax free growth. The best way to take advantage of this to invest early. The part that sucks is that you're squirreling away money to educate a kid that still needs you to wipe their butt. Tough call that they'll even need it at that point.

My personal experience (and this is about 20 years old) is with parents who owned two businesses and three houses and sucked at saving actual money. On paper they made plenty to pay for my school, but in reality they were paying my tuition (and more) to the bank in interest and taking care of four other kids besides me. My best friend in college has parents that make about 1/4 what my parents did and they were able to help him considerably. It has made a impact in how I save for my kids.

cash under the mattress?

Well, at least now the student loans stick around even through bankruptcy, so you can't even just tell your kids to go bankrupt while they're still young.

However, that does make a good argument to pay for college on credit cards...

Is the 529 in your name with your son as a beneficiary or is it in his name? AFAIK that makes a difference in how they’re looked at.

Just save like crazy. You get screwed one way or another; I recommend a 529 but it still isn't perfect. If you have other kids, I recommend putting it in your name. I don't think it matters which name it is in as far as counting assets goes.

My story: I saved like crazy, worked from the age of 13 on. I have a 529 that my parents and I jointly funded. Because of my savings, going to an instate state school, and my parents generosity, I didn't have to worry about student loans--but the 529 did effectively make it impossible for me to qualify for any need based scholarships, even though only about 5% of it counts against assets. Pretty annoying--we saved for college, why aren't people's designer clothes and iPhones counting against assets? But I digress. 

The real reason I'm "berked" is because I had quite a bit left over--I did get some scholarships that were not anticipated, and I made more in school than I expected as well. So now I have ~$20k that I can't access unless I want to take a 10% penalty on it, after the taxes for the earnings--unless I use it for furthering education (could happen) or my kids. I can't even use it to pay off my wife's student loans. How berkeleyed is that? I'm penalized because my parents and I were responsible. 

First world problem I know  

Tiger Moms girls get 100% free schooling because their father is 100% disabled according to the VA.

My two will be on their own to join up and get the GI Bill the way I did or learn to love scholarships and loans.  It's possible their mother is puting  away  the child support to pay for their college years but I doubt it.  Either way, while I love them dearly, once they get out of high school my financial hit will be largely at an end.  I'll be doing all I can at that point to get enough into my retirement fund to avoid catfood and a second career as a Walmart greeter.

Just remember, cat food is more nutritious than dog food. 

mtn said:

The real reason I'm "berked" is because I had quite a bit left over--I did get some scholarships that were not anticipated, and I made more in school than I expected as well. So now I have ~$20k that I can't access unless I want to take a 10% penalty on it, after the taxes for the earnings--unless I use it for furthering education (could happen) or my kids. I can't even use it to pay off my wife's student loans. How berkeleyed is that? I'm penalized because my parents and I were responsible.

This is a valid concern. 529s are great for saving due to their pretax structure, but they're not flexible at all. The money can only be spent on education costs for the kid that it belongs to. So, if you save more than is needed, or Junior gets scholarships, or decides to go into the trades right out of high school, etc then you get stuck with some hefty penalties to use it for other needs.

Because of this, I know some people that (at least partially ) save for their kids education using a Roth IRA. You lose the pre tax benefits, but you gain flexibility. I think you'll have more options for investing what's in the account, compared to a 529, so it may grow more than it otherwise would. And If the money isn't needed for junior's education, you can apply it to other things, like your own retirement.

EDIT: apparently, 529s are not pretax. Contributions are post tax, but withdrawals are tax free like a Roth IRA. The 529 does have a higher annual contribution limit than a Roth, but AFAIK, retirement savings aren't looked at on the FAFSA. So, money in a Roth won't be seen by those looking, while money in a 529 would be.

I'm going thru the same thing with my kids.  It all comes down to the less you have the more you get.  Example one.  My daughter has a couple of part time jobs so she can save for college.  Money goes in bank; college sees the money; gives her less.  Cash every paycheck and stuff it under the mattress; college sees less money; kid gets more.  Example two.  I own a piece of land.  On the financial aid form, I have to include the assessed value as an asset.  On the form for one college, she qualifies for nothing.  Sell the land and use that money towards paying down my mortgage on my house, she gets $13,900 a year.  Its all about how much it looks like you have.  There are experts that will help you with this stuff.  Over the years I have had several major construction jobs.  The whole reason the people were adding a huge addition was just so they had a big mortgage and would qualify for financial aid.  After kids were out of school, houses were sold, and the parents downsized.  In those cases, it was definitely just working the system.  A 4 year education here in Boston can be well over $200K.  My daughters friend is a freshman at BU this year and her tuition and board was calculated at $58K for this year.

I'm loading up 529 plan accounts for both of my kids.  I had some help, and I want to do the same for my children.  Also, I've done well enough in life, and I don't expect help unless I really need it.

I'm also going to open coverdell accounts to help pay for the private primary (and possibly secondary) educations that they will probably recieve.

I dodged a bullet with my kids, I happen to stumble upon a job at a private liberal arts university and one of the benefits is Tuition Exchange.  On top of the school that I work for there are about 650 additional schools that offer free tuition through this program.  It's not a slam dunk, you still have to be accepted by the school and offered the scholarship, but so far it has worked out for my oldest, my youngest is a senior this year and sending out applications now.  We split what is left with the kid, them taking out a load in their name and us paying cash for the other half of what's left.  This job has been a hidden gem, I don't have to travel anymore, get free education for my kids and rarely work hard enough to fill 40 hours.  If you are after educational benefits, a college is a great place to work.

I did some research prior to landing this job and the survey of financial folks I talked to favored the Roth IRA route due to it's flexibility, if the kids didn't go to school, you still have retirement money socked away for your use.  The FAFSA is a mystery to me, I fill out a bunch of information using a bunch of different login info, link up my tax returns and it tells my daughter she qualifies for a non-subsidized student load.  I get to fill out two this year, I'm really looking forward to that....said no one ever. 

Take all of your liquid assets and use them to pay down the mortgage on your home. That equity is not counted as an asset to be tapped.

Other than that, merit-based rather than need-based aid will help, and spend a grand applying to 10-15 schools just in case one of them needs someone like your kid and wants to pay to get them there. You wouldn't apply to only 3 employers in your field, right?

I don’t think I’m going to save for my kids college.  Work hard and figure it out. The loans motivate the hell out of me.  All my peers at this company are 15-20 years older than me. 

When we were in your position almost 10 years ago, the first question the financial advisor asked was, "Who here has a 529?"  Quite a number of smug hands went up in the audience.  His next response was, "Every dollar you have in that plan is a dollar you will not get in financial aid."  A lot of the smugness disappeared.

On advice, we moved most of our open investments to annuities, which are also not counted against FA because of withdrawal penalties.  Because DD#1 and DD#2 were going to college back-to-back, we picked 10-year annuities.  They haven't done badly, but when they mature in 2 more years, I plan to move them somewhere else for the last 6-8 year sprint before we retire.

DD#1 had about $6,000 saved.  We spent that on a car for her to get it off her books, then paid it back to her after she graduated... using money from DD#2, to get that off her books.  We'll pay DD#2 back out of our pocket when she graduates next spring.

Other than that, we just tried to live well within our means so that we could afford $20k/year in costs out of pocket... and we encouraged both DDs to go to our state university, which is pretty good for a reasonable price.  We didn't get much if anything in need-based money.  We also required both DDs to borrow some money each year, so they had some skin in the game too.

We did our best not to cripple them with debt, though.  DD#1 was a spectacular student, and got about $7500/year in merit grants.  That made a big difference.  She got out with modest debt and has diligently paid them off within 3 years.  DD#2 didn't get any merit grants, and she'll have a little higher debt load (though we also increased our contribution, since there are no more DDs after her).

DD#2 is probably looking at grad school... and she's kind of going to be on her own for that.  Though we may be able to help a bit, she's already used more resources than DD#1 did, and fair is fair.

mad_machine said:

cash under the mattress?

Worked for me. Been there, done that got the diploma...Bank on the equivalent of a new car every year for 4 years.

One less thing I have to care about.

 Tr8Todd said----- A 4 year education here in Boston can be well over $200K.  My daughters friend is a freshman at BU this year and her tuition and board was calculated at $58K for this year.

My lord!   When I graduated from the University of Illinois in 1993,  (as an IL resident)  tuition was $3,600 a YEAR!   That didn't include room and board, but still---- the cost of college has gone mental.  I'd think it would be less expensive to teach kids these days.....with online classes and all.   

Back in the "good ole days" it was realistic to work you way through college.   Not really an option anymore it seems.  (besides community colleges)  

In reply to Joe Gearin :

OK, Duke, repeat to yourself:  Don't flounder... Don't flounder... Don't flounder...

In reply to Joe Gearin :

It's not as easy to work your way through, as it might have been in the past but it's entirely possible. I graduated in 2012. It took me 5.5 years to do a "4  year" engineering program at a well regarded state school, but I graduated with just a couple of challenge cars of loan debt, and had that paid off with the first payment. I worked almost every weekend during that time while my friends were doing normal college stuff. But I'm in much better shape financially than most of my peers because of the lack of debt. The 2 guys that were hired in with me had fancy degrees from a private school. Their $90k educations got them the exact same job as my $30k education. College costs can be crippling, but with decent planning and some willingness to sacrifice it doesn't have to be.

I'm watching the fun my sister and niece are going through. $100k in scholarships at a $50k+/year private school. Both are up to their necks in loans to cover the rest.  Thankfully nephew 1 isn't school bound and nephew 2 is in 9th grade. 

chaparral said:

Take all of your liquid assets and use them to pay down the mortgage on your home. That equity is not counted as an asset to be tapped.

I bought a house in FL in 2006, and sold in 2010. So I won't be putting it all in the house. Ever again.

One other strategy is to go to community college for the first two years. Just make sure that the classes they are taking will transfer to wherever they want to go and for whatever they want to do. If the kid can also live at home during this time you can easily save $15,000 a year compared to a state university. Nobody cares where you started, only where you graduated from.

In reply to D2W :

All Six kids in my family went to two years community college.  Four went on to universities the last two years.    

All had part-time jobs in CC and a car they bought.  All did well in the end.    

I went to CC and a local university and paid my way for three years.  My dad helped with the last year.  My wife and I had zero debt when we got married.   You CAN get thru spending less.