I have a senior about to enter college in a few months. We have a 529 and wanted to know about adding more while she is in college. Our financial planner advised against it since our 529 is set up as age-based and 18 y/o, investment is conservative so in essence, it’s not going to grow much. But if we are going to save up funds for loans and such, would it better to put it there than in a savings account in a bank? Should we convert the portfolio from an age based to something else? Or do we just keep it there right now and not put anymore funds?
Do you get a state tax benefit for contributing to a 529? If so, even if it doesn’t grow at all you’d benefit.
It will also be better to have the 529 than to have a savings account in your child’s name. There isn’t much difference in having a saving account in the parents’ names or a 529 as far as asset treatment on the FAFSA/CSS.
If you doma savongs account…do it in the parent name. Savings accounts and 529 accounts both have 5.6% assessment for FAFSA EFC purposes.
If your child attends a Profile school…YMMV.
I have to ask…if you have the money to put more into,the 529, why not use that money to pay for some of the college costs that would otherwise be paid for with loans?
If your state has a bonus for 529 contribution e.g. as a tax credit, check the minimum reqs and check the math to see if it is an advantage to still contribute a minimum amount, Otherwise optimise your own pre tax savings with IRA and 401K etc and pay for college what you already have in the 529 until it is exhausted. Are you taking loans, or your kid is taking stafford’s only? There isn’t much point in worrying about investment if you are taking out higher cost loans.
We have a small amount in an UTMA that it outpacing the state 529 returns because our son is a senior and the 529 is conservative. We will leave the UTMA go for a few more years and hope to benefit a few more dollars. He’ll spend down the 529 quickly though and our state only lets you deduct $3,100/year. So we continue to max fund that just for the deduction the the balance will be out of pocket.
The best deal I found was prepaying 4 years of tuition so that you can get the freshman tuition rate for all 4 years. If you can afford this, you are getting an AFTER TAX return equal to tuition inflation. This was offered by the college but you have to ask about it. It’s not widely known, and I didn’t know to ask D1’s college about it. This deal was very good for me for D2.
The second best deal I found was the Private College 529 which if I purchased before July 1 of the year D1 graduated HS, I was able to buy a senior year tuition credit for the cost of the year she graduated HS. So basically, I got a return of inflation after tax, but you have to invest for at least 3 years, so you can’t use this for the first 3 years.
The third best deal I found was the Colorado 529 Stable Value fund. It is currently paying 2.59% and is guaranteed to be at least 2%.
I didn’t actually use Colorado, because at the time I needed it, Virginia 529 had FDIC insured options paying 2.25%. Those no longer seem to be available.
I agree with those who say why not reduce the amount of loans. That’s probably the best deal of all since the after tax return is probably higher than either tuition inflation or the 2.59% of the Stable Value fund. Also don’t most loans come with a huge origination fee off the top? Reducing the amount reduces the origination fees also.
What happens to a prepay if you kid leaves the college? That sounds horribly risky to me LOL.
@threebeans: the UTMA account will be assessed by colleges at 20% each year toward your EFC, due to the UTMA ownership being in the student’s name, vs. at 5.64%/year of a Section 529 which is considered a parent asset.
Personally, @Kaimito, I’d place the additional contributions into the age-based 529, especially as you receive a state tax benefit, for which here in Minnesota we receive zip/0/nada. At this point, those contributions should be conservative. If the stock market drops 20% in the next year, you will be dancing your way to the college’s bursar’s office and thinking about how smart you are (to both save and to invest conservatively).
@MinnesotaDadof3 we are full pay
Regarding post #6. At D1’s college, we prepaid two years of tuition at a time. Freshman+Sophomore and Junior+Senior. The contract was easy to read and not onerous.
D2’s school was not amenable to prepaying. So we are doing the Private College 529 as described in post #5. I recall Oppenheimer manages this. Again, the agreement is sensible. I just wish we’d bought in earlier.
You get your money back with no interest. Not too risky.
I should also add, that if you prepay multiple years, you shouldn’t do it from a 529 because only the current years expenses will count as qualified educational expenses. That could be a problem if the bulk of the saved money is in the 529.
Thanks everyone for the excellent advice! We’re still figuring out how to use the 529 Plan since we didn’t save much. Maybe good for a year in-state? If she will go elsewhere, then we will likely be having a Direct Plus (if she doesn’t have enough grants, scholarships and student loans). I’m trying to see how to use the 529 if we’ll spread it out through the entire 4 years or use it all in a year. Since we plan to start saving to use for the next year, I didn’t know before I posted the question if putting in a 529 is a better choice than just a savings account.
You might consider spreading the 529 out for room and board costs, and using current earnings or loan proceeds for tuition. That way you might be able to take the AOTC for all four years. There aren’t many ways to pay room and board with tax benefited money other than a 529.
Again though, if you have to borrow money to pay for school, tax incentives from the 529 probably don’t really apply. Use your saved 529 money to avoid the origination fees and interest for as long as possible. Spreading a small 529 savings dollar amount out over 4 years while having a loan is pointless, right? The real question is affordability.
^^Not if you can use the AOTC.
Say you have $40k in the 529 and R&B is $10k per year and tuition is $10k. You could pay the entire first and second years out of the 529, but you’d get no AOTC ($2500) since it was all paid by a tax benefited funds. You’d also give up borrowing the lowest cost loan, $5500/6500 direct loans, and if you don’t borrow it in the year you can’t take it out later. Yes, you’ve saved $110 in the origination fees and a small amount of interest but you’ve forfeited $5000 in AOTC for two years
Now it is years 3 and 4 and you need another $20k for each year. Student can only borrow $7500 at the lowest rate (direct) loans. If the parents have to take plus loans, the origination fees are 5%, and the rates are higher. Yes, you will only be paying interest for 2 years of school time rather than 3-4, but the savings is not going to equal the higher points or rates.
I think you’d be better off taking the $5500 the first year/ $6500 the second, and using only $10k of the 529 funds every year, take the AOTC, take the lower cost loans.
All depends on whether the family can qualify for the AOTC, if the loans are subsidized, the amount in the 529, how much can be paid OOP or if the family would need to take Plus loans in the early years.
Bump
Wow! You got me thinking there. I still have a lot of reading to do but I appreciate everyone’s advice!
OP says there might be enough in the 529 for one year instate.
A UTMA (student owned) 529 account will always be reported and assessed on FAFSA as a parent asset, so it’s important to understand the difference between a generic UTMA account in the student’s name and a UTMA 529 account. Colleges that distribute institutional money for financial aid, often based on Profile information, may not follow this FAFSA model as to how student owned 529 accounts are treated, meaning that these accounts might be treated as student assets in calculating financial aid.