Help with How (Where) to Save for Kid's College!

[JustTrying]

Hello! Baby Just Trying #1 is due this summer. DH and I are trying to decide on the vehicle in which to save for the little one's college. I'd love your help in making this decision.

Here are some facts about us to help you guide us:

Current Annual Pre-Tax Income: ~$110,000 (DH is self-employed and I'll be taking maternity leave which is why this is not a solid number).
State of Residence: Washington State (so there is no state tax benefit to us doing 529)
Current Savings Rate: Likely to be ~$40,000 into retirement this year. Likely to increase in years to come. In addition to this we overpay on our mortgage and I'm building up our emergency fund in anticipation of the baby from 3 months of expenses to 6 months of expenses. (We are obviously not truly mustachian!)
Amount Per Year We Plan to Save for College: $2,000-$2,400
Our Ages when Baby Goes to College: Early 50s.
Our Intended Financial Plans when Baby Goes to College: We plan to be living off investments.
Plans for other children: Maybe 1 more or 0 more. Definitely not 2+ more, unless we end up with twins, which is not super likely.

I was thinking about doing a Coverdell ESA since we have no tax advantages to using a 529, and we have more options of where to invest if we do an ESA vs a 529. However, from my understanding, an ESA must be used by someone under the age of 30. I really like learning, so if we don't have another child and my child chooses not to attend college, I'd like to use the $$ to learn something new and fun myself. It seems that if I might end up being the beneficiary of the account, I'd need to save in either a 529 or a non-college specific investment account.

Also, since I live in a state with no income tax, I can choose any state's 529 plan, so many many options are available!

So mustachians, what advice do you have? If you were in my situation, where would you choose to put your child's college savings?

Thanks!

[ltt]

Personally, I'm somewhat reluctant to say put it in a dedicated education account, because you never know what the child will want to do 18 years down the road.  Some kids go to college, some kids will work, some will go in the military, etc.  We've always put ours in a taxable investment in our name, and then we can use it towards the child's college or, should they decide not to go, can put it towards a downpayment towards a place to live, etc. 

[teen persuasion]

No 529s for us, either.  I researched them, and despite the state tax break we could get it just wasn't advantageous to have money tied up exclusively for college with penalties on non-college withdrawals.

529s are treated as parental assets, just like other taxable assets, on the FAFSA.  It was much better for us to pay down the mortgage (we had a high rate) and max traditional 401k contributions to lower our AGI to the point we were eligible for either auto EFC = 0 or at least the simplified needs test (assets are ignored).  If you are FI by the time your child is doing the FAFSA (beginning 2 years before college, now), you may be able to engineer your income to a low EFC.  There's trade-offs, though - Roth conversions are bad for the EFC calculations.  Any retirement distributions, taxable or tax free, are  included with income on the FAFSA, artificially increasing your "available income".

Then again, I've watched the FAFSA calculations and charts change since 2008.  Who knows what they will be in 16 years?   

[tobitonic]

Remember that lots of schools are also looking at the PROFILE, which digs much more into family finances than the FAFSA. In other words, those investments so many here are planning on living off might well be counted as part of the money you have at your disposition to pay for your children's educations.

[MrsDinero]

We are going to do both for our kids.

We also do not have a state advantage for a 529 plan, however we are doing one. What we are not planning on doing is fully funding the 529, we haven't decided on the exact number yet, but we are thinking $20-$30k.  We will set up an automatic allocation, however our main focus is our retirement.

The main reasons we are doing the 529s for both our kids is:

1) so each kid has SOME money that is earmarked for college.

2)  relatives and friends have expressed interest in contributing to their college fund instead of giving presents on birthdays and christmas time.  This allows them to directly contribute  if they want.

[catccc]

We went with 529s for our 2 kids, but for us there is a state tax advantage.  I'm not really worried about the effect it would have on the FAFSA in terms of being counted as an asset.  It is an asset, and that's fine.  I never filled out a FAFSA in my life- worked my way through school and bargained sports participation for tuition breaks.

In my mind, ideally it plays out like this, though: DD1 gets scholarship, we get to cash out the 529.  DD2 gets scholarship, we get to cash out the 529.  Fingers crossed!

Current balances are $27K and $30K.  I don't want to over fund, but IDK when I should stop, either.  Kids are 5 & 7 now.

[tonysemail]

I'm funding 529s.
Getting scholarships and FAFSA grants would be great, but I'm not counting on it.
I plan to spend the 529s down to $0 and then they can get student loans for whatever balance remains.

[firelight]

We funded 529 for our kid (and will for future kids) with seed money (one time deposit of 10k), set it to aggressive and backed off. Whatever remains in that account when our kid goes to college is hers. Rest, she'll have to get scholarships, take loans or get help from us if we can do so at that time. I'm hoping it compounds substantially enough that she can cover all expenses - another benefit is she'll experience the power of compounding and would be more interested in doing so in her adult life too.

[Secretly Saving]

We're funding 529s.  Here is the thought process:  We have two kids who are likely to want to go to college and possibly grad school.  The 529s can be used for tuition, room and board, supplies, even technology and study abroad programs.  If our kids get scholarships, great.  Then we can get the money back without the penalty. (Yahoo!!)  If our kids don't use all the money, we can pass it on to extended family or future grandkids or even use it to take some classes of interest ourselves!  (I'd like to continuously learn so that appeals to me.)   Worst case scenario, there is a 10% penalty on the EARNINGS part of the money, not on our contributions if we decide to just cash out.  I really don't think the 10% penalty will really be that big of an amount after we have exhausted ALL of the other possible options. 

[JustTrying]

Thanks for all the replies! I am leaning more towards the 529 at this point, though now I have to choose which state's to use, as I don't like the WA State options!

[catccc]

I believe the NY program has one of the lowest expense ratios around, you'll be investing in Vanguard funds with them.  We use NY.  We are lucky in PA that we get a state tax benefit regardless of the state that sponsors our 529.  (But the bummer about PA is I do not get a tax benefit for retirement contributions.  I'd much rather have that than the 529 benefit, but I'll take what I can get...)

[Dee18]

My father researched this extensively years ago and went with the Utah program.  I don't know if it still ranks so highly, but I can tell you that they could not make things easier for withdrawals during college.  I called a few times when my daughter started college last year.  Each person I spoke with knew the answers to my questions; they seemed very smart and efficient.  The process of obtaining the reimbursements, and the "cash out for scholarship money," is easy to do electronically.

[tonysemail]

when we first researched this, Utah had the best program with lowest fees.
Since then, California has switched providers from Fidelity to TIAA-CREF and now it has lower fees than Utah.
Here is one snapshot of fee comparisons-
http://www.savingforcollege.com/529_fee_study/

[JustTrying]

when we first researched this, Utah had the best program with lowest fees.
Since then, California has switched providers from Fidelity to TIAA-CREF and now it has lower fees than Utah.
Here is one snapshot of fee comparisons-
http://www.savingforcollege.com/529_fee_study/

Sweet! Thanks so much!