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Learning, Sharing, and Teaching => Investor Alley => Topic started by: newton on January 17, 2016, 07:01:23 AM

Title: College Savings Account - Best Way to Use
Post by: newton on January 17, 2016, 07:01:23 AM
Hello everyone - wanted some good advice.

I have a Coverdell and a 529 for my daughter who is currently in college.  Fortunately she received a full scholarship and will graduate with her undergrad this spring.  She is enrolled in professional school starting next fall which will take 4 years.  I do not have enough to cover her expenses in my Coverdell and 529.  I have saved about the following:

Coverdell - 12K
529 - 45K

Her tuition will be about 32K a year for 4 years plus about 12K living expenses.

My plan was to have her take a loan for the tuition and use the savings to pay for her living expenses (withdrawn each year).

I'm wondering if I can take a loan for the entire amount of tuition and living expenses and withdraw the savings when the market is doing well?

Any thoughts on the best way to plan this out??

Title: Re: College Savings Account - Best Way to Use
Post by: msilenus on January 17, 2016, 04:00:07 PM
I'm pretty sure you can't "bank" qualified expenses for later.  Closest you can come is to take the money out, then put it back in to step-up basis.  I don't know if you could then pay for college with loans.  Maybe it depends on whether or not they're subsidized?  I bet a personal loan would be fine, but then you'd pay a higher rate.  Sorry I don't know the answer on that.

My bias would be to greedily use the opportunities for qualified withdrawals as they present themselves.  So I'd drain the accounts in preference to taking loans.  It's much better for the case where she joins a cult or becomes a SAHM or whatever after her first year of qualified expenses.  Not terribly likely, but it's not clear how splitting the load optimizes for anything.  I suppose using the qualified expenses to withdraw aggressively also reduces total education loan interest paid, by deferring/back-loading loans.
Title: Re: College Savings Account - Best Way to Use
Post by: mizchief on January 17, 2016, 08:46:31 PM
I am more familiar with 529's than Coverdall's.  I would use the 529 for tuition because the accounting is easier.  Tuition and books are qualified educational expenses.  So is room and board (up to the amount that each school dictates) but it is recommended that you keep receipts.  With tuition, the school will keep track and will send you the proper form.

The 529 can directly pay the tuition to the school so all is accounted for.

And the expenses have to be paid in the same year they are accrued.  Read the rules; they are tricky.
Title: Re: College Savings Account - Best Way to Use
Post by: newton on January 18, 2016, 05:51:33 AM
Thanks for the responses.

I am concerned about pulling the money out of the Coverdell and 529, especially when the markets are low.  That was my only thought about using a loan to pay the tuition as I could afford some of the monthly expenses.  When the market was up, I would pull money to cover the entire year of expenses.

I'm also not sure if I can use the 529 or Coverdell to pay back the loan but I am assuming not.
Title: Re: College Savings Account - Best Way to Use
Post by: fa on January 18, 2016, 06:11:46 AM
As we were coming close to the start of college, I switched the stock market fund to money market precisely to avoid the scenario you are describing.  That strategy worked perfectly, but I lost out on some market gains.

I think you must take the money out in the year the expenses were accrued, i.e. you cannot keep receipts for the future.  In your current situation I think the only thing to decide is whether to leave all or some of the money in the market.  If we hit a recession and get into a serious bear market, moving into a money market may not be a bad thing to do.  A 10% loss from the peak may be better than 25% or 50%.
Title: Re: College Savings Account - Best Way to Use
Post by: newton on January 18, 2016, 07:00:43 PM
Good point.  I may have to sit tight and wait for a rebound, pull as much as I can (1 year tuition and living expenses) and pay that.

Thanks for the advice.  I was hoping I could use it to pay back the loan but I don't think that is possible.