529, is it a mistake?

[effigy98]

I plan on FIRE with about 25k a year in claimed income. I come from a very poor family and nearly all my younger cousins got free rides to college from government grants including money for living expenses (paid to be a student??). I was astonished when I found out how much money they are given to be students. I paid for my own college as these programs did not seem to exist back in my day.

I just had my first child and am curious if you believe its better to save nothing so they can get handouts or to work another year and fund their education? By the time they are college age I will make very little and I'm sure they will qualify for many handouts if they still exist then, but at the same time, if they are no longer available it will fill me with massive regret. Maybe instead of 529 I should just fun my own retirement and use that to fund their education? If I understand the rules correctly, any college savings counts against the student, by my retirement accounts do not, only income.

[LadyMaWhiskers]

If the choices honestly to work one more year and guarantee their education is funded versus leave everything up to government handouts, that seems like a no-brainer. What's one more year of work to situate your child for a better future?

[Eric222]

I'm highly risk averse when it comes to my kids.  Who knows what changes will happen to college education in the next 10-15 years (or whatever your time horizon is)?  The only thing I'm reasonably sure of is that me having money set aside for them is the most reliable way to make sure they get an education without a pile of debt at the end.

Even if setting aside money for them in a 529 decreases the amount of aid they are able to get, I'd be shocked if the amount in the 529 was less than the aid they had to forgo. 

[johnny847]

Your kid is going to college in about 18 years. A lot can change about the financial aid landscape in that time. And as you said, you'd regret it if you purposely didn't save much expecting a lot of aid but then never got any.

Secondly, while the very top schools that get plenty of donations don't practice this, quite a few other schools practice "gapping": they use the FAFSA or maybe some internal method they come up with to say okay your Expected Family Contribution is $X, our tuition is $Y (which is >$X), but we're going to give you less than $Y-$X in aid and you'll just have to figure out how to make up the difference.


But more on topic, you should not fund your kids' college education before your own retirement. I know as a parent you want to do everything you can for your kids, but the fact of the matter is this: your kid can take a loan for his/her education and pay it off eventually, but you can't take a loan for retirement. I wouldn't even contemplate saving for your kids education until you can max out your own retirement accounts.

[steviesterno]

as long as your financial house is in order, I see no reason not to contribute. We had our first about 7 months ago, and set up his 529 when he was about 3 months old. We don't get the state deduction here, but it still makes sense. With some money we had and gifts from grandparents, he's already at almost a whole year of college paid off. Granted this is assuming the average 8% return, but we know we have 17+ years for it to grow. If I add just $100 a month, it should be enough for med school if he chooses to go that route.

All this money grows tax free, which helps. You only pay taxes if you take it out for non-education expenses. But since you can transfer it to other family members, even if one kid gets scholarships or goes to a trade school, you should still be able to come out ahead.

You could also always transfer it to you and continue your education during FIRE if you wanted. You can use the money for American education, and many universities offer adult education study abroad courses for just such a reason ;)

[Dancin'Dog]

Scholarships are much easier to get if your child happens to be extra bright and/or an extremely good athlete.   

[MDM]

But more on topic, you should not fund your kids' college education before your own retirement. I know as a parent you want to do everything you can for your kids, but the fact of the matter is this: your kid can take a loan for his/her education and pay it off eventually, but you can't take a loan for retirement. I wouldn't even contemplate saving for your kids education until you can max out your own retirement accounts.

+1

Saves me from writing exactly this.

[CanuckExpat]

If you are not maximizing pre-tax accounts (401k, traditional IRA), do that before first.
If those are maxed out, and you get a state tax deduction for contributing to a 529, contribute only up to the amount of deduction you get a year.
If you don't get a state tax deduction, don't contribute to a 529.

[cacaoheart]

A 529 counts against available aid less than a child's regular savings account would, while cashing out your own retirement to pay while they're in school would count as boosting your income and decrease eligibility more. It would make more sense to me to have them take out loans if necessary, then help them pay them off afterward if you want, at which point boosting your income by taking funds out of retirement accounts won't affect FAFSA eligibility.

I can foresee having a 529 as a way for family friends to give gifts to my kid (due next March), but as others have said, I'll be focusing on maxing out my HSA, 403B (and 457 if available), and Trad IRA before I make contributions of my own. Coming from a rural school with low income parents, I ended up with more scholarships and grants than I could use for my first degree.

My parents had always told my brother and I that they couldn't afford to help us pay for school but we were expected to go. Instilling good financial and study habits can go a long way.

[thegardener]

I would fund your own retirement first. There are loans for school and not for retirement.

That being said, also consider the fact that it is difficult to get money out of 529s if your kid doesn't use it all. Yes, you can take out amounts equal to scholarships, but some grants are exempt. Yes, you can take out money for certified living expenses, but there are limits to this as well. If you have 10s of thousands of dollars in a 529 and your kid decides to go to trade school for auto repair (my younger brother) or gets a grant that is exempt that pays for tuition and supplies for most of college (me), you may end up with some 529s with a bunch of money in them that isn't going to come out without penalties. 

[Beriberi]

Retirement counts are often not counted toward aid availability. However, you don't get to have 1M in the bank and call it a "retirement account."  I believe the scope of "retirement accounts" is limited to 403b, 401k and SEP, and the various Roths.  From what I've seen, most FIRE'd people are using non-tax advantaged accounts to save much of their retirement income.

So, if you have a large lump of cash in the bank, most schools are going to expect you to contribute a big chunk of the lump.  You will take it out (assuming you are choosing to fund the child's education) and pay taxes on the gains.  Instead, you can put the money in a 529, which will grow at the same rate (assuming the same investments). You won't pay taxes on the gains.  Since you are more than a decade from paying for college, the taxes on gains are a huge part of the equation.

I don't see FIRE'd people qualifying for significant government or nongovernment college aid for their kids.  You can always refuse to fund the education, and then your children can take it out in loans or self-fund their education. 

[SuperSecretName]

I would fund your own retirement first. There are loans for school and not for retirement.

That being said, also consider the fact that it is difficult to get money out of 529s if your kid doesn't use it all. Yes, you can take out amounts equal to scholarships, but some grants are exempt. Yes, you can take out money for certified living expenses, but there are limits to this as well. If you have 10s of thousands of dollars in a 529 and your kid decides to go to trade school for auto repair (my younger brother) or gets a grant that is exempt that pays for tuition and supplies for most of college (me), you may end up with some 529s with a bunch of money in them that isn't going to come out without penalties.

10% of earnings + income tax.  It's really not that bad (don't forget, no income/penalty on withdrawing your contributions).  Or you could "sell" it to a friend/family member.

I think far more people will find themselves with no enough, rather than too much.

[little_brown_dog]

We have a 529 for our baby - easy, simple to use, and tax free growth. If you have the money to dedicate to a college fund and would like to save for college, a 529 is a great option. I am generally a huge fan of using all available tax sheltered accounts first for savings before putting additional funds into other non sheltered accounts.
However, your question seems like it is about whether it is worth it to save for college period. I would save a bit, regardless of your anticipated low income. Extremely strong/high performing, poor students do often get substantial aid, but it is actually not the norm for them to get full rides. They make up the difference with loans. For every low income kid who gets a ton in aid, there are many more who only receive partial or meager assistance. I think it is risky to completely bank on the idea that your kid will be one of the lucky few to get the majority or all of their college funded by the school or government. If you are okay with your kid covering a majority of their college costs, even if that number ultimately turns out to be very high, then you can definitely take your chances and avoid saving specifically for college (either through a formal 529 or through additional savings elsewhere). But if you do not want your child on the hook for covering a substantial portion on their own, then you really should save somehow.

[Landlady]

I decided on a stocks and bonds account at Betterment for my son instead of a 529. He's two so there's plenty of time for it to grow. I don't know enough about him yet to have the confidence in a 529... Will he be good at school? Will he be smart enough for a scholarship? I hope so, but I know that a nest egg is pretty useful for whatever he'll want to spend it on.
Of course I'm never sure that I'm making the right decision, but it was a decision. I'll gift him the money he needs when he needs it. Or if he's a jerk I can keep it all for myself. :P

[CanuckExpat]

Of course I'm never sure that I'm making the right decision, but it was a decision. I'll gift him the money he needs when he needs it. Or if he's a jerk I can keep it all for myself. :P

I think those are important caveats to remember with this discussion :)