Ask the grumpies: How best to save for kids’ college

First Gen American asks:

I would love a post on savings bonds as a vehicle for college savings…pros and cons vs 529. Also is one better for high earners. There seems to be some language about earning limits on the tax deductability of the earnings but no penalty if not used for educational expenses.

Disclaimer:  We are not professional financial planners.  Before making important financial decisions, talk to a fee-only financial planner with fiduciary responsibility and/or do your own research.

According to this page from the treasury:

For single taxpayers, the [education] tax exclusion income limit [for savings bonds] is an adjusted gross income of $92,550 and above. For married taxpayers filing jointly, the tax exclusion income limit is an adjusted gross income of $146,300 and above.

So to me that says that savings bonds are not a good vehicle for college savings for high earners.  Maybe if they’re the kid’s and the kid is not filing as a dependent, but that seems risky too given how FAFSA and CSS heavily weight the kids’ savings (exceptions here).

Savings bonds are also a less risky, lower earning asset.  Given the lack of tax advantages for higher earnings and current interest rates, they’re not much better than CDs or high interest savings accounts for low-risk low-earnings savings and will also show up in financial aid decisions.

So… for both high and low earners in the “may get some financial aid” range, the best thing to do with your money is to put your savings in places that won’t count against your financial aid– so fill up retirement accounts (especially IRA Roths if you can since you can take out the principal on those in case of emergency), pay off credit cards, put money in home equity below what CSS forms pick up, fill up your HSA, and so on.  (Forbes magazine is probably the best place to look for these kinds of limits/suggestions.)  That may seem counter-intuitive that the best way to save for college is to hide money in ways that it is more difficult to tap for college, but financial aid is powerful and you can take out (short-term) loans for college but you can’t take out loans for your retirement (and taking out loans for your mortgage can be expensive and problematic).

AFTER you’ve hidden as much as you can, I still think the 529 in a state that either gives you a state tax break or, failing that, a state that has good Vanguard options with low fees is your best bet.  You could also do a Coverdell if your income is low enough (<220K in 2017 and 2018), but they’re not really any better than 529s unless you have private K-12 tuition that it could go towards, and the limit is pretty small.

If you are too high income to qualify for financial aid (and note that that income may be higher than you think) then you don’t need to play games hiding your income and savings because there’s not anything you could do to get things low enough for colleges to pitch in.  It may also be worthwhile in this case to push some savings onto the child so as to take advantage of the child’s lower income.  If you’re in this situation, don’t just read free advice from the internet– pay for a fantastic fee only financial planner with fiduciary responsibility and get all of your financials in order.

High earners and grandparents cutting down their estates may want to look into frontloading 529s with 5 years worth of 14K gift exclusions or, if they don’t want to force the money to be used for college, they can look into a gift trust.

How are you saving for kids’ college (if applicable)? 


14 Responses to “Ask the grumpies: How best to save for kids’ college”

  1. bogart Says:

    So, my current employer offers a pretty good tuition benefit for employees’ dependents, hopefully that will persist (andI will stay employed) until we can use it. DS has a 529 funded by a grandparent; it’s not huge, but it might be $20K at this point, about 8 years before it’s needed. And other than that, yes, we’re focusing on retirement savings (including Roths) with the thought that these can be used for that purpose if needed.

    • Leah Says:

      Is the 529 held by the grandparents? Might want to examine that. There are different financial aid implications depending on who owns the 529 plan.

  2. Leah Says:

    We are saving for retirement and have a modest college fund. I know conventional wisdom is to not save for college unless you max out retirement, but we wanted to have something. We had cash gifts from family so put those in the college fund along with random windfalls.

  3. Leah Says:

    PS with savings bonds: they don’t fully mature for 30 years. I’m just now starting to cash savings bonds my grandmother gave me as a kid.

  4. Sandy L Says:

    I’ve done much of the tax shelter stuff available to me that you mention above. HSA, 401K and mortgage pay down.

    In hindsight I probably should have did a 529 auto withdrawal from pay at some nominal amount like $10/week and then ramped up as time went on. We just put kid cash gifts into it up til now.

    We mainly wanted to make sure our other ducks were in a row before putting a ton into college savings.

    It’s amazing that a good education now costs more than a very nice house and those houses take most people a lifetime to pay off. It does seem like this is a big contributor that the growing divide between he haves and have nots in this country.

    • gasstationwithoutpumps Says:

      Not in California! A good education at UC costs about $40k a year for 4 years, or $160k (including living expenses). The median home price in California is $500k or about 3 UC educations. My two-bedroom house in a fairly nice neighborhood is twice that.

      You can get a decent education from 2 years of community college and 2 years of CSU, for about $90k (2 years at $20k and 2 years at $25k). That is much less than the price of habitable house in most of the state. For that matter, it is only about 35% of the median US home price of $250k.

    • Leah Says:

      Also to note: the “sticker price” of a school is rarely what people pay to go to the school. People that pay the most seem to be students going to flagship unis in a state other than the one where they live. A lot of the private schools that look expense actually give really generous financial aid. There are options.

  5. Sandy L Says:

    Now that would be an interesting follow up post. Should I buy my kid a house or pay for tuition?

    Student loans can be deferred etc. if the kid is paying their own way they may be more serious etc.

    • nicoleandmaggie Says:

      Tuition. The pay your own way thing is BS. We already have a post on that somewhere. You can compromise by having them pay their own extras (clothing, meals out, etc). Houses lock a person in place and create additional expenses.

      Also: paying tuition directly doesn’t trigger the gift tax.

      • Leah Says:

        Agreed that the “pay your own way” is BS. My mom paid for all three of our tuitions, and we’ve all been so grateful to not be saddled with debt like some of our friends. I know plenty of people in college who dropped out because they realized how big their loans would be or couldn’t get enough loans to cover tuition plus living expenses — this was especially true for people whose families could technically afford college (according to FAFSA) but whose parents decided to let the kids pay.

        The reason I don’t think paying your own way makes you more serious is because you don’t pay as you go. The student loans — you don’t see those until much later. People who are going to waste money on college will waste it either way.

  6. Revanche @ A Gai Shan Life Says:

    I went to a state school in CA for four years and paid approximately $4-5k a year for tuition, books, and fees. I can’t count housing costs because I was living at home and paying that almost entirely on my own by some point but it was rent for an entire house and a family of four, so I’ve never done the math on that, like I don’t on food, gas, and insurance from those years on the assumption I’d have had to pay those costs anywhere.

    With that background and as a relatively high earner, I’ve got a 529 for JuggerBaby. There’s a bunch of gift money plus a lot of the money I set aside from not using daycare much in the first year. Now I’ve got automated deposits going so I just need to figure out how much we intend to invest total for zir. IIRC we should each be able to contribute $14,000 tax free annually and I seriously doubt we’re going to have as much as that, forget more than $28,000 in any given year, to contribute on top of our mortgage and retirement savings/investing so that’s about all we need to know or worry about on that front.

  7. Ask the grumpies: Retirement vs. college savings | Grumpy Rumblings (of the formerly untenured) Says:

    […] our most recent recommendation of what order to save for multiple big financial goals, and here’s our recommendation of what vehicles to use.  Finally, if you haven’t opened up a 529, here’s our thoughts on which one to […]

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