Today’s article is the second in a series inspired by Kevin at Invest it Wisely. His article Challenging your Personal Beliefs asks readers to take a concept that you hold near and dear to your heart and think about doing the opposite to see if you can learn something from the exercise.
When I first started blogging, I did a guest post on Budgeting the Fun Stuff on a topic called My College Savings Plan: Looking out For #1. In the article I write about all the reasons that you should put yourself first when it comes to prioritizing your savings goals. As I was thinking of my next opposite topic, I realized that I’m already doing the opposite approach in this aspect of my life. I don’t have “college fund” as a regular line item in my budget. If my kids happen to get $20 from grandma, I’ll send a check to their 529, but that’s about as far as it goes.
The reason for the opposite approach on this one is pretty straightforward. The Federal Financial Aid program weighs certain assets and liabilities more heavily than others when calculating your eligibility. For example, the federal government doesn’t expect you to tap into your retirement savings or home equity to pay for junior’s education. Those items are not considered eligible assets. So why on earth would I contribute to my kid’s 529 ahead of my own retirement or home equity? I can’t think of a good reason, so I don’t.
Another interesting point is that savings in your child’s name are weighted much more heavily than assets in your own name. Yes, there may be a tax benefit to putting things in you’re child’s name, but I wouldn’t do it unless your adjusted gross income is below $50,000/year. That seems to be the current threshold for eligibility. It gets much tougher to qualify for aid when you make more than this amount. This is yet another reason to pay into your retirement first..it reduces your adjusted gross income. If you go to the FINAID site, it goes through all of the specifics in much more detail.
Lastly, as a person who’s put myself through college through a combination of financial aid, working about 30 hours a week, and student loans, I can confidently say I’m a better person for it. It influenced many aspects of my life. It made me appreciate my education more because it was coming right out of my pocket. It drove me to pick a major that had high job placement rate and a good starting salary. I learned how to maximize my limited time and became a super efficient task master. It helped me during job interviews. The benefits far outweighed the suckiness of being sleep deprived for 4 years.
So in Summary, the reasons I don’t save for my little rugrats is not because I don’t love them. It’s the following:
- Having your children pay for a portion of their education helps them appreciate college more. I hate children who feel entitled to their parents money.
- The federal government weighs your assets differently from your children’s assets in need based calculations.
- There is no guarantee that junior will help you out in your golden years the way you did when they were getting educated. It’s likely that when you enter retirement, your child will have a young family of their own and they won’t have a lot of extra cash to pay back the favor.
- If you still want to help them, you can pay your debts first so that when your child enters college, you’ll have a higher cash flow to be able to pay as you go.
So, for all you people that say “I make too much money, my kid’s will never qualify for financial aid. I’ll just keep doing what I’m doing.” What if you get laid off around the time your child goes to college? It’s way harder to get a good job in your 50’s. If you had a paid off house and your money in a 401K instead of a 529, you’d be much much better off.
Why would anyone put their children ahead of themselves when it comes to college vs retirement? Maybe I’m just super selfish. Maybe it’s easier to plan for life events in chronological order. I’d love to hear the answer from the regular 529 savers because I have the polar opposite opinion on this topic.
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