Don’t Save for Your Kid’s Education

by Sandy L on November 18, 2010

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.

{ 8 comments… read them below or add one }

Nicole November 18, 2010 at 8:03 AM

We’re stashing $500/month in our kid’s 529. But we’re also maxing out our 403(b) (but not the 457 or whatever number that is) and have so far contributed to our IRAs every year, though next year we may stop and pick up the 457 instead.

If we thought there was a strong chance our kid would be eligible for financial aid (even at private schools our projected income post-promotions is too high to qualify for partial aid) we might not put so much in the 529,. but if our circumstances change then we can stop contributing at that point. Hopefully by the time of any layoff we’d have a nice passive income stream too. We’ll see.

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Little House November 18, 2010 at 10:05 AM

I don’t have kids yet, so I’m coming at this from a different view point but I agree with you. I think saving for retirement needs to be put ahead of saving for junior’s college. I also believe that students who help pay for or put them selves through college are less likely to mess around and drop classes or take forever to graduate. It takes some gumption to fund your own education; a quality that’s good to have in the “real world!”

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Invest It Wisely November 18, 2010 at 11:32 AM

Well, you certainly do sound somewhat selfish, but I think in a good way. I agree with you to a certain extent. I believe in helping someone out enough so that they can help themselves, and at the same time maximizing your perceived benefit as well as theirs.

Let’s say my kid wants to study to become a doctor, and they have the grades to do it. Medical school is damn expensive even in Canada, so I think I would help them out quite a bit. I don’t think part-time work is an option, either, if in med school. So, my help here would be letting them stay at home, probably rent free. This alone saves tens of thousands of dollars per year; I know, since I was not able to stay at home during my own education. I would likely contribute a large part toward their education, but I think only some would be in the form of a bursary; the rest they would have to contribute or it would be a loan. Finally, if they wanted a car or other luxuries, that they would have to find a way to pay for on their own.

I think it becomes situational. Let’s say my kid instead wants to just study because it will keep them from having to work. Maybe they’re not taking school so seriously, maybe their grades aren’t so great. Many parents would let their kids get away with this, but here is where I think I would start cracking down.

Great post, Sandy. It makes me think and realize that there isn’t really a black and white situation here. You don’t want to not help your kids at all, but at the same time, helping them too much can actually be hurting them in the long run.

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retirebyforty November 18, 2010 at 12:11 PM

I am researching 529 and from what I understand you can put it in your name and it will count an parent assets. You can use it to pay for Jr’s education. And beginning in 2009-10 school year, student owned 529s will also be reported as parent assets. So financial aid will take 5.64% from this amount into account when looking at how much family should contribute.
Another advantage – A tax-free distribution from a 529 plan to pay this year’s college expenses will not be part of the “base-year income” that reduces next year’s financial aid eligibility. (from savingforcollege.com)

Sounds like a good deal to me. You also get to write off the contribution from the state tax.

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Sandy L November 18, 2010 at 5:03 PM

Nicole – I appreciate the do a little of everything approach you take. I am not patient enough to spread my money around like that. I like to knock goals off one by one.

Little House – the other benefit for the kid is that they don’t have the purse strings controlling their actions. I had a friend in engineering school who really wanted to be an english major but his parents wouldn’t pay for a liberal arts education. He ended up dropped out with only 1 semester to go.

Invest It – I spoil my kids because I grew up with very little. I’m sure they’ll get plenty from us when the time comes. I just want to make sure I don’t give to them to the detriment of my own well being. I was a chemical engineering major. It was a very tough major and I often felt like there were not enough hours in the day to get my assignments done. It is possible to work even with tough majors. I want it to be a better experience for my kids but like you said, if they want luxuries then they are on their own.

Retire by 40 – Yes, the 529 does have some nice tax benefits and I plan on using it once my debts and retirement are taken care of. But what if you have the option to contribute to a 529 or pay off your house. Your primary residence doesn’t count as an asset. Despite the tax advantages, I’d still pick the house first. The rules are changing though, so who knows what things will look like in 5 years.

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Nicole November 18, 2010 at 8:12 PM

Dang it. I just typed out a long brilliant post, forgot to put in the captcha code, and lost it.

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Everyday Tips November 19, 2010 at 8:54 AM

We contribute to most our other savings before the 529 already. We will never qualify for financial aid as my son is 18 months away from college, unless major catastrophe strikes. I do love the tax deduction we get from our 529 plan though. We do have money saved, but not nearly enough to cover 4 years. We will pay for most of it, but I do want my kids to have a vested interest.

Enjoying these contrarian posts!

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Matt November 19, 2011 at 6:51 PM

I like your opposite posts. I feel the opposite on this issue though. Because my parents didn’t have a dime saved for mine or my siblings college education, I had to utilize ‘financial aid.’ Now that I look back on it, I don’t consider it ‘aid’ at all. It’s just a way of forcing college kids into a debt to the federal government. A debt which, by the way, is NOT bankruptable. Thanks federal government.

I never want my kids to have the burden of student loans, especially federally subsidized ones. I started saving $100/month for each kid in 529’s from the day they were born. This likely won’t completely cover 4 years, but our house will be paid for by then and we will be able to help cash flow college expenses. Plan B: if the kids either get scholarships for college, or don’t go at all, that money is ours to spend on a vacation home or something!

We still have ample 401k and Roth IRA savings and contributions to fund our retirement, all the while paying down our home mortgage. It is scheduled to be paid off no later than the year before our oldest graduates high school. So unlike you, Sandy, we do not focus on one thing at a time, but do everything all at once, just in smaller increments.

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