Saving money in a 529 plan or in the child’s name reduces eligibility for financial aid and limits use of tax credits.
Planning for children’s college education is planning under conditions of extreme uncertainty:
- You don’t know for sure if children will attend college.
- You don’t know whether it will be private or public college.
- You don’t know what private and public resources will be available.
- You don’t know what the tax rules will be.
No one knows what methods of paying for college will be available years from now. We have only to look at the recent changes to understand the challenges of financial planning for college. Twenty years ago Education IRA’s and state-run Section 529 plans did not exist. Twenty years ago there were no provisions to borrow from your 401(k) plan or to make penalty free withdrawals from your IRA to pay for children’s college. There were no education tax credits. The concept of using home equity to pay for college was not an accepted practice. Liquidation rules for US Savings bonds did not allow an exemption from federal and state taxes if the bonds were used for qualified college expenses. Many of the federally subsidized loan programs were not available twenty years ago.
The best way to save for college is to put money in the most effective place to build wealth. The best way to pay for college expenses is to take money from the most effective place to conserve wealth. Planning under uncertainty requires planning with flexibility. Saving for retirement is the best way to save for children’s college. Money saved inside an IRA or QRP does not reduce eligibility for financial aid because it is an “exempt asset” when calculating the Expected Family Contribution (EFC) on the federal FAFSA form. You can borrow from your 401k to pay for children’s college. Money inside an IRA can be used to pay for college without penalty. Saving for college inside a 401k or IRA is planning with flexibility.
Paying for your children’s college is a great act of love. But building your wealth so you don’t become a financial burden to your children in your old age may be an even greater act of love. The “sandwich generation” refers to the growing number of families who find themselves ”squeezed” by the need to care for children and aging parents at the same time. Funding your own retirement and long term care in old age has higher priority than funding a child’s college education. Saving for your own retirement is an act of love for both your child and your fellow citizens. Social Security, Medicare and Medicaid are going broke because people are not saving enough for their own retirement and long term care. You can get loans for college education, but you cannot get loans for retirement or long term care.
Education loans, like home loans, are both examples of “good debt”.