College Savings Ideas

[Theia]

My DD is 2yo. My father wants to help us out and start a college savings thing for her. I'm totally grateful. The thing is, I don't like to manage money, funds, stocks, etc. I can do it on a small day-to-day thing, but long term, keeping an eye on the market.... so not my thing.

My father also does not want to use a mutual fund style of savings. He is unimpressed by the returns he has had on mutual funds. I mostly trust his judgement on this because it's something he likes to do and he has done well with saving in his life.

So he has been pushing me the past few weeks to find something to start for DD. I've tried to offer the very basic knowledge I have, like 529's etc, and having someone who is a professional manage it for me. But the 529's are mutual fund based from what he told me, and he's a tightwad (I say it in a good way) and doesn't think someone else should be paid to manage a savings account for her. But I don't want to have to watch the markets, switching money between stocks etc. To me that is a full time thing in order to do it well, and not something that I am even remotely interested in doing. So I can't imagine my success rate would be all that high.

What options do I have? I know there has to be someone here that has some good suggestions. We are in the US, and my parents live in a different state from DD and I. I'm a single, low income parent.

TIA

[sunflower.mama]

You can shop around the 529 plans to see who has the lowest fees. We have ours with Utah and they charge $3 a month. We are very happy with it and the account gets rebalanced every few years as the child gets closer to college age. I would never want to manage this myself either. I think you can choose how to allocate within the 529 although I am not 100% sure on this. The $ you will save over the long term by not paying any taxes on the gains should far outweigh any administrative costs you pay.

[velochic]

529 plans have CDs (Certificates of Deposit) within them where you can put your money rather than into Mutual Funds, if you or your father really don't want ANY risk at all. CDs are FDIC insured, but know that over the course of the lifetime of the investment, you will be lucky to earn enough to keep up with inflation. It will most likely be the equivalent of "break-even", possibly even in the red. That being said, stocks carry risk and you can lose a lot more that way than you can with CDs. They may not go up much, but they don't lose anything.

There are also mutual funds that are "balanced funds" - these have a good mix of equity (stock) and bonds and cash (like CDs, MMMF) investments and these tend to be much less risk than the equity-only funds. They are safer than equity-only mutual funds, but they also have potential for much greater returns than CDs.

529's also have something called "targeted funds". With these, you pick the year you want to access the money and the fund company invests your money being riskier toward the beginning and safer toward the end of your targeted goal. So say you invest now and say you want to start taking disbursements of the money in 2026. Right now, you would have more equity mutual funds and less bonds and cash investments. Then, as your child gets older, the fund automatically shifts your money to safer and safer investments over the years until you have it all in safe investments when you want to use it.

The reason for getting a mutual fund is that you *do* have someone managing your money for you. They are called fund managers. For Vangauard funds, you pay a very tiny amount to have these experts manage your money. Other companies charge more. But that is the point of having mutual funds... experts are picking the stocks, bonds, REITS, commodities, etc. that are included in the fund and since there are thousands of people invested, each person only pays a small amount to this fund manager to make the decisions.

If the amount is significant (say $100,000), it might be worth it to talk to a financial planner (fee-based, not commission-based) at least for a consult. They don't have to manage your portfolio, but can steer you in the right direction if you're uncomfortable making the decisions. Good luck!

HTH!

[hopefulfaith]

Yes to what Velochic said. And last I heard, Utah and Michigan had the most highly rated 529 plans and you don't have to be a resident of either state to set up plans there. We have the Michigan 529 (MESP: Michigan Educational Savings Plan) for our kids, and picked a targeted fund with medium/low risk, which is working out nicely.

I know you said your father doesn't want a mutual fund-style account; does he want something like an educational trust? Michigan has one of those, too: the MET program (Michigan Educational Trust) essentially "buys" college credits at today's prices. Perhaps that sort of thing is what he is thinking about? I don't know the details of it (residency requirements, etc., fund performance, etc.), but it gets a lot of good press here.

[Theia]

Originally Posted by sunflower.mama

You can shop around the 529 plans to see who has the lowest fees. We have ours with Utah and they charge $3 a month. We are very happy with it and the account gets rebalanced every few years as the child gets closer to college age. I would never want to manage this myself either. I think you can choose how to allocate within the 529 although I am not 100% sure on this. The $ you will save over the long term by not paying any taxes on the gains should far outweigh any administrative costs you pay.

Thank you for your input. I'm glad to know I'm not the only one who doesn't want to be the active manager. I'm all for saving for the future, but I think in most cases it is best to have a professional manage the savings for long term growth. I didn't know you could shop around 529's, so that is good to know.

When the child is ready to use the money in a 529, what are the costs? Does it matter if the fund is held in a state that is not where the child choses to attend college?

Originally Posted by velochic

529 plans have CDs (Certificates of Deposit) within them where you can put your money rather than into Mutual Funds, if you or your father really don't want ANY risk at all. CDs are FDIC insured, but know that over the course of the lifetime of the investment, you will be lucky to earn enough to keep up with inflation. It will most likely be the equivalent of "break-even", possibly even in the red. That being said, stocks carry risk and you can lose a lot more that way than you can with CDs. They may not go up much, but they don't lose anything.

There are also mutual funds that are "balanced funds" - these have a good mix of equity (stock) and bonds and cash (like CDs, MMMF) investments and these tend to be much less risk than the equity-only funds. They are safer than equity-only mutual funds, but they also have potential for much greater returns than CDs.

529's also have something called "targeted funds". With these, you pick the year you want to access the money and the fund company invests your money being riskier toward the beginning and safer toward the end of your targeted goal. So say you invest now and say you want to start taking disbursements of the money in 2026. Right now, you would have more equity mutual funds and less bonds and cash investments. Then, as your child gets older, the fund automatically shifts your money to safer and safer investments over the years until you have it all in safe investments when you want to use it.

The reason for getting a mutual fund is that you *do* have someone managing your money for you. They are called fund managers. For Vangauard funds, you pay a very tiny amount to have these experts manage your money. Other companies charge more. But that is the point of having mutual funds... experts are picking the stocks, bonds, REITS, commodities, etc. that are included in the fund and since there are thousands of people invested, each person only pays a small amount to this fund manager to make the decisions.

If the amount is significant (say $100,000), it might be worth it to talk to a financial planner (fee-based, not commission-based) at least for a consult. They don't have to manage your portfolio, but can steer you in the right direction if you're uncomfortable making the decisions. Good luck!

HTH!

Thanks Velochic. I used to have a 401k and when I left my job I moved it to a private management company as an IRA. I loved my money manager, and his fee was based on the size of my account and was only a few dollars per quarter IIRC. So worth it in my opinion, and it was a company that specializes in socially responsible investing Anyway, I tried to steer my father towards this idea with savings for DD's college and he said that "these money managers make a killing off of doing their work cuz even if he only charges a few dollars per account if they are managing thousands of accounts...." Really, I wanted to laugh, but I didn't. I have no problems paying someone for a service I value. And if they make lots of money doing this service for many people, but the cost is appropriate to the level of investment.... I see no problem. But dear old Dad is another story.

We did discuss CD's, but given that we do have a long time to invest, we agreed we wouldn't want to start with them. I do like the idea of aggressively investing in the beginning and then becoming less aggressive as the time of disbursement draws close.

I totally agree with you about the worth of fund managers. Maybe I should have titled my thread "How to convince my Father of the worth of Fund Managers" FWIW, I'm going to take this information and C/P it into an email to him so he can think it over.

Originally Posted by hopefulfaith

Yes to what Velochic said. And last I heard, Utah and Michigan had the most highly rated 529 plans and you don't have to be a resident of either state to set up plans there. We have the Michigan 529 (MESP: Michigan Educational Savings Plan) for our kids, and picked a targeted fund with medium/low risk, which is working out nicely.

I know you said your father doesn't want a mutual fund-style account; does he want something like an educational trust? Michigan has one of those, too: the MET program (Michigan Educational Trust) essentially "buys" college credits at today's prices. Perhaps that sort of thing is what he is thinking about? I don't know the details of it (residency requirements, etc., fund performance, etc.), but it gets a lot of good press here.

How does this MET work, does anyone want to give me the short version? Reading the fine print of stuff like this make me

Also, he sent me some stuff about Coverdell savings for college, but then he looked into it deeper and decided he didn't like it. Of course there was the mutual fund issue, but something about the returns were too low or too expensive when it came time to disburse? I don't remember.

Thank you to everyone. I'm going to show this info to my Dad.

[sunflower.mama]

Originally Posted by Theia

.

When the child is ready to use the money in a 529, what are the costs? Does it matter if the fund is held in a state that is not where the child choses to attend college?

I can answer this one - no costs to using the $ in a 529. It is yours to spend as long as it's a qualified withdrawal - college, graduate school and maybe some private secondary school expenses. And the 529 in the title refers to a federal law which authorizes these types of plan - they are exempt from federal income tax on the gains. So it does not matter where you go to school because a school expense in any state would be considered a qualified withdrawal from the perspective of the federal gov't which makes the rules. Each state is allowed to administer a plan, and they are all a bit diff. That's why it is good to shop around. We chose Utah because they have some of the lowest fees/best returns. We live in MA and we get no state tax benefits from participating in the MA plan (which I used to do before I rolled it over into Utah - it's like an IRA in that sense - you can roll it around into a comparable plan if you so choose). Some states do have state income tax benefits associated with their plans - ie you can deduct your contributions - so you might want to do your state's plan if your state has such a benefit.
I am pretty sure that once you opt to open a 529 plan you can invest as you choose. I took the "easy route" and did targeted funds which are on autopilot. But I believe it's like an IRA and you can hold whatever you like - individual stocks, EFTs, bonds whatever.

[Theia]

Originally Posted by sunflower.mama

I can answer this one - no costs to using the $ in a 529. It is yours to spend as long as it's a qualified withdrawal - college, graduate school and maybe some private secondary school expenses. And the 529 in the title refers to a federal law which authorizes these types of plan - they are exempt from federal income tax on the gains. So it does not matter where you go to school because a school expense in any state would be considered a qualified withdrawal from the perspective of the federal gov't which makes the rules. Each state is allowed to administer a plan, and they are all a bit diff. That's why it is good to shop around. We chose Utah because they have some of the lowest fees/best returns. We live in MA and we get no state tax benefits from participating in the MA plan (which I used to do before I rolled it over into Utah - it's like an IRA in that sense - you can roll it around into a comparable plan if you so choose). Some states do have state income tax benefits associated with their plans - ie you can deduct your contributions - so you might want to do your state's plan if your state has such a benefit.
I am pretty sure that once you opt to open a 529 plan you can invest as you choose. I took the "easy route" and did targeted funds which are on autopilot. But I believe it's like an IRA and you can hold whatever you like - individual stocks, EFTs, bonds whatever.

Thank you. I'm going to let my Dad look around a bit to see if there are any great benefits to opening it in either state we live in. Then I'll point him towards Utah and Michigan. I hope he just lets it go as a managed option.

[velochic]

Originally Posted by sunflower.mama

I am pretty sure that once you opt to open a 529 plan you can invest as you choose. I took the "easy route" and did targeted funds which are on autopilot. But I believe it's like an IRA and you can hold whatever you like - individual stocks, EFTs, bonds whatever.

Each plan has a set of investments available within the fund. You don't have the choice to invest in anything, it's within a fund family, usually. Most plans have a great variety, though. Our dd's plan (Virginia) uses Vanguard funds.

[WorldsBestMom]

Hey listen to your Dad. That College fund will go along way for your daughter when she gets older. There won't be any need for her to borrow from the student loan.

[ashleyhaugh]

another question- what happens to the money in a 529 if you end up not needing some or all of it, or if the kid decides not to go to college or whatever? are there penalties and stuff?

long story behind the question, but basically i dont want my ds to be out money if it comes to that, lol

[Theia]

Originally Posted by WorldsBestMom

Hey listen to your Dad. That College fund will go along way for your daughter when she gets older. There won't be any need for her to borrow from the student loan.

I'm not sure what you mean? I am totally willing and grateful that he wants to set up a college savings for DD. He just doesn't want to do so in a manner that is a mutual fund type investment. I have huge SL debt and I would like for DD to be able to avoid that.

Originally Posted by ashleyhaugh

another question- what happens to the money in a 529 if you end up not needing some or all of it, or if the kid decides not to go to college or whatever? are there penalties and stuff?

long story behind the question, but basically i dont want my ds to be out money if it comes to that, lol

I've thought about that as well. That is a very good question. Does anyone know the answer to this? In my world it is a big assumption to think that DD will for sure go to college in 18 years. In that much time so much can change. Even now there are lots of professionals who are saying college degree's are highly over-rated. I know there are lots of indicators of the importance of a college degree. I don't really wish to debate that though.

Do you have to use the money by the time the child reaches a certain age, like 25? If the child is an adult and doesn't wish to go to college, can you withdraw the money and just pay steep fines or what?

TIA everyone

[velochic]

Originally Posted by Theia

I've thought about that as well. That is a very good question. Does anyone know the answer to this? In my world it is a big assumption to think that DD will for sure go to college in 18 years. In that much time so much can change.

Do you have to use the money by the time the child reaches a certain age, like 25? If the child is an adult and doesn't wish to go to college, can you withdraw the money and just pay steep fines or what?

TIA everyone

If you withdraw the money for non-qualified expenses, you will pay income tax and 10% penalty, just as you would for a 401(k), for example. If your child doesn't go to college right away, you can keep the money in that account as long as the state allows (you need to contact an investment manager of the plan to find out any limits they might have). I seriously doubt there is a time limit to when you can use it. You can also transfer the account to any immediate family member if your child never uses it. ETA: you can even transfer it to yourself if you want to use the money for your own higher education.

[sunflower.mama]

Also - the taxes and penalties only apply to the gains, not the contributions. I'd look into whether your child could use it for trade school etc.