my sad college fund

[moneybags]

I have a high school sophomore. I was evaluating her college savings yesterday and realized that her 529 account has grown a little over 2% in 5 years. It's so pathetic. Anyone have any scholarship tips ?

[Slug]

I started my son's 529 in my own name in '02 (4 yrs before he was born). It's still down 3%. My time horizon is longer than yours, but I just intend to keep dollar cost averaging with monthly contributions and the occasional Upromise free $. Actually, if you take into account the free $ from Upromise I'm probably pretty far to the positive. Definitely make sure that your principal is protected in large part as you only have a couple of years to make it up if we fall off the cliff again.

[nck4857]

I getting ready to start a 529 plan for my son, I guess I should put it in my own name, correct?

[jIM_Ohio]

I have a high school sophomore. I was evaluating her college savings yesterday and realized that her 529 account has grown a little over 2% in 5 years. It's so pathetic. Anyone have any scholarship tips ?

Let's discuss your whole situation, not just the 529. I have some opinions on college savings which are a little off center...

For example...

2008 was in the time period in question, and your son was probably a freshman then... so I would ask why with 4 years to college was money in stocks (at all?). If you did have stock exposure, no more than 40% should have been expected.

Another question is what return were you expecting inside the 529? I assume you contributed $1000 or $10,000 or something like that. Were you expecing $10,000 to turn into $80,000 (800% return) or $160,000 (1600% return) over a period of 10-18 years? You might have expected that (after all we do expect that with retirement accounts). My approach is you entered college savings with bad expectations if you thought 10k would turn into 80k, and even 10k turning into 20k is not a realistic 529 expectation for MOST people.

I have twin 2 year olds. Their grandparents gave me money and I put it into a 529. At the age of 3 months old their allocation was 50% dividend paying stocks and 50% inflation bonds. My goal is to first preserve the money contributed, and if it grows a little bit, GREAT.

More importantly is the parents financial situation. Is your mortgage paid off? Is your retirement savings on track? (Not necessarily in that order). Do you qualify for federal tax savings (tax credits) for education (like Hope and Lifetime learning). If you make too much, the federal tax credits get phases out... probably around 160k AGI, but I would have to look for limits in 2010 and 2011 to be sure.

You have two years for son to start college... here are steps I would take

1) Look into the exact details of the Hope credit and lifetime learning credit. You can only take the Hope credit twice (freshman and sophomore years) and it gives you a 100% return and 50% return on the money you pay for college (see list of qualified expenses when you read the credit).

The biggest issues to take this credit (assuming income qualifies) is to make sure the expenses are qualified (for example room and board is not qualified I do not think) and make sure the money which paid for the qualified expenses was NOT in the 529 plan. Then use the 529 plan to cover room and board.

I think the 100% and 50% return of the hope credit is better than any return you get inside an investment of the 529.

2) Immediately move the 529 money you will use in next 2 years into cash- NOW. Don't risk losing money. The money for junior and senior year should be allocated with no more than 20% equities and 80% bonds... and I would suggest 20% equities-40% bonds-40% cash with the junior and senior year monies right now. When you write freshman tuition check, I would reduce equities to 10% and bonds to 20% (this money is for senior year) and keep remainder in cash. When you write check for sophomore year, all money for junior and senior year should be in cash.

3) Focus on your budget (right now) and project that same budget to when son starts college. I am looking for low hanging fruit- cash flow which can be freed up (temporarily) to pay for SOME of the college expenses.

For example if you can get a car payment paid off in next two years, then allocate that $400/mo to college expenses, you have the money ($4800/year) to pay cash for some expenses, and qualify for the hope credit and get about $2500 of it back.

The limits for hope change yearly, and I have not read it recently. It works like this
you get 100% of the first $X spent back 100%
you get 50% of the next $X spent back 50%

so if the max expenses were $4000 listed in hope credit, you get 100% back of the first $2000 spent ($2000) and 50% of the next $2000 spent back ($1000) for a total of $3000 back for $4000 spent.

I think $4000 is a high guess for the current limit- its probably around a $3600 cap, but last I looked was 2008.

You have to decide if its better for you to put the $4000 into a 529 and get a 5% tax deduction (guessing at your state income tax rate) which is $200 back... then spend the $4000+3% interest ($120) on college tuition and get "nothing" back.

Or not use the 529, pay $200 more in state taxes, then in 2 years spend that $4000, get about $3000 back from fed, and if you wanted, apply that $3000 to tuition for next year (so you actually get $7000 to spend in tuition, you just need to free up that first $4000 or so).


For Junior and senior year, its "better" to use 529 money then... as your son is not eligible for hope credit (only freshman and sophomores are) and the lifetime learning credit is max of 20% of 10k of costs. Meaning you get 20% of qualified expenses back, up to 10k of expenses.

On that same $4k of expenses above, lifetime learning only gives you $800 back (where as hope gave you 75% of same expenses back).

In general, lifetime learning benefits people which spend higher amounts on college, where as if you go to a community college, the hope credit might cover close to 100% of your costs.


You cannot take both hope and lifetime learning credits for the same person or for the same expenses the same year. If you have two kids, you can take hope for one and lifetime learning for the other the same year (because its a different person and its a different expenses).


Focus on your positives... you do have some money in 529... you can probably get some federal tax credits back... and if you cannot get the federal tax credits, make sure son gets a job and the moment he graduates high school make sure he is providing more than half of his own support... that makes him eligible to file taxes and claim his own exemption, and he would be eligible for the tax credits because his income is under the limits for both.

[jIM_Ohio]

I getting ready to start a 529 plan for my son, I guess I should put it in my own name, correct?

529's are listed in kids name with someone listed as the account holder.

I am the account holder for my son
He is the beneficiary

You can change beneficiaries.

I have twins
we only have a 529 in name of one son.

At some point in time I will take the 529 and split it in half. It was easier for me to open one account, and put all money in that account and let it compound together. Because I don't know if my 2 year olds will both go to college or not, no reason to give me 2X the paperwork right now.


Keep in mind the following is true or could be true

Son A has a 529 with me as account holder
son A could have a 529 started by grandmother 1 as account holder
son A could have a 529 started by grandmother 2 as account holder
son A has a 529 and with me as account holder and grandmother 1 contributes to this account

and there are other permutations to this

there are limits as to how much I can contribute to son A's account
there are limits as to how much son A can have all 3 people contribute for him

Know the rules for your state
someone would have to be really rich to hit the limits (no way I will every come close to 529 account limits unless I win the lottery)
my son would have to attend harvard law, havard medicine and stanford for undergrad just to need the maximums from me IMO

[MonkeyMama]

I agree with moving the money to something safe, if you have a sophmore.

I'd also question which 529 plan you have the money in. Most of them are pretty inflexible and expensive. I would shop around for a low cost 529 to roll the money into - if high fees are part of the problem.

[Hector]

529 or any other account where money is invested in the stock, why one will not take money out and keep watching it tanking? Granted, I am new to all investing and dont have that much experience, but I started investing in late 2008 and didnt do anything when market was tanking. I was fortunate enough that I got back to break even, but from whatever I have seen, I made a rule that I wont just sit and let my account tank too much. I made some rules and if market price will fall below that point, I will sell not matter what. I see people talk about dollar cost averaging and long term time horizon all the time, but I dont get where I will keep investing money at certain date of every month doesnt matter how market behaves because in the long run it will be up overall. One of my basic rules is, its okay if I dont make a lot but I will make sure not to loose a lot. But again, I am relatively new and might change my rules later on, but for now I wont sit and watch my portfolio tanking.

I have a question regarding 529. How soon one can open this account even before their kid is being born? Is it possible to have just one account for two or more kids?

[jIM_Ohio]

529 or any other account where money is invested in the stock, why one will not take money out and keep watching it tanking? Granted, I am new to all investing and dont have that much experience, but I started investing in late 2008 and didnt do anything when market was tanking. I was fortunate enough that I got back to break even, but from whatever I have seen, I made a rule that I wont just sit and let my account tank too much. I made some rules and if market price will fall below that point, I will sell not matter what. I see people talk about dollar cost averaging and long term time horizon all the time, but I dont get where I will keep investing money at certain date of every month doesnt matter how market behaves because in the long run it will be up overall. One of my basic rules is, its okay if I dont make a lot but I will make sure not to loose a lot. But again, I am relatively new and might change my rules later on, but for now I wont sit and watch my portfolio tanking.

I have a question regarding 529. How soon one can open this account even before their kid is being born? Is it possible to have just one account for two or more kids?

You only lose money if you sell
you do not lose anything if you hold (and wait).

In 2007 I had close to 200k when I entered 2008 (Dec 31 account balances approached 200k)
By October those accounts were close to 120k. I lost 80k (40%) of my balance.

By mid 2009 I was back to about 190k (some of that was contributions, most of it was gains).
I lost no money because I did not sell... I even skipped my annual december rebalance, because I did not want to sell anything at a loss.

The issue I have is many people extrapolate what they do with a retirement account (401k- 50+ years of investments go into this and account lasts until you die or spend it all) with a 529 (by definition this will exist for only 18 years, 22 by time kid is done with school).

529's will not compound like retirement accounts and will not last as long as retirement accounts, therefore I do not suggest investing them as aggressive.

[Hector]

I think it’s a myth when one says ‘You only lose money if you sell. You do not lose anything if you hold (and wait)’. Regardless you sell it or not it’s already a loss because that’s the market price.

It’s good that you are back to almost break even now.
In 2007, you had 200k, and at one point you were down to 120k (40%). You didn’t do anything and now you need to make 80k (67%) to come back to 200k.
This doesn’t happen normally. If we keep invested there is a high probability that our portfolio thank by 50% when time like this recession comes (which happened regularly - once a decade on an average) and just to cover that we need to make 100% on it and we know how long does it take to do so. In some cases it doesn’t happen ever.

When we talk about individual companies, it is even worse than major indexes. Because major indexed keep excluding companies which go to bankrupt and overall (for 30-40 year period) it looks more profitable than individual companies. So the probability of individual stock compare to major indexes is even lower to be back at their top compare to major indexes.

[Slug]

You can open a 529 at any point. Just open it in your own name and name yourself as the beneficiary. When you have a kid, you can switch the beneficiary to the kid. I haven't switched it yet and probably won't until I'm sure he's going to college and won't be an idiot with his access to this money.

[Hector]

You can open a 529 at any point. Just open it in your own name and name yourself as the beneficiary. When you have a kid, you can switch the beneficiary to the kid. I haven't switched it yet and probably won't until I'm sure he's going to college and won't be an idiot with his access to this money.

Thanks for the information. What happens if kid ends up not going to school? Can you withdraw that money? When? Any penalties for doing so?

[Slug]

Thanks for the information. What happens if kid ends up not going to school? Can you withdraw that money? When? Any penalties for doing so?

YES! There are penalties if you don't use it for school. If my son doesn't go to school, I'll just retire and go to school for a CFP and use the money for myself :-) Or, I'll switch the beneficiary to someone else's kid who is going to college.

[moneybags]

My approach is you entered college savings with bad expectations if you thought 10k would turn into 80k, and even 10k turning into 20k is not a realistic 529 expectation for MOST people.

I guess I should have started out by saying I was just venting. I had realistic expectations for my investment. I have other means of paying for college, and I have a younger child, so I do not need to use the 529 money for several years.

you can probably get some federal tax credits back... and if you cannot get the federal tax credits, make sure son gets a job and the moment he graduates high school make sure he is providing more than half of his own support... that makes him eligible to file taxes and claim his own exemption, and he would be eligible for the tax credits because his income is under the limits for both.

Assuming I don't qualify for the tax credits, this scenario is not always the most beneficial. The child can claim the tax credit, but not necessarily the exemption. They also may not be eligible for the full credit. If their tax liability is low, it may be better to keep them on the parents' return and forgo the credit.

[jIM_Ohio]

I think it’s a myth when one says ‘You only lose money if you sell. You do not lose anything if you hold (and wait)’. Regardless you sell it or not it’s already a loss because that’s the market price.

It’s good that you are back to almost break even now.
In 2007, you had 200k, and at one point you were down to 120k (40%). You didn’t do anything and now you need to make 80k (67%) to come back to 200k.
This doesn’t happen normally. If we keep invested there is a high probability that our portfolio thank by 50% when time like this recession comes (which happened regularly - once a decade on an average) and just to cover that we need to make 100% on it and we know how long does it take to do so. In some cases it doesn’t happen ever.

When we talk about individual companies, it is even worse than major indexes. Because major indexed keep excluding companies which go to bankrupt and overall (for 30-40 year period) it looks more profitable than individual companies. So the probability of individual stock compare to major indexes is even lower to be back at their top compare to major indexes.

Hector- I don't need to break even in 1 year or 2 or 3... I need to invest because I need the money for much later in life- like 15 years. I can guarantee you about 5-10 years before I retire, my portfolio will not lose 40% because it won't be invested so heavily in stocks.

It is about time- if you have time, then the 40%+ up and 67% down or 67% up and 40% down swings will be but a small blip on the radar. I remember 1999 when I lost 50%- that was $7000 which turned into $3500 quite fast. But 2000 and 2001 were good to me- made it all back and then some.

If you want the good returns, you need to take the bad returns with it.

[jIM_Ohio]

I guess I should have started out by saying I was just venting. I had realistic expectations for my investment. I have other means of paying for college, and I have a younger child, so I do not need to use the 529 money for several years.



Assuming I don't qualify for the tax credits, this scenario is not always the most beneficial. The child can claim the tax credit, but not necessarily the exemption. They also may not be eligible for the full credit. If their tax liability is low, it may be better to keep them on the parents' return and forgo the credit.

It was tough to know over the internet if you were venting.

The max income for credit is 180k MFJ or 90k single/head of household.

Publication 970 (2009), Tax Benefits for Education


If you make more than 180k, you probably like the state tax deduction going into 529 right now...
if you want to check if child can get those on his own tax return...

you need to verify a few things...
I took a tax class 2 years ago, and have not put it to use, so double check me on everything...
the IRS does not list everything together, so its tough to look up one publication and connect the dots.

For child to claim own exemption, they need to provide more than half their own support. What constitutes support is a list of things like room and board. If they make $10k at a summer job and tuition room and board is 20k, they can probably meet the 50% test.

There are other parts of the exemption test, but its easier for child to prove 50% of own support than it is for parent to claim the exemption of someone else IMO.

Once child gets own exemption, getting the credit will be easy (easier?)
as you pointed out its possible child files a return, gets the credit, but cannot claim their exemption as well.
Just do what gives your family the biggest refund of taxes... and its OK to fill out tax forms 2-3 different ways to see which way comes out best.

Any good tax preparer has software to run all of these scenarios for you. If you need assistance getting child to 50% of own support so they get credit, its OK to put money into a savings account now (for child) and let them live off that savings in college (its paying for own support) to get the credits.

A competent tax professional can make sure you or child qualifies for the credits, but it might require some planning.

For example, the most important tax return you file is the one in spring of child's Junior year. You will have to fill out the federal student aid application before you file taxes when child is a senior... so if you can shelter income or savings in 2010, that is a good thing for financial aid purposes.