Unusual college savings situation

[disneysteve]

I know we've had lots of threads about college savings, financial aid, etc., but I don't think I've mentioned our situation. I'm still not quite sure how we will handle it so I thought I 'd see what you folks think.

DD is 12 and entering 7th grade, so we have 6 years before she starts college. We currently have a 529 for her and contribute $300/month. Balance is about $25,000. If we stopped funding it and that money grew at 6%, it would be worth about $35,800 at age 18. If we continue with $300/month and it earns 6%, it would be worth about $61,700.

Here's the problem (not a bad problem, just a complicating factor). My daughter was injured in a car accident in 2002. As a result of a subsequent legal case, she was awarded a settlement in the form of an annuity that will begin making monthly payments to her when she turns 18. She will get $600/month. There is also a custodial account outside of that annuity that she will gain access to at 18 that will have about $3,000 in it.

We don't expect, or want, her to use all of that settlement money to pay for college. We are fine with her using some for college, some for personal stuff, perhaps a car payment, and the rest to start building savings for her future. I think that properly managed, it could give her a great start in life.

So the question becomes how to divide everything up. I already wonder how much should be accumulated in a 529 to avoid having to pull money out for non-qualified expenses (and pay the penalties that result). If some of that $600/month will go toward college costs, that lessens the amount we need to save in advance.

If this were your situation, how much of the $600/month would you expect/require your kid to put up toward college costs? Would you reduce what you were putting into the 529? Would you cut back the 529 contributions but put that money into an alternate account earmarked for college if needed?

Curious to hear your thoughts.

[bjl584]

What is the term of your daughter's annuity?

[atomicrc11]

Did you plan on paying 100% for her college education costs? If so, then I would keep funding the 529. If not, she would have had to take out loans anyway, so why not let her decide whether she should use the money for college or take out loans? In the end it is her money. However, she will need to figure out what to do with it eventually, so why not let her learn her life lessons herself?

Plus you don't want to get stuck with a lot of money in that 529 and then have to take it out with a penalty.

[Seeker]

1) Rise in College expenses between now and 6 years from now. I'd probably plan on these rising by 1-2k per year.
--- Will living expenses work into her college expenses? Many people consider room & board & meals to be part of college expenses. I don't really consider these to be college expenses, because we have to do those things anyway (pay rent, eat, etc). But I never lived on campus.

2) Does you daughter KNOW what she wants to be doing? Some colleges/degrees costs a whole lot more than others. Do you know what her education might cost in today's terms?

3) $600/month is a good chunk of money for a college student. If she's responsible with money (and with your past posts -- she probably is), then it's "her" money and I would "expect/require" her to divide it as she chooses.

4) The 529 may have a projected worth of almost 36K... if colleges are costing $12k per year as a national average, then that projected amount will pay for approximately 3 years in today's terms. So approximately half -- but this also depends on location of the college and a bunch of other factors.

But then again, you already know all of the above.

I guess to me, with a only-child, I'd have to consider the whole picture. The characteristics/temperament/capabilities of each person are unique and thus, I cannot really say what would be right for you and your daughter.

For me personally (and we have no children, though I have nieces and nephews beyond college age and one nephew who went to technical/computer school instead of any college), I'd say at least half the education expense should be borne by the student. IMO that helps the student more quickly "value" their education; IMO the student in question would be more likely to not "waste" time "finding themselves" in college.

On the other hand, if my child desired to become a true "professional" -- doctor, lawyer, etc. -- then I'd be inclined to help them a whole lot more in their education just because of the knowledge that their choosen field will require more of them than other areas of education/profession, and would also require more education time than just the 4-years.

[disneysteve]

What is the term of your daughter's annuity?

Life.

Plus you don't want to get stuck with a lot of money in that 529 and then have to take it out with a penalty.

Exactly. How do you now how much is too much? Obviously, it will depend on factors such as what school she goes to, any scholarships, other financial aid, etc.

[bjl584]

Well, I'm assuming that you and your wife have already made a decision and a commitment to pay for your daughter's education since you set up the 529. However, in light of the annuity that she will be receiving, I don't see a problem with you stopping contributions to the 529, using what money is already in there for her college and have her make up the difference with her annuity money. Afterall, she will be receiving it for life. She has a lifetime to invest it and make it grow, or do whatever with it. With the money that is already in the 529, I don't think that she will have to come up with too much of her own money, depending where she wants to go to school. I think that she will value her education more if she helps contribute toward it. Also, I don't think that there is any better investment than education, so let this be your daughter's first investment with her annuity. An investment in herself.

[moneybags]

I think the first question to answer is "how much of her education are we going to pay?". My brother told his kids they get $15,000/year for 4 years. If you answer the "how much" on your end, then you can tell her what she will be responsible for. (I personally haven't answered that question for myself.)

I find the 529 to be a tricky investment, especially with an only child. I have 2, so if the 1st one doesn't use the money, I have a fallback. I would be hesitant to overfund it, no matter how many kids you have.

I would make funding a Roth IRA a priority for your DD. Assuming she works during college, she can easily fund her IRA with her settlement. Even a summer job could provide enough earned income. Maybe you can advance her the IRA funding if she works before then, and she can pay you back when she is 18.

[disneysteve]

in light of the annuity that she will be receiving, I don't see a problem with you stopping contributions to the 529, using what money is already in there for her college and have her make up the difference with her annuity money.

I think that she will value her education more if she helps contribute toward it. Also, I don't think that there is any better investment than education, so let this be your daughter's first investment with her annuity. An investment in herself.

I like that reasoning a lot (the bolded part). I will definitely remember that when we are discussing this with her.

I think what I'll probably end up doing is cutting back or stopping the 529 contributions but continue to invest that money elsewhere with the knowledge that we can tap it for educational needs if we choose to but we won't be locked into using it for that purpose. I already decreased the 529 by 25% from $400 to $300 a year or so ago. I think it is time to cut it back even farther.

[Merch]

I really don't think there is a right answer to this questions. I think either way you are fine.

The one thing I would say, is that you don't want your daughter to incur a student loan.

With that said, I view my child's education as my responsibility, at least at the undergrad level. So, I would continue putting money in the 529 plan.

Any money given my granparents or family for my sons education, I put into their savings and investing accounts. I look at this as their money and not mine and they could choose what they want to do with it when they turn 18.

But again, I don't think you can go wrong either way. Another thing, maybe you pay the tuition and she pays for books, meals, dorm/apt, car, etc.

I think I like that suggestion better. You pay for the basics out of the 529 and she pay for anything above that.

[jIM_Ohio]

DS- similar to advice I gave scanner- what is the mortgage situation for you?

The 529 plan is a good start and the 31k you think you have available in it is about the right amount- funds about 8k per year of tuition.

The annuity is $7200 per year- is this taxed?
There is $300/month you have available now- if this money were applied to mortgage, would it be paid off in 6 years?

I am a huge fan of paying for college right from household budget if mortgage is paid off. Take care of your financial picture now (by paying off mortgage) to allow flexibility for how money is spent later.

[disneysteve]

There is $300/month you have available now- if this money were applied to mortgage, would it be paid off in 6 years?

I wish.

Right at this moment, we owe:

Home Equity Loan: $6,453.59 @ 5.99%
Mortgage: $97,427.68 @ 5.875

I am paying extra on the HEL and should have that paid off by the end of this year. At that point, I'll put the current HEL payment of $218 toward the mortgage, but even if I added another $300/month to that, I still wouldn't be close to repaying it in 6 years.

[jIM_Ohio]

I wish.

Right at this moment, we owe:

Home Equity Loan: $6,453.59 @ 5.99%
Mortgage: $97,427.68 @ 5.875

I am paying extra on the HEL and should have that paid off by the end of this year. At that point, I'll put the current HEL payment of $218 toward the mortgage, but even if I added another $300/month to that, I still wouldn't be close to repaying it in 6 years.

How close is it though- the HEL would be paid off in about 12 months with the extra payments ($218 extra and $300 I am suggesting).

The $518 extra towards 1st mortgage has it paid off in 16 years with simple math and that will be much faster in reality with compounding and ammortization.

My math has a 6 year payoff for 5.875%/97k to be a payment of $1608/month. $518 can come from the second mortgage payoff amount.

How close is your current payment to $1090/month? I know it's lower from other posts/threads... but look at this as "cash based investing" over next 6 years. Takes on less risk than other methods of achieving same goal.

My attitude towards this is college savings needs LESS risk because the time of the investment horizon is rigid. Most people would not ask child to delay college a year because they did not have the money or needed the market to recover.

[disneysteve]

My math has a 6 year payoff for 5.875%/97k to be a payment of $1608/month. $518 can come from the second mortgage payoff amount.

How close is your current payment to $1090/month?

Current P + I is $697.17, so I'd need an additional $393/month on top of the $518/month from the paid off HEL to retire the mortgage in 6 years. Theoretically, we could afford to do that, but it would mean decreasing our equity investments which would change our asset allocation significantly. I don't think I want to go that route, though it is an interesting scenario to consider.

[jIM_Ohio]

Current P + I is $697.17, so I'd need an additional $393/month on top of the $518/month from the paid off HEL to retire the mortgage in 6 years. Theoretically, we could afford to do that, but it would mean decreasing our equity investments which would change our asset allocation significantly. I don't think I want to go that route, though it is an interesting scenario to consider.

Changing asset allocation is the issue I am dealing with. I alluded to it indirectly in previous posts in both threads.

Here are the details-

Conventional wisdom suggests getting more conservative as the time horizon is reduced.

For retirement this might mean being 80% equity and 20% bonds/cash 10 years from retirement and shifting to 60% equity and 40% bonds when a person retires.

If the lower asset allocation does not give the return needed, in many cases the retiree can delay retirement a year or two and let compounding earn the money needed. Or retirement expenses could be cut.

The two solutions for a more conservative retirement asset allocation will not work for college planning.

Delaying freshman year is generally not an option- child will generally want to attend with freshman of the same age.
Cutting college expenses is an option based on choosing the college (private vs state school vs community college), but once the college is chosen, negotiating the price with the college is not an option I have heard of working.


I will then extrapolate this issue to parents doing the saving. Generally a person should have numerous asset allocations.

Asset allocation for long term expenses (retirement and health care). 80% equities not unreasonable.

Asset allocation for mid term and short term expenses (college, new car, vacation, something else with time horizon less than 15 years). I would put max equity exposure for this at 40% and decrease this down to 15% within 5 years of needed money.

Asset allocation for emergencies and short term expenses. 100% cash. No bonds, no equities.

The issue is where does the college planning timeline (mid term allocation) cross the parents retirement timeline (long term allocation, mid term allocation or short term allocation)?

For me I am doing my best to time retirement within 3 years of kids starting college (or completing college).

With kids about 10 years apart, I would guess retiring within 3 years of child #1 starting college is not an option. But retiring within 3 years of child 1 finishing college is (because at this time child 3 would be starting college if my math is working right).

So my asset allocation point is the parents allocation will be getting more conservative in the general timeframe of kids going to college. So adding a cash position makes sense- and best place for cash these days is to pay down the mortgage- getting a 4.5% return on cash over a 15 year period is not likely right now. At minimum the risks a person would take to get the 4.5% return on cash is high.

I do agree taking $393 out of one part of budget and applying to another part of budget is a tough sell. I have this built into my plan already (and my kids are 5 months old tomorrow). In my case I am dealing with close to $1000-$1500/month I need to find. I actually found it, I just need to convince my wife I am right.

$393/month represents $4716/year. If a spouse works part time, that could represent taking home around $100/week more than now. In some tax situations that might be a tax return. In other situations applying half the amount per month would make sense, then pay off mortgage with a lump sum 72t withdraw from a retirement account.

[disneysteve]

$393/month represents $4716/year. If a spouse works part time, that could represent taking home around $100/week more than now. In some tax situations that might be a tax return. In other situations

As I've posted, my wife is working PT currently, usually 2 days/week. If she were working FT, paying off the mortgage in 6 years would be a very realistic possibility. When she was working FT, she made 3 times what she's making now (and we had a lot more going to savings - about 80% of her income). Oh well, at least for the forseeable future, she will remain PT. She probably wouldn't consider FT again until DD is in college, at which point it wouldn't be relevant to the conversation at hand.