Children's college or retirement

[Like2Plan]

My sister's "plan" is to refi their house to pay for college for my 2 nephews. One is 13 now, the other is 11 next month. I don't think it will be enough.

Question is how much to save? I think each will need a minimum of $100k. I think with the short time we have, tax savings and interest earnings of 529 plans just won't make it. It will have to be flat out deposits to savings accounts - $50,000 a year for the next 4 years. Yikes!

wincrasher,
Assuming it is your wish to fund your nephews college, you have a longer time horizon than 4 years because you don't have to pay for the full 4 years in advance and you have a little more time for the younger one.

If you put aside 14.3k (you could do 7.15K each with two account owners one for you and one for your spouse so you don't incur the gifttax) for oldest for 7 years (assuming he goes to college in about 4 years and attends school for 4 years and you need to be finished saving by spring semester of senior year of college) and 10k per year for 10 years for the youngest, you could reach your 100k goal for each. (Quite a generous gift. )

If you are saving in a 529 plan, the obvious advantage to saving up to senior year of college would be if it turns out they have other funding available-- you don't overfund the account.

[jIM_Ohio]

My sister's "plan" is to refi their house to pay for college for my 2 nephews. One is 13 now, the other is 11 next month. I don't think it will be enough.

Question is how much to save? I think each will need a minimum of $100k. I think with the short time we have, tax savings and interest earnings of 529 plans just won't make it. It will have to be flat out deposits to savings accounts - $50,000 a year for the next 4 years. Yikes!

You hit the nail on the head as far as I see college tuition and financial planning.

If the parent is going to let the kid choose whichever college they want... the blank check is way too expensive to plan for... 200k for 4 years now could be expected... considering most middle class people will retire on about $1 M per year or LESS that 200k is 20% or more of the retirement account balance. Took me 14 years to get 200k in my 401k...

529's are a good way to get a small discount (tax break) on money set aside for college, but even if a mortgage cannot be paid off before college starts, paying it down so the balance sheet looks better is still a better move than using a 529.

[wincrasher]

I really dislike the idea of limiting my flexibility. With my luck, one of them would want to become and auto mechanic (no offense, I wish I could find one) and I'd have $100k tied up with no where to go.

Plus, what if something happens to me and I need the money? The backup plan can always be to borrow the money needed for college.

But I'd much rather not cut it too close. Having it all on account from day 1 would be alot of peace of mind.

My sister's plan I have alot of trouble with. She's 6 years out from being payed off. So at 50, she plans to pull out all her so-called equity to pay for college - and have mortage payments again until age 80?

[zetta]

I really dislike the idea of limiting my flexibility. With my luck, one of them would want to become and auto mechanic (no offense, I wish I could find one) and I'd have $100k tied up with no where to go.

I believe you can use 529 money for trade school as well. If he chose that route, you could pay for your nephew to become an auto mechanic, then leave the balance to grow and pay for his future children's education.

[Like2Plan]

529's are a good way to get a small discount (tax break) on money set aside for college, but even if a mortgage cannot be paid off before college starts, paying it down so the balance sheet looks better is still a better move than using a 529.

The risk is you pay down a mortgage for which the interest rate is low (I've seen rates around 4.5% lately) and in turn you end up having to get a PLUS loan at 9% (or higher) for the college. Or, if the plan is to refinance the mortgage (after you get it all paid off because the cash flow is not sufficient to cover college costs), you could end up with a much higher interest rate ... In fact, I wonder if mortgage interest will ever be much lower than what you can get right now?

In addition to the small discount, the 529 allows the transfer of wealth--If you do it in planned fashion, you can avoid paying gift tax. These accounts are also protected from bankruptcy and judgements (with conditions and according to the rules of the state).

However, it might not be the best place to save money if your are not sure the funds are going to be used for college....

[Like2Plan]

I really dislike the idea of limiting my flexibility. With my luck, one of them would want to become and auto mechanic (no offense, I wish I could find one) and I'd have $100k tied up with no where to go.

Plus, what if something happens to me and I need the money? The backup plan can always be to borrow the money needed for college.

But I'd much rather not cut it too close. Having it all on account from day 1 would be alot of peace of mind.

My sister's plan I have alot of trouble with. She's 6 years out from being payed off. So at 50, she plans to pull out all her so-called equity to pay for college - and have mortage payments again until age 80?

In your situation, maybe a 529 is not the best way to go. You could put some of the money you intend to give each of them for college in a 529--and save the rest of it outside a 529 plan....

[Landlord Greg]

That's a no brainer - retirement.
I was actually just reading an article a few days ago about this very topic, and it gave 6 very compelling reasons why you shouldn't save for your children's college tuition.
A few of those reasons included the fact that you (or your kids) can easily borrow student loans, but there's no such thing as a retirement loan. Another is that student loans are the cheapest loans you can get, far cheaper than any other type of loan available.
Finally, college students WORK a lot harder when they have their own skin in the game.
Anyway I'd put that money towards your retirement, or towards a real estate investment, or some other investment that will give you a return and some financial stability.
Best of luck,

__________________
Greg
EZ Landlord Forms

[LivingAlmostLarge]

retirement. college has loans, not retirement.