College Savings

Dear Liz: My wife and I have three kids ages 4 and younger. We have been diligently saving in our state’s 529 college savings plans for all of them. Now with various concepts of free college and student debt relief gaining traction, I’m wondering if we would be better off simply investing future amounts elsewhere that don’t lock it into educational expenses, which may look very different in 14 to 18 years.

Answer: Politics is the art of the possible. Although some student debt relief is possible, as is some expansion of free college options, it’s hard to imagine a U.S. where college educations are entirely free for everyone.
Even in states that currently offer free two- or four-year public college options, the aid is typically limited to free tuition, which means students still have to pay for books, housing, meals, transportation and other costs. Some programs are need based, which means not all students qualify, and many students choose other non-free options, such as private colleges and graduate school.

So the advice hasn’t changed: If you can save for college, you probably should. You may not be able to cover all the costs of your children’s future education, but anything you save will probably reduce their future debt.
In an uncertain world, 529 college savings plans offer a lot of flexibility. The money can be used tax free for a variety of college expenses, and any unused funds can be transferred to a family member — including yourself or your wife, should either of you want to pursue more education. If you withdraw the money for non-education purposes, only the earnings portion is typically subject to income taxes and the 10% federal penalty.

Dear Liz: I understand that money for children’s college education can be put in a bank account with a parent as the trustee under the theory (I suppose) that the child might make bad decisions. In my case, money that I had worked hard for was put into a custodial account and then used by my parents for “necessary” household expenses. My family was not impoverished. This was a dreadful memory for years, and I’m not the only one. Social Security money for a relative, a child, was lost in a divorce. In another case, money was given to a parent for education, but was used in a failed real estate deal, with the children never realizing the money was meant for them. How can money be invested for a child’s education without it being available to an adult for “necessities”?

Answer: When parents take money that belongs to their children, they may not think of it as stealing. But that’s exactly what it is, legally and, of course, morally. There are clear rules for custodial accounts and trusts that should prevent such self-dealing, but often the child’s only recourse would be to sue the parents. That could make for some awkward Thanksgiving dinners.

There wasn’t much you could have done as a child to prevent the theft. But if you ever want to give money to another child, think carefully about the integrity and ability of the person you’re putting in charge of the money.

First pay attention to how they handle their own money. Someone who’s deeply in debt or living paycheck to paycheck may not have the skills to be a good steward.

Then ask yourself, “Could I see this person taking the money if they were really hard up for cash or could otherwise justify it to themselves?”

Then pay attention to your gut reaction. If you believe the person has integrity, that doesn’t mean something bad can’t happen, but you’ve certainly reduced the odds. If you have questions, or you don’t know the person well, you may have other options.

For college expenses, you can open a 529 college savings plan, name the child as the beneficiary and continue controlling the account yourself until the money is paid out for college.

This approach can have potentially large financial aid implications if you’re not the parent, so you may need to delay distributions until after the child files his or her last financial aid form. Sites such as SavingForCollege.com have more information about how these plans interact with financial aid.

A 529 plan probably will be the best option in most situations. Otherwise, you can consult a lawyer about setting up a trust and naming a trustee other than the parents. Trust distributions also can affect financial aid, so you may need to time those carefully.