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Paying for College -- Now What?

Alright, so the market's gone bust and many folks have watched the value of 529 plans plummet along with any other savings in the market like those 401(k) nest eggs.

So, what do we do now? Are 529s still the way to go?

Yes, say both Joe Hurley, the founder of Savingforcollege.com, and Kiplinger editor Janet Bodnar. In fact, if you've been holding off on filing those 529 papers, now would be a good time to invest, Hurley says.

Both point to the tax savings options that are key benefits of 529 plans. The money is tax-free if it's used to pay for college. In many states, you can get an additional tax break by deducting some or all of your contributions. Plus, enrolling is easy and most plans accept low contribution minimums, Hurley says. For families planning to apply for financial aid, parent-owned 529s get counted at a lower assessment rate than student-owned funds. The best option, though, for setting an account up may be asking a trusted grandparent or aunt or uncle to open the account.

Grandparents can use 529s as an estate planning tool, Bodnar says, and make gifts to the parents. The current federal financial aid formula only assesses parent income and doesn't inquire about grandparent-owned accounts. Individual colleges, though, have their own rules and may still ask about these accounts. In addition, there's little clarity on whether payments for college from 529 plans need to be reported to financial aid offices as student income or not. Hurley says the only way to know is to ask the school for their interpretation of the rules.

Over their existence, 529 plans have now experienced two low-point fluctuations. The first, in 2000-2001, revealed the need for more conservative investment options, Hurley says. Age-based investment options are set up to invest heavily in stocks when children are young and move the money to more conservative investment choices when the teen nears college. This time around, 529 plans are looking to be more competitive. "There's continuing movement [on lowering] fees," Hurley says. And 529s are starting to add some new principal-protected options such as bank cds and stable value funds.

If you're reeling at your latest 529 statement and wishing the investments were more conservative, you can change them. New federal rules announced last month let 529 custodians change investment options on the account twice this year.

It's hard to say for sure just how much money parents have lost in 529 plans, Hurley says. Because investment options are so varied, age-based plans for a 5-year-old may have seen a significant drop while money-market invested plans for a 17-year-old may actually have seen some gains. That's essentially what Hurley has seen with the 30 accounts he has. That's not a path he recommends for the rest of us, by the way. Hurley has that number of accounts for research purposes.

What results have you seen over the long haul with your 529 plans? Does the current state of the economy have you and your child reeling over how to pay for college?

By Stacey Garfinkle |  January 14, 2009; 7:00 AM ET  | Category:  Teens
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Comments


Daughter is 5 and son is 6 months old. I am too scared to open up the investment statements. The few times I have glanced at it, I just got a sort of sick feeling. I just keep praying the market will recover in time. But I do still make monthly investments in their 529 and other savings plans.

Posted by: foamgnome | January 14, 2009 7:50 AM | Report abuse

For college right now, we're paying a bit more than $500 a month, our stepdaughter is paying about half that out of money she makes working part-time and summers, and two loans (the one everyone gets plus a private ed loan) are picking up the rest. I am concerned about our ability to get the private loan for her last year. If we can't, it's going to be incredibly tight. We'll do what we have to do because she needs her degree.

The money we invested in a 529 is down about 30-40%, but I'm confident it will come back. We have three 529s, one for each child, but we've tried not to use the one for our oldest unless absolutely necessary. So far it hasn't been necessary, but it may be soon, especially if we can't get the private loan. In fact, we may have to tap into the other two children's 529s. Hopefully not, though.

Posted by: WorkingMomX | January 14, 2009 7:55 AM | Report abuse

Two thoughts - first, be sure to sign up for upromise (and have extended family do so as well).

Second - I'm halfway through helping my second son through college. As I do not make a ton of money, early on I decided to save a small portion for college funds, but to put most into my own retirement. Don't shortchange yourself, it is much easier to get a loan for college than it is to get additional funds when you retire.

I have a certain amount that I contribute each semester for college. My boys then needed to decide where they would go, and how to pay for it, based on that. They both started at community colleges, and worked part-time to make up the difference. I like to think their education meant more than it would have if Mommy had paid for the whole thing.

Posted by: jjtwo | January 14, 2009 8:21 AM | Report abuse

How much have we lost on the kids' 529s? A lot. And at the kids' ages, we're not going to make it back in time.

(BTW, I'm not sure what Hurley's looking at, but check out http://www.collegesavingsmd.org/college-investment-plan-investment-performance.aspx It's the recent results for Maryland 529's. Note that EVERY SINGLE PORTFOLIO OPTION has lost money in the three months ending Dec. 31, and all but one (the short-term bond portfolio) has lost money for the year 2008. Yeah, you didn't have to lose 40% for the year, but you pretty much lost.)

Does this cause us concern about paying for college? Yeah, to an extent. We'll figure out a way to do it, though, because the education's that important to us.

Posted by: ArmyBrat1 | January 14, 2009 8:34 AM | Report abuse

Do it the old fashion way, pull up your boot straps and have the kids get a part time job to help pay for their education.

Posted by: Krazijoe | January 14, 2009 8:41 AM | Report abuse

Amazing how this column and almost all the banks and brokers touting 529 plans never mention the only type of 529 plan that never loses money. Virginia and other states have a PREPAID 529 plan where you pay today's prices for tomorrow's college. in my own case, the Virginia VPEP plan cost me only $17 K but will pay out $35 K - that's a 100% tax free return. You can even pay on the installment plan.

Posted by: charm2017 | January 14, 2009 8:48 AM | Report abuse

Yes, the 529s took a hit like everything else but hopefully by the time DD goes to college, things will be better (must think positively or else go crazy with worry).

Posted by: ishgebibble | January 14, 2009 8:49 AM | Report abuse

"Do it the old fashion way, pull up your boot straps and have the kids get a part time job to help pay for their education.

Posted by: Krazijoe | January 14, 2009 8:41 AM"

They do. But do the math. Part-time jobs pay somewhere between 7 and 10 dollars an hour, before withholding. The University of Maryland-College Park estimates that annual expenses for a Maryland resident full-time student living on campus are about $21,000 per year. (Tuition, room and board come to 17K; the rest is books, transportation, etc.) See http://www.admissions.umd.edu/admissions/finaid/tuition.asp

So, how many hours does our hypothetical student have to work, part-time, to make a substantial dent in that number?

I put myself through undergrad school working three part-time jobs that paid about $2.65 per hour (that's how old I am). But my tuition, room and board were about $900 per semester and that was before my academic scholarships, so that was feasible. It's not feasible now.

Posted by: ArmyBrat1 | January 14, 2009 9:03 AM | Report abuse

Yes, the 529s took a hit like everything else but hopefully by the time DD goes to college, things will be better (must think positively or else go crazy with worry).

Posted by: ishgebibble | January 14, 2009 8:49 AM | Report abuse


Marry money.

Posted by: jezebel3 | January 14, 2009 9:25 AM | Report abuse

I started a 529 plan when my daughter was in second grade. She is ready to start college this year and my VA 529 plan has lost so much value that ALL the interest accumulated over the years has been erased.
The net effect is no different than putting the money under the mattress.
At this point I am wondering if I will now start losing the principle this year. I invest $3,000 per year. I am thinking of stopping that soon.

Posted by: jrs2 | January 14, 2009 9:53 AM | Report abuse

I suspect that our kids will be disadvantaged compared to their parents. None of us grew up in the American education system so in terms of financing our education it was relatively simple.

A state university in Peru is very cheap - if you can get in. The poor can't afford it but any middle class family would be able to. Both of their parent's families were middle class.

All universities in Canada were (are?) publicly funded so you didn't have to worry about paying tens of thousands of dollars for a year. It was still expensive for a lower/middle class family and I remember struggling to pay for everything even with financial grants but it was doable. You did not have to be well-off in order to go to school and you didn't have to worry about being saddled with a large debt load. I think I had less than 5k in debt when I left. This was 20 years ago but I knew people in university in the US who were paying considerably more than I was at that time.

Which means that our kids may well not be able to afford the education that their parents got. I know that we aren't putting monies aside for their education. I don't know if their parents are doing something that I wouldn't necessarily be privy to but I suspect not. In a couple of years when our finances are in better shape, I will probably suggest we start saving a little something. A little something is better than nothing? Let's hope that they turn out to be geniuses and get scholarships.

Posted by: Billie_R | January 14, 2009 10:11 AM | Report abuse

charm2017: Thanks for pointing that out. You are correct that prepaid tuition plans can be a good solution for folks. Some states have them, some don't. Hurley also mentioned that there is a private college prepaid plan called independent 529 plan that about 270 private colleges are a part of.

Posted by: Stacey Garfinkle | January 14, 2009 10:13 AM | Report abuse

this bit about having grandparents set up the 529 to avoid the negative impact of the plan whn seeking economic assistance seems really underhanded. I'm really glad you brought it up as an idea, but it really seems like a loophole that is too clever by half and will likely be closd up so that those of us who are sneaky about these things won't have a big advantage over other folks. Having the grandparent open up the 529 is a risk because the money could go to her other grandkids, so people should be careful about trying to work the system.

Posted by: captiolhillmom | January 14, 2009 10:23 AM | Report abuse

Our kids are young, so I know there is plenty of time to 'make it up.' For the 6 YO, I think we still have slightly more than we put in, for the 3 YO - been losing money for months. The funny part is that we've been getting these statements for years, and it has the 'contributions' line, then the 'interest' (or whatever they call it), so as to show you how much you're making.
We're losing money now - so the 'income' line is ******0.00*******. Which is wrong. So they have it set up to just say zero - rather than actually SHOW YOU how much you're losing. So silly. I know I'm losing!
The plan in Washington (state) is that you pay the 'tuition' fee (i.e., it's maybe $75 per tuition credit now, or however much). When you take money out, it's calculated by how many 'tuition credits' you have, multiplied by the number of credits you have bought. So you don't lose money (unless they decrease the amount of money you pay for tuition that year). It's actually a pretty good plan, I think (anyone can put money in it). If the kid ends up going to a Washington state school, great, otherwise they'll give you the money.
Anyway - the kids will get an education or not. They are well aware of how important education is - given that mom and dad each have two degrees. And we talk with them about it. If they decide not to spend all our money on education - well, then, their minimum wage job will be an education too, won't it? My DH doesn't necessarily agree with me but we have many years to worry about it.
I am extremely thankful that my in laws have set up a 529 for each of my kids. I don't know what's in there, but whatever it is, it will be a help.
And then we can just hope that the kids get the HOPE scholarship here in GA - given that we're still living here - and it'll be pretty easy to pay for their education...

Posted by: atlmom1234 | January 14, 2009 10:47 AM | Report abuse

After setbacks due to 9/11 and a job loss a couple of years ago, we had to plunder an IRA just to live (after savings ran out), and we are using part of one IRA to send our son to college.

We had saved a lot for retirement, and fortunately, we can fall back on it now, but we are going to pay dearly at tax time. And, we're going to try to make it up with increased savings again.

I can't decide whether aggressive saving was worth forgoing new clothing, a bigger house, etc., but I suppose it was.

I used to follow the rules for investing and saving, and am now breaking nearly all of them! Ouch!

Posted by: readerny | January 14, 2009 10:53 AM | Report abuse

Actually one of the biggest savings comes from going to a local school. Of course there are some areas of the country where a 4 year university is not in driving distance. But cutting out the room and board saves almost 50%.

I say almost because you would still have added utilities, food, living expenses and transportation costs if you live at home. Of course all of this depends on if you have parents who are willing to pay for you to keep living with them. Some poor families may not have that luxury.

The argument I keep hearing is that "going away" to school is a valuable life lesson. Probably true on some level, but doesn't outweight the thousands of dollars of debt accumulating. Also, there are some lessons that you may not want your child to learn while away at college. :)

Second biggest savings is considering doing two years at a junior college. If you choose your classes wisely and consult with a potential 4 year school a good number, if not all, your credits will transfer. Two year schools are generally cheaper then four year schools. Of course live at home.

Lastly, consider a part time job. Not to make up the difference in tuition and room expenses but to at least cover books, miscellaneous or any other added expense. If they can help to chip in for the parent's portion that is great. But like AB states, the vast majority of kids won't make enough at a part time job to curb the huge college expenses.

I think the days of self funding college for the average kid is pretty much over. But you can do a lot to reduce the debt accumulated if you make wise choices.

We view it like this, we owe our children to attempt to provide a 4 year college education to the best of our ability.
Scenarios:1) Best case-our investments pay off and we can pay 100% for state college away-all expenses paid
2) Second Best-our investments pay the bulk of a 4 year education but need to chip in some $$ while attending. This won't be hard for us because our mortgage will be paid off before oldest is done with HS.
3) Moderate plan-investments tank and we pay for tuition and expenses and attend local 4 year state school (George Mason)
4) Bad case-does two year at a community college and then transfers to GM.
5) Worst case-two years at junior, transfers to GM, needs to take out small loan. In that case, child can live at home rent free till loan is paid off given they make an honest attempt to pay it off.

Either way, we will make sure if the child wants to and is willing to work seriously at their studies that they can come away with a four year degree with most of it paid by parents. I feel good about it. I would not lose sleep over not being able to pay for four years of partying away from home.

Posted by: foamgnome | January 14, 2009 10:55 AM | Report abuse

"...jobs that paid about $2.65 per hour."


WOW! I WISH I had made $2.65/hr. I was paid $1.70/hr for shelving books in the library.

Our 529 for our 17 yr old has lost a bit of money but as someone pointed out here, most 529's have different funds based upon when the child will attend college. The closer to attending, the more cash oriented the investments.

With the dau formerly known as AF Dau starting college last week, we will have to help her out. Even with the GI bill, there is still not enough to pay for college. But the new GI bill coming into effect in August will provide much more towards education.

In fact, my father and sainted mother went to college under the GI Bill. After WWII, the payment was full tuition (at public school rates) plus $75/month for living expenses. This was a better deal than I had way back when I went to college.

Many people have noted here that the expense of college has far outstripped most individuals ability to pay for it without taking on massive debt. I believe that it will continue to take effort and sacrifice on the part of the both the parents and child to obtain that sheepskin.

Posted by: Fred_and_Frieda | January 14, 2009 11:30 AM | Report abuse

Are 529s still the way to go? I hear this all the time, and it drives me nuts; why do people seem to confuse the bucket with what's in the bucket? 529s are just a bucket to hold investments in, just like IRAs, 401(k)s, brokerage accounts, etc. 529s just happen to be a bucket that comes with some nice advantages -- most importantly, tax-free growth, but also some state tax deductions (as in MD) and (for now) preferential treatment in the college aid test.

If your 529 hasn't performed well, don't blame the bucket -- look at what's in it! Most plans offer a good variety of choices, from money-market-type accounts to bonds to stocks and mixtures of everything in between; if your state doesn't offer what you want, you can choose a different plan that does. I think a lot of people, like us, have chosen the age-based variety, which has lost money. But if you find you can't live with that level of risk -- or maybe your state's age-based portfolio turned out to be a lot more risky than you think is appropriate for, say, a 15-yr-old -- then switch your investments to a more conservative option. They may lose some money -- almost everything does in a market like this one -- but probably not so much to put college in jeopardy.

Ok, rant over. Beyond that, I do definitely worry about college affordability, and what it means for my kids, because college costs have gone up much faster than the mechanisms for paying them. Here's a "then and now":

Then: my college (small private midwestern school)
Tuition/room/board: @ $10,000
Scholarship from national scholarship program (max): $2,000
Federal loan (max): $2,500
Total delta: @ $6500; 1/3 from my parents based on need, the remainder made up in grants.
Result: maximum debt @ $10K -- @ 1 year's tuition, or @ 20% of starting salaries in my field. Even no additional grants would have left only an extra $26K over 4 yrs, or about half of starting salaries in my field.

Now: same college
Tuition/room/board: @$48,000
Scholarship (max from same program): $2,500
Federal student loan (max): $2,750
Total delta: @ $43,750
Result: someone needs to cover almost $175K. Either schools need to dip much further into the financial aid pool, or mom/dad/junior need to fork over a lot more. Meanwhile, starting salaries in my field have about doubled, give or take, but using loans would now leave a kid owing @ 1.5-2X more than the potential annual salary. And, of course, grad school (which I needed to get into my field) has gone up at the same rate.

Upshot is that even though we make good salaries and are saving up quite a bit for the kids, we likely can't afford to send our kids to my own alma mater. Which depresses me.

But what are you going to do about it? I could go all fatalistic -- well, I'll never be able to save enough, I can't trust the market, so why try? But how does that help anything 15 years down the road? The way I see it, I have one reasonable shot of giving my kids the same opportunity I had: save as much as I reasonably can, and trust that the market is going to turn around. So I'd rather at least take that shot. And even if we don't get there, we will at least be putting the kids in a better position -- whatever they ultimately do -- than if we did nothing.

Posted by: laura33 | January 14, 2009 11:45 AM | Report abuse

Stacey -- I got another one of those "comment held for approval by blog owner" messages; can you check? Thanks.

Posted by: laura33 | January 14, 2009 11:46 AM | Report abuse

WOW! I WISH I had made $2.65/hr. I was paid $1.70/hr for shelving books in the library.
-------------------
Well, Fred, I'm really a dinosaur. I was paid $.75 per hour to shelve books in the college library. :) This was in the mid-60s.

I fear for our sons' ability to send their children to college. I only have one granddaughter so far, and she is three years old, but by the time she is ready for college the expense will likely be well out of reach for most people. It already is a major stretch for most as it is. We were able to cobble together scholarships, grants, and loans for our sons but it was still expensive for us with what was left over. I don't see how people will be able to do this much longer.

Posted by: lsturt | January 14, 2009 12:28 PM | Report abuse

"WOW! I WISH I had made $2.65/hr. I was paid $1.70/hr for shelving books in the library.
-------------------
Well, Fred, I'm really a dinosaur. I was paid $.75 per hour to shelve books in the college library. :) This was in the mid-60s."

Aww, y'all are just trying to make me feel like a young pup! (It's working. :-)

One thing we're watching closely is what happens to student loans in the credit crises. I got through six years of school without one; we haven't planned one for the kids. But it's always there as an option.

But two years ago, oldest DD was accepted by a college in NJ where tuition, fees, room and board approached $52K per year. They offered no grants/scholarships; they told her how to apply for student loans and assured her it would be approved. We didn't let her go there because we couldn't let her get 200K in debt for a 4-year degree. But that was a symptom of the credit situation - encouraging an 18 year old just starting college to go 52K a year in debt!

Posted by: ArmyBrat1 | January 14, 2009 1:10 PM | Report abuse

AB - unless is was Princeton, you absolutely made the right choice - there is no other college in NJ worth anywhere near that! (Not to imply that you made the wrong choice if it WAS Princeton - merely an observation on the (lack of) quality of most colleges in NJ.)

Posted by: dcd1 | January 14, 2009 1:25 PM | Report abuse

dcd - see http://www.drew.edu/depts/finaid.aspx?id=28157#

$46,723; NOT counting books, fees, transportation to/from campus, etc. etc. etc. When we worked out the details it was pushing 52K, with no financial aid to speak of.

NOT worth it, in my book.

Posted by: ArmyBrat1 | January 14, 2009 1:47 PM | Report abuse

AB -- good call. There are very few places I'd be willing to pay $200K for. And that's not one of them.

Posted by: laura33 | January 14, 2009 2:00 PM | Report abuse

If the daughter is fugly, I'd spring for Princeton.

Posted by: jezebel3 | January 14, 2009 2:00 PM | Report abuse

"If the daughter is fugly, I'd spring for Princeton."

I don't have to worry about that. Mine are all brilliant, talented, athletic, dedicated, and yeah, beautiful, too. :-)

Well, they are to ME. :-)

Posted by: ArmyBrat1 | January 14, 2009 2:22 PM | Report abuse

I don't have to worry about that. Mine are all brilliant, talented, athletic, dedicated, and yeah, beautiful, too. :-)

Well, they are to ME. :-)

Posted by: ArmyBrat1 | January 14, 2009 2:22 PM | Report abuse


Why the crappy offer of financial aid to the gorgeous genius?

Posted by: jezebel3 | January 14, 2009 2:36 PM | Report abuse

"Why the crappy offer of financial aid to the gorgeous genius?"

Um, it's a school with a crappy financial aid program? (Well, it is to ME, after not offering any financial aid. :-)

DD is at the school that gave her the huge academic scholarship - I'm happy.

Posted by: ArmyBrat1 | January 14, 2009 2:41 PM | Report abuse

No 529's for us. Grandparents buy savings bonds for all the grandkids (thanks, Dad and Mom!). I did encourage my sister to look into 529's, because she's getting token child support from her kid's father, and it seemed like a good use of the small amt. I don't know how she's doing with it now - hopefully, she's not taking a bath and blaming me.

Instead, I've used my 401(k) as a combined piggybank. And working in the financial sector, I did most of my investment choices right, so my 401(k) is only down about 10%.

By the time older son needs college money - if he ever does, which is a big question with his autism - it won't be a problem to borrow from the 401(k), pay it back over the next five years (also getting a nice rate of return for my 401(k) in the process), and then repeat the process for younger son. But younger son is pretty bright, and there's possible academic scholarships in his future.

In any case, I've learned that it's best not to look at investments in the short term. They're going to fluctuate, and the short-term drops are upsetting to most people. It's much better to look at 5 year or even 10 year trends. Over a longer term, those disturbing quarterly wiggles smooth out into a more-or-less steady upward curve. Most of the time anyway!

For a kid in the last year or two of high school (like my older son), this is a bad time. But for kids who are younger, this would be a great time to start a 529, or increase what is being contributed. It's called "dollar cost averaging" and it's worth doing a web search to learn what that means and how it works. I promise that it will help improve a worried parent's ability to sleep at night!

But the other option I want to mention (and Armybrat already did, too) is military service. I got my degree while I was on active duty in the Air Force. Best decision I ever made. Those aptitude tests sent me in a direction I would never have thought of on my own, and it was absolutely the right one. Uncle Sam was paying 75% of tuition, and my college (local, private, liberal arts school less than 10 miles from the AF base) gave a 15% discount to military. I paid for books and the final 10% of tuition out of my military salary, and graduated completely debt free, and with four years of work experience in my field.

Posted by: SueMc | January 14, 2009 2:50 PM | Report abuse

AB, you young pup :), you made the right decision. Even Princeton is not worth $52 grand. I had heard that their financial aid program was pathetic, which lowers its worth even more. Sad--only the rich or the desperate for an Ivy diploma need apply.

Interestingly enough, there are lots of great state schools and private colleges that offer a great education along with generous financial help where it is needed. Unless a person is willing to saddle him/herself with monumental debt just to get a sheepskin from an "elite" school, a world-class education can be had at much more financially reasonable schools.

I'm sure your beautiful/handsome, brilliant, talented, awesome kids are doing just fine without ivy wrapped around their necks.

Posted by: lsturt | January 14, 2009 2:57 PM | Report abuse

Someone was mentioning alternatives such as military service so I thought I would put another possibility into the mix....

My husband is in the Electrician's Union as an electrical apprentice. In this program, they pay you to go to school one day every other week for 5 years. On top of that, you obviously get 5 years of work experience. If you pass the program, you can elect to get your apprenticeship program transferred into college credits that can be applied to a degree. I don't remember the exact details but I believe it was something like 30 credits and the brochure said that you would be more than 1/2 way through a degree. Sounds like an inexpensive degree if you were interested in the field.

Posted by: Billie_R | January 14, 2009 3:16 PM | Report abuse

We cashed in our 4 year old's 529, which had grown modestly, last year and put the money into gold and silver coins. They're down a little bit too, but nothing like the stock market.


Posted by: MPAmom | January 15, 2009 1:47 PM | Report abuse

The 529 is a silly marketing gimmick that is really good for mutual fund salesmen masquerading as investment counselors.

How bout a Coverdell account you can invest in anything you want, Bonds, Options, gold bricks, pork bellies, REAL ESTATE, etc. doesnt matter. You get much more flexibility and super low fees. 529's spend a lot more in advertising though so the media eats it up, yum yum yum.

Posted by: mikey999 | January 15, 2009 8:09 PM | Report abuse

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