My favorite was Oreo.  In her last year, she would curl up in the bend of my elbow and lean her soft, warm, little body against my rib cage, and I would stroke her back and her head for sometimes up to an hour.  Sounds kinda sweet, doesn’t it?

The 529 Is Not the Perfect Pet

Like pet rats, the 529 plan is billed as a perfect investment.  Put in after-tax money, let it grow tax-deferred, and if you pull money out under prescribed rules, the withdrawals are tax-free.  You probably know someone who had a great experience with one.  What’s not to like?

Problem is, you don’t know until you’re knee-deep into the commitment.

Here’s what’s not great about pet rats:  The cage will take up more space that than you care to relinquish, their urine and feces still smells, cleaning the cage takes up a lot of time, the kids likely won’t help like they promised, and vet visits are pricey if you can even find a vet who can treat a sick rat.

Here’s what’s not great about 529 plans:  Just because you funded one doesn’t mean your kid goes to college, you can typically only change investment options once a year, it will likely not cover all of the college costs, and spending the money on the “wrong” things costs you penalties and possibly higher taxes.

For you, the 529 cage might be the wrong size, smelly, and your kids may be no help at all.

Alternatives to the 529

I think what people like about the 529 plan is that it is money specifically set-aside for college.  There’s something mentally appealing about the segregation, and it’s harder to raid the funds in a weak moment when it has little Lizzie’s name on it.

But there are lots of other ways to accumulate assets that can be psychologically earmarked as a college fund:

• A stock/bonds account that can be later transferred to a child to pay for college or pay off student loans.
• Real estate is hugely popular, especially if purchased before a child is born or is very young. Use the rental income or sale proceeds to pay for college.
• Being self-employed and employing your child during the summer has wonderful tax benefits for college funding.
• Some retirement plans allow for withdrawals for college expenses without penalty. You can fund these for your kid if they work while in K-12 and have earned income.

This list goes on.

The 529 is not the be-all-end-all of funding a college education.  If you are going to use one, be judicious about how much you put into it.  While the rules around 529 money have changed over the years (you can even fund a Roth with them now under the right circumstances), the last thing you want is money earmarked for college that will never be used for such.

Focus on the Outcome You Really Want:  A Happy Kid

We loved our rats, but in truth, what we all really wanted was a dog.  At the time, I was unwilling to take on the responsibility or the commitment.

What you probably really want is for your kid to grow up to be successful, confident, resilient, financially self-sufficient, and happy.  College may or may not be part of that path.

I suspect that what you really want for yourself is to grow up to be funded for retirement, confident, financially self-sufficient, and happy.  Flexibility and options are key, and the 529 doesn’t have much flexibility or options.  Choose it wisely.

If you want to talk more about college funding, please reach out.

Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

I had to laugh the other day, though, when a post requested a referral to a financial planner who “could explain all the options for paying for college that people use.”  This person wanted unbiased advice and essentially the a la carte menu of possibilities. That would be a little like me walking into the paint store and saying, “I just want to see all the colors people use to paint their walls.”  Have you ever seen how many colors there are, how many different shades of the same color, and how many brands of paints?  That’s before you get to oil or acrylic.  Don’t get me started on brushes. And have you ever taken a sample of favorite paint home from the store, put it on the wall and hated it?  This original poster would have been better off with a survey.

Your advisor should advise YOU.

Here are the many ways I’ve seen college get funded:

• Kid decides not to go to college or not to go right away.
• Kid decides to live at home and attend two-year college.
• 529 plans.
• Paying out of income as the child goes to college.  In other words, not using savings at all.  (Heck, in one instance, the family’s annual tuition expense went down when the kid left a private high school and went to a state university and the family bought a new car.)
• Brokerage and investment accounts.
• Grandparents or other family members paid for it.
• Scholarships.
• Work-study programs.
• Loans.  (Remember, you can borrow for education but not retirement)
• Life insurance cash values.
• Investment properties (either selling them or using rental income).
• Inheritances and inheritance advances.

I could go on.  My point is that there is no right way to do this, you need someone who can listen to you, understand your values and know who you are, and help you navigate among the many options with a presentation of the beauties and pitfalls of each. That’s what good advisors do:  they listen well, they have opinions, they articulate them, and help their clients come to their own decisions about their financial lives.  This is why good advice is worth it.  It saves you time, money, anguish and agony.  A strategy for college funding is not always easy to just paint over.  Make sure you get as good of a look as you can at the start.

How to make the most of family bonding time

When I’m working with clients, I will often ask questions like these:

• Do you think you will inherit money from your parents or extended family?

• Do you believe you will have to support your parents or other family members financially now or in the future?

• Do you think your parents would be willing to contribute toward college education?

• How is the health of your parents? Are they taking any medications?

I would guess that somewhere around 80% of the time, I get blank stares or guesses as a response to these questions.  What that tells me is that aging parents are not sharing with their adult children the status of their financial lives.  This probably started generations ago and was passed down when the adult children were young and parents didn’t want to share financial information with young children who might share that information with friends and neighbors.  The habit stuck.  Now the information is not shared for any number of reasons—privacy, embarrassment, unequal inheritance allocations, etc.

This is bad news for everyone.  It’s bad news for aging parents who need to assign the task of Power of Attorney to someone, who want to maintain family harmony, who may need financial or other support in the future as they age.  And it’s bad news for adult children raising their own children, probably instituting the generations-old habit into the next generation, and are clueless about what their parents might need or what they might be able to anticipate inheriting in the future (or not!)

Take time during your family vacations to talk, bond and laugh.  You do not need to talk finances.  But you do need to start building the relationship and trust with your family members so that when there is an opening to talk about serious financial issues, the bridge is there to make that conversation happen easily, timely, and when everyone has their faculties.  The last thing you want to do is have this conversation when someone is medically, physically, or psychologically impaired by illness or old age.

Get the conversation going.  Start with the weather.

Ask yourself these questions

* Do you want your children to go to college?  Why?  Some people say, “Because I want them out of the house.”  Well, if they’re out on their own, making money and paying rent, does that count as “out of the house”?  If so, then maybe going to college isn’t that important to you.  There’s no shame in a vocational degree.  We need welders and plumbers.  Some of them make very good money.

*  Do you think it’s important for your children to go to college?  I usually get a resounding “yes” on this one, mostly because it leads to better jobs and better pay.  In the Bay Area, where I live and work, most of my clients’ kids are going to have to get advanced degrees to live and work nearby (and/or work themselves to death at several start-ups until one of them goes public).  After all, we want the grandchildren to be close-by.  This is why I often look at a Bachelor’s degree as a second “preschool” experience.  It’s a chance for kids to mature, build networking skills, learn a little, gain more independent living skills, and figure out what they want to do in life.  Most of us don’t have that figured out by 18 years of age.  An “Ivy league” education will achieve that.  So will a private, smaller, lesser-known liberal arts school.

*  Do you want to pay for college?  This is where it gets fuzzy.  Most people will say yes because they believe that they have to, or that it’s the only way a kid can go to college, or that they don’t want their kid to come out of school in debt, or that they don’t know what else to say.  But there’s a difference between wanting your kid to go to college and wanting to pay for it.  So then, I ask….

*  If you could find a way for your kid to go to college and get someone else to pay for it and not have to pay that person back, would that be okay with you?   To which I almost always get the answer, “Of course!  That would be great!”  Then, stop putting money in your child’s name, stop saving money in brokerage accounts for this purposes, and stop funding 529 plans.  The leaner you can look on the Free Application for Federal Student Aid (FAFSA), the standard form for applying for college financing, the better.  The baby boomer generation is going to transfer an enormous amount of money to higher education institutions in the next 20 years.  That money, which will likely end up in endowments, may be available to you and your kid for college and it often does not need to be paid back.  You’ve got to fill out that FAFSA form to start that process.  Save for retirement first, and if you have to access those funds to pay for school, then do so.

*  Are you attached to being able to go to a cocktail party and talk about how much it’s costing you to send your kid to college?   Some people are committed to paying for college because they believe it’s part of parenthood.  No shame in that, either.  Just expensive.  Start saving.

Reasons not to use a 529 plan

1. If you’re underfunded for retirement, you can’t afford it.  You can borrow to send your kids to college.  You cannot borrow for retirement.
2. Not all state plans are created equal.  You have to do your research and you have to keep an eye on fees and investment choices.  States can change their plans.
3. You’re opening another (many?) accounts.  That typically means more fees.
4. If your kid doesn’t go to college, you have to change the beneficiary of the account and that person must be related to the kid.
5. Most investment options are subject to market fluctuations and if your kids are close to college age, you probably can’t risk that much volatility.
6. Any 529 plans in your name count on the Free Application for Federal Student Aid, or “FAFSA” form, which is the standard form at most schools for applying for student loans.  This may limit your ability to borrow since the school will see that you can afford to pay.
7. That same FAFSA form is also used by schools to determine who will get scholarship or endowment money that never needs to be paid back.  Imagine your kid going to college and someone else paying for it.  The fewer assets you have to disclose on the FAFSA, perhaps the better.
8. Life happens.  What if you need that money for other things?  Taxes and a penalty for withdraw for non-educational purposes.

Who should fund a 529 plan?

This is a no-brainer strategy for folks who are well-funded for retirement, committed to paying for their kids’ college education (no loans, no scholarships), and are certain that their kid or grandkids will go to college.  Oddly enough, the wealthier clients that I meet who can afford to do this have been advised against it by other planners.

Other options?

If you want a 529 plan, consider having your parents open it up.  You can contribute, but you don’t control it.  If you’re an employee, consider creating a retirement plan for yourself that allows you to access the assets tax-free for college educations. If you’re a business owner, consider doing the same and/or creating a welfare benefits plan for your business.  In both of these instances, the money you are saving could be—but is not required to be—used for college expense. If the money is not used for college, it can serve other purposes in your life.