So, I spent 20 days and the last nine posts to share my exploration of the college savings topic, and it's time to come to a conclusion and action plan. As a quick recap, I started by discussing what I feel as parents' responsibility of sharing college expenses and sharing my personal goal of college saving. To understand how the game is being played, I looked into how financial need is established and calculated. And to determine the financial vehicles I might use, I studied 529 Savings Plan, 529 Prepaid Tuition Plan, Coverdell Education Savings Account, UGMA/UTMA Custodial Account and some other alternative tools.
You might already feel from my discussion of each specific tool that I don't think 529 Prepaid Tuition Plan or UGMA/UTMA Custodial Account deserves much consideration. The first will be very detrimental to financial aid calculation and the net effects may be to waste your investment dollar-for-dollar by reducing potential grants or scholarships for your kid. The latter is not as tax-effective as other tools, and set the dangerous and irrevocable foundation to let your child squander the savings for purposes other than college education.
My personal preference is Coverdell ESA first, and 529 Savings Plan second. I like that Coverdell ESA's latitude in deciding investments, which will usually lead to less fees and quicker growth than 529 Savings Plan. And Coverdell ESA is almost a no-loser; even if your kid does not plan to get a college degree, you can still use the account to pay for elementary and secondary school expenses.
As Coverdell ESA contribution is limited to $2,000 a year per beneficiary right now, 529 Savings Plan can be complementary. 529 Savings Plan also offers tax-free growth for college savings, although one needs to be careful to choose the right plan in terms of cost effectiveness and capital appreciation potential.
The Action Plan
First, I will continue to contribute to the maximum of 401(k) and Roth IRA accounts. This does not mean I want to consider my retirement first -- 401(k) and Roth IRA balance can still be applied toward college savings through certain channels -- but instead, as a way to shield some assets from the EFC calculation.
Second, I will set up a Coverdell ESA account this year and start contributing $2,000 a year now. This will not let me garner $160,000 by 2020, but it is a good start.
Third, I will not contribute to 529 Savings Plan this year but will revisit this topic every year. As my son is 15 years from college, I feel it is early to commit a large sum toward a not-so-perfect plan. I am mindful of the gap to the $160,000 plan, but I'd rather keep my money in after-tax account for now.
During my research, I found the following three resources particularly helpful for parents:
Department of Education
As always in the domain of personal finance, there is no one-size-fit-all. My conclusion and action plan, and, to some extent, the whole Saving for College series at PFBlog, might not fit any other family (see more disclaimer here). Use it with your own discretion.
(This article is a component of the 10-part "Saving for College" series at PFBlog. If you want to read from the start, follow the links at this Table of Contents page.)