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College Savings with a Twist?

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4thekidos

Junior Member
Sorry in advance if this is the wrong forum!

I am looking to start a college savings fund for my child, but want there to be some caveats attached. First, I want a savings fund that will allow me to make some low-risk, long term investments such as CDs, money market, maybe bonds. No stock speculation here.

But, I imagine it working this way:

  • I put in $100 every month
  • The money must be used by the child to attain a 4 year degree
  • If the child gets a scholarship, he takes possession of the leftover money in the fund once he has his 4 year degree
  • If he chooses to NOT go to college, he gets half the money and the other half reverts to us (his parents) after his 21st birthday.

What we are trying to do here is to provide a strong incentive to go to college, and a strong incentive to get a partial/full scholarship. The more scholarship he gets, the more money he keeps after graduation.

Would a plan like this work? How would it be structured? Would it be a contract? Savings plan?

Thank you in advance!!What is the name of your state (only U.S. law)?What is the name of your state (only U.S. law)?
 


curb1

Senior Member
You set up a brokerage account at a place like E*Trade or Charles Schwab and,

Put in $100 every month.

The money must be used by the child to attain a 4 year degree
If the child gets a scholarship, he takes possession of the leftover money in the fund once he has his 4 year degree
If he chooses to NOT go to college, he gets half the money and the other half reverts to us (his parents) after his 21st birthday.

That simple. It is a "no-brainer". Do exactly as you suggested. Make some low-risk, long term investments such as CDs, money market, maybe bonds.
 

anteater

Senior Member
Or do some reading, and then analysis, of 529 college savings plans. In terms of your criteria, the analysis of pros and cons gets more complicated.

But you would get tax deferral and, depending upon your state, perhaps a state income tax deduction. The con would be the tax penalty for withdrawals not used for qualified higher ed expenses.
 

curb1

Senior Member
I thought about the 529s and I have been using them for several years. The problem is there is not close to the flexibility that "4thekidos" desires. Plus with the very low risk investments that s/he desires will get eaten up by the 529 fees.

What I suggested would be the least expensive and he could do exactly what he wants. Or, at any time adjust his thinking without any cost.
 
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4thekidos

Junior Member
Ah ok, so I guess the simplest way is to just create an account in MY name and when the time comes for college, I can distribute the money as I see fit. That's simple!

A 529 imposes a 10% penalty (plus income tax) if the money is not used for tuition. That's fine if my kid goes to college. But in the:eek: chance he doesn't, that money in a 529 will get taxed like crazy!
 

curb1

Senior Member
You need to be careful buying bonds. You need to know when you want them to mature. Interest rates at this time are very low. As interest rates go up from here, the value of your bond will go down. So to be safe, buy bonds with a maturity date that you desire. If you were to sell the bonds before they mature, you could take a loss if interest rates were higher than when you purchased the bonds. So buy the bonds with the idea of holding them until maturity, then you will end up receiving the interest rate you desire.

How long until child graduates from high school?
 

anteater

Senior Member
Not intending to be argumentative, but a couple points:

  • There are low cost 529 plans. Some, although I can't recall which offhand, even offer CD's.
  • Qualified withdrawals include more than just tuition. Room & board, books, etc. are qualified.
  • From at least the federal point of view, contributions are after-tax - no federal deduction. Therefore, for unqualified withdrawals, only the earnings portion is subject to tax and the 10% penalty.
  • I'm a bit hazy on all the tax-related in's and out's of unqualified withdrawals due to scholarships received, but I know that the 10% penalty on the earnings portion is waived.
  • Kept in a taxable account, tax will be due each year on the earnings.

As I said, it is a complicated analysis given the possible outcomes. (Although, with the amount of money mentioned, I have to believe that most, if not all, will end up being used for higher ed expenses.) And the desire for maximum flexibility is hard to quantify.
 

curb1

Senior Member
I agree with your observations. But, it would be as easy for the OP to have his/her flexibility, safety and taxable advantages by correctly buying government issued bonds. The commission of buying these bonds would be less than the fees of most 529s.

Without the conditions that the OP expressed, the situation could present more options.
 

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