I have roughly 10 years until my kids go to college. How should I save for them if I have a lump sum of money (say $10K for discussion). I ask because I've heard good things about an ESA (I think this is the Roth for school) but contribution limits are $2K per year (I think).

How best do you save for college when you have a lump sum?

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    @BlackJack That was the bumper sticker on my previous car. :) – Alex B Aug 27 '11 at 14:58

This is a tricky question, because the financial aid system can create odd incentives.

Good schools tend to price themselves above and beyond any reasonable middle-class ability to save and then offer financial aid, much of it in the form of internal "grants" or "loans". If you think about it, the internal grant is more of a discount than a grant since no money need have ever existed to "fund" the grant. The actual price to the parents is based on financial aid paperwork and related rules, perhaps forming a college price-setting cartel. It is these rules that need to be considered when creating a savings plan.

Suppose it is $50k/year to send your kids to the best school admitting them. Thats $200k for the 4 years. Suppose you had $50k now to save instead of $10K, and are wondering whether to put it in your son's college savings (whether or not you can do so in a tax advantaged way) or to pay down the mortgage. If you put it in your kids savings, and the $50k becomes $75k over time, that $75k will be used up in a year and a half as the financial aid system will suck it dry first before offering you much help. On the other hand, if you put the $50k on paying down the mortgage [provided the mortgage is "healthy" not upside down], your house payment will still be the same when your kids go to college. The financial aid calculations will consider that the kid has no savings, and allocate a "grant" and some loans the first year and a parental portion that you might be able to tap with a home equity loan or work overtime.

Generally, you should also be encouraging your kids to excel and perhaps obtain academic scholarships or at least obtain some great opportunities. A large college savings fund might be as counterproductive as a zero fund. They shouldn't be expecting to breeze through some party school with a nice pad and car, homework assistance, and beer money. Unless they are good at a sport, like maybe football -- in which case you won't need to be the provider.

It is not obvious how much the optimal ESA amount is. It might not be $0. Saving like crazy in there probably isn't the best thing to do, either.


I think you have a good start understanding the ESA. $2k limit per child per year. The other choice is a 529 account which has a much higher limit. You can deposit up to 5 years worth of gifting per child, or $65k per child from you and another $65k from your wife. Sounds great, right? The downside is the 529 typically has fewer investment options, and doesn't allow for individual stocks. The S&P fund in my 529 costs me nearly 1% per year, in the ESA, .1%. the ESA has to be used by age 30, the 529 can be held indefinitely.

  • The important thing to note about 529s is that you aren't restricted to your state's plan, but may lose state income tax deductions if you choose another state's plan. – duffbeer703 Aug 27 '11 at 3:07

It depends on other factors like your income, "need" and other assets.

Parents are expected to contribute 6% of their assets, students at least 35%. 529s and ESAs (which I think may be in the process of being phased out) count as parental assets, which may or may not be a good thing.

If this is a significant chunk of money, you need to talk to a professional deeply familiar with the financial aid process. Colleges are rapacious for your money, and you can easily "overpay" for a child's education, particularly if you send your kid to a private school.

  • duff - for the parent's 6%, are all assets equal? Home equity, retirement savings, etc? For the students 35%, are their retirement accounts included? They're expected to liquidate for school? – JoeTaxpayer Aug 27 '11 at 11:56
  • JoeTaxpayer: I'm not an expert by any means, but I believe that qualified retirement programs are exempted from the calculation. They do expect you to draw on some home equity. – duffbeer703 Aug 29 '11 at 21:39
  • duff - me neither. I need to research a bit. It would be a mistake to counsel someone to load up the college account when the 401(k) and IRAs may be excluded ans the reward for saving is to not get grants. – JoeTaxpayer Aug 30 '11 at 0:05
  • @JoeTaxpayer: I agree, it seems like a poor incentive. I liked the ESA accounts better, because you used to be able to use them for K-12 education as well. Personally, I'm having my first child in a few months, and I'm probably going to skip the 529 and use a mixture of regular investments and savings bonds to save for at least the first 8-10 years. – duffbeer703 Aug 30 '11 at 15:24
  • apps.collegeboard.org/fincalc/efc_finances.jsp is a start. We used a trust instead of 529 as the fees were worse than just paying cap gains. From this site, it shows as an asset of the child. Retirement accounts don't get listed at all, home equity does. Even sibling assets come into play as if available. – JoeTaxpayer Aug 30 '11 at 16:01

begin having them take community college courses while they are still in high school - this should be a better use of time than AP courses.

if they continue and get an associates degree the credits should be transferrable anywhere

take the associates degree to a state school and have them finish just their two years (4 semesters) at the state school.

that should be an non-stressful and affordable approach that will give them a time/age-based advantage over their peers.

so instead of playing with financial aid and retirement plan rules, this sort of goal can help you save, without creating inconsequential and unnecessary expectations for yourself or your family

  • So what would you do with the $10K today? – Alex B Sep 18 '12 at 17:48
  • pretax or post tax? if you really want to earmark it for school, I would put it in a tax deferred/tax sheltered school retirement plan, like the ESA you mentioned – CQM Sep 19 '12 at 1:31
  • And how best do I put a lump sum into an ESA? – Alex B Sep 20 '12 at 17:42

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