Ask the readers: How can we help pay for nieces’ and nephews’ education?

Strategies for saving for college haven't been discussed much on Get Rich Slowly over the years. And yet student debt has been a regular and pressing problem for many. Saving before you get to college seems like an important financial step.

Reader Lynn K. wanted to ask the readers several questions about saving for college — for her coming nieces and nephews, not even her own children. How generous is that? So here are Lynn's questions for you:

My brother and sister-in-law are about to have their first child, and my husband and I would like to set up some sort of college fund for the child. Unfortunately, we're not sure where to start. The first question is: How much should we contribute? We don't intend to have any children of our own, so we can afford to pay quite a bit toward their child's education. However, what if they have four more kids? What if our other in-laws have several children? We want to be able to be fair without bankrupting ourselves, and we don't want to go through all the trouble if the money we contribute barely makes a difference.

The second big question we have is: How or where to invest the money? I've done some research and found 529 plans, but I'm concerned about how much control is lost with those plans (and where the money can end up) if the child in question doesn't finish college or chooses not to attend in the first place. Ideally, I'd like to set up something that allows my husband and me to distribute the funds once per year when the child is enrolled, or, if he or she chooses not to go to college, as a lump sum later in life. So how can we get a decent return on our investment and maintain control over the distributions?

The third and final question is a little stickier. My husband's parents also want to set aside money for their grandchild to get an education. They have inquired about combining efforts. They have a lot more money than we do and will almost certainly contribute more than we will, especially for the next five to 10 years. I am happy to share planning information and work together to set up accounts, but I am very hesitant to set up a single account that we both contribute to, because there's always some chance that we have differing opinions on how the money should be distributed and the last thing I want is to get into any kind of dispute over money where family is concerned. Do you think that the financial benefits (if any) and convenience of having a single account outweigh the risks of getting into a financial relationship with family? If not, how can I tell them about my misgivings without sounding like I don't trust them? On that last point, I do trust them, and I believe they make sound financial decisions; I just don't want to combine finances with anyone other than my husband.

When I've researched articles on saving for college, two of my go-to sources have been Joe Hurley's Savingforcollege.com, which provides a comprehensive look at 529 plans in every state and Q&A's on everything related to college savings, and Mark Kantrowitz's Finaid.org, which covers loans, scholarships, savings programs (including 529 plans, UGMA/UTMA custodial accounts and many other methods), and military aid. These will help you, Lynn, as well as anyone else who's starting to save for their children's — or someone else's children's — education.

So, readers, do you have any other tips or advice for Lynn and her husband?

More about...Education, Investing

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SAHMama
SAHMama

We have a 529 for each of our children. You can choose among plans. It benefits us because we get a state tax deduction, up to $2k per year. If the child doesn’t use the benefit, you can change the recipient to ANYONE. You can even use it YOURSELF! So say they do have 5 kids and the first one ends up with $100k in his account. But he gets a full ride to Harvard or joins the army or whatever and doesn’t need it. Allocate it to kid #2. Or kid #3, 4 or 5. Or split it between… Read more »

Marsha
Marsha

If I followed the story correctly, there are (or will be) nieces and nephews on both sides of your family–from your siblings and from your husband’s siblings. Your in-laws probably want to contribute only to their grandchildren’s education, not the grandchildren of your parents. So an easy way out of contributing to their fund is to tell them that you are setting up an account for all your combined nieces and nephews. And that’s what I think you should do: set up one (non-529) account for the future education of all nieces and nephews. Contribute regular amounts that you can… Read more »

Steve
Steve

I don’t believe you can have one 529 that disburses to multiple recipients (the official term is beneficiaries).

I suppose it might be possible to do something with changing beneficiaries, but I’m not sure if you can do that multiple times per year.

Stonalino
Stonalino

You can change the beneficiary once each day, as long as they are in the same family.

So if I start a 529 for my niece, and then my husband’s brother has a son (a nephew), I can us the same 529 for both, EVEN IF THEY ARE IN COLLEGE AT THE SAME TIME.

I have only one 529, but I have two kids of my own, and younger nieces and nephews. If there’s any money left when my own girls are out of school, I can easily use it to support our siblings’ kids.

Elizabeth
Elizabeth

The first of my nieces an nephews arrived a couple of years ago 🙂 My brother and SIL let us know after he was born that they were setting up an RESP for him. A few of my family members, myself included, have been giving them money as of gifts (or as part of a gift along with a book or small toy). He’s too young to really understand gifts anyway, and he already has too much stuff. The 10-20% government matching is a good return on the money. We’re letting the parents handle the investing for now because they’ve… Read more »

Kristin
Kristin

When my first niece was born 8+ years ago, we went through some similar thinking. We now have 5 nieces and nephews, and have come to a solution that works for us. Currently, our savings for all the nieces and nephews is in a single online savings account. We have increased our monthly contributions with the birth of each new kid. We prefer to retain maximum control over the funds and simply write checks later when they are needed. At some point we may shift from the online savings account into some broad stock funds, but the balance isn’t huge… Read more »

AMW
AMW

In regards to how to make it “fair” for all current future nieces and nephews….I think it is prudent to make the initial investment on each child exactly the same but then on a year to year basis evaluate how much you can afford to invest per existing child and give that. You can always balance it out at the end if you feel the need.

getagrip
getagrip

First off for any 529 plan I’ve heard about if you set it up you control the assets. If your sibling or in-law sets it up, they control the assets. You can provide money to those accounts and may still get a tax break, but you wouldn’t have direct control, your in-law or sibling would. So unlike a uniform gift to a minor where the child upon turning 18 gains control, you retain total control if you set up the 529. You decide how much comes out, for who, and when. This means you can pay for a year of… Read more »

Chris D.
Chris D.

My suggestion is similar to Marsha, #2 above. You can set up a 529 in your own name now, and receive the tax breaks for contributions over the next 18 years or so (assuming it’s in your state). Your parents can do the same thing for themselves. By the time people are needing to tap that money, probably all the nieces and nephews will have been born, and you can roughly divide the money up equally. The only question I have is in transferring money to other beneficiaries: can one transfer one-sixth of the money to another beneficiary, then 2… Read more »

Krishanu
Krishanu

“The only question I have is in transferring money to other beneficiaries: can one transfer one-sixth of the money to another beneficiary, then 2 years later transfer one-fifth of the remainder to another one?”

Yes, you can in a 529 account. The beneficiary information in the account has to be changed to match the intended recipient.

Eileen
Eileen

Great questions and you are ahead of the game in considering these questions. My in-laws (my children’s grandparents) made a few of these mistakes. Initially they decided that one of their retirement checks would go to the grandchildren’s college funds each month. But the # of grandchildren went from 1 – 6 over the course of the years, so the oldest have much more money saved than the youngest. We have 2 of those kids and there is a big difference. They also put them in regular minor savings accounts, meaning that the funds “belong” to the children as soon… Read more »

Sam
Sam

I set up a 529 plan for my nephew and niece, I have full control over the 529 plans and my brother (Dad to the kids takes over if I die). I contributed a certain amount (which changed from year to year depending on my own budget and needs) each quarter to the plans, automatically and same for each, and I contribute at birthday times, Christmas and graduation. I always contribute the same amount for each but I only have one niece and one nephew. My nephew is now in college and he has not requested to tap this money… Read more »

TB at BlueCollarWorkman
TB at BlueCollarWorkman

Well I htink that’s awful nice of you to think about contributing to your nephew/nieces’ educations. Sometimes that kind of stuff gets confusing to me, and so I think, why do you have to figure it all out anyway? It’s your brother/sisters’ kid right? So it seems like it’s their arena to figure out college education and all that. My suggestion? Write a check for however much you want, whenever you want, to your bro/sis and tell them that this is for Little Bobby’s college fund. Let your bro/sis handle the details of it the way that they want to.

Pamela
Pamela

My sister and brother-in-law set up college accounts for their kids, so I send money directly to the accounts.

If someone isn’t comfortable with setting up an account themselves, or if the parents are a little weird about it (it happens), they could buy savings bonds for the kids. Not as profitable, but they will be able to cash them in and make some money, and it’s a very safe investment.

Babs
Babs

I second the savings bond idea. There are some tax advantages and even more tax advantages if you use it for education. Some 529 plans have the same problem with high fees that mutual funds can have.
I think that it is very generous and as others have said any amount would surely be appreciated.

Steve
Steve

You don’t have to use your own state’s 529 plan. If your state’s plan has high fees, especially if you don’t get any state income tax deduction, then you can pick a better state’s plan. Utah is popular; it’s run by Vanguard and has (last I heard) the lowest fees in the nation.

Erica
Erica

I write this from the standpoint of being the recipient of such generous gifts from my grandparents and from the perspective of a parent to a 20 month old and starting to save for my daughter’s college education. My brother and I were extremely blessed to have grandparents who wanted to provide us with a life more well off than their own. Including both of us, they had two other grandchildren in which they gifted the same way, enabling them to control how much each grandchild received. As some stated before, their method was not the most aggressive avenue, however… Read more »

Jen
Jen

Just agreeing with most of the above — 529s grow tax-free (unlike savings accounts) and money can be switched from the named beneficiary to another.

Maybe put the majority of the money into a 529 (or as someone noted, pick an opening amount per kid and then adjust contributions to all accordingly) and save some as a planned college money account but that would be accessible to you if needed or wanted for other purposes. If you don’t use it, you can always roll it into the 529s.

getagrip
getagrip

Forgot to comment on the mixing funds with grandparents. If that is something you want to consider, I would recommend using a trust. Then the terms of the trust are set up at the outset, to include control, changes to, and distribution, and you can argue about those points up front before money is actually put into the trust. If they just want to make a big pot of money in some bank account, I wouldn’t do it because they are very likely to want to retain control of that account and have their names on it. Additionally, if the… Read more »

Samantha
Samantha

I have a question along these same lines I’m hoping to get advice on. My niece has just gotten her GED after a rough time and wants to attend college. Her parents are not willing or able to help her. She’s working hard. How do I approach her to help pay for her school? I don’t really want her parents involved. I’m also scared to pay for a year or two and she drops out, but I understand that is a possibility. What do you guys think? I was thinking maybe a matching, where she saves and I match her… Read more »

Eileen
Eileen

I think it’s great you want to help (though I understand that the parents might be unwilling, unable, or gun-shy at this point). If your niece has the ability to pay for it, then your idea of paying her back after the successful completion of her semester is a good one. If she doesn’t have the means to pay at all, maybe suggest she take a few classes (as opposed to full time) and offer to pay for those so both of you can see how it goes. In this scenario, I’d also suggest any funds go directly to the… Read more »

adult student
adult student

Good questions. You may have done this already but I think the first thing to do would be to just sit down and have a long conversation with her – tell her you are proud of her for getting her GED, you really want to hear about her plans for the future, and that you want to be there for her to bounce ideas off of or ask for advice. The nonprofit maxim that “if you want money, ask for advice; if you want advice, ask for money” holds here – talking about advice will help you figure out how… Read more »

getagrip
getagrip

Can she go to a community college first and get some credits under her belt? The expense would be less to start and you could gauge her ability and commitment without a lot of debt on either of you. She could even get her two year degree there part time before jumping into a four year school full time. Can you provide non-monatary assistance like letting her live with you if you are near a school she could get into? I would not offer full tuition, but help provided she gets the grades and passes the classes. So the matching… Read more »

adult student
adult student

This is so nice! On one side of my family, there were no other children, so our extended family wanted to help us out with college, and my parents and I really appreciated that. For better or for worse, going to a good college helped me to do work that I love after graduating, and avoiding student loans allow me to live decently on a pretty small salary while I’m in grad school to advance in that career, so it makes a huge difference. This is a bit old-fashioned, but my grandfather & my mom’s aunts all tended to give… Read more »

partgypsy
partgypsy

The way that the 529 works, is there is an account owner (the person who sets up the account), and a beneficiary (the person who is the future student). The owner decides how the money is invested and disbursed. From what I understand, the 529 money can be transferred penalty-free to another 529 in the same state. And there are the contributers to the account. Anyone can contribute to the account, but they don’t decide how the money is invested or disbursed. A child can be beneficiary to more than 1 account. The money in a 529 affects financial aid… Read more »

Ella
Ella

I’m in exactly the same position as the author. I have been sending contributions directly to the 529 managed by my brother with my niece as beneficiary. After reading the comments, I now think I should “own” my own 529 with my niece as beneficiary, to retain greater control in case of many more nieces/nephews and to take advantage of my state’s tax credits. See also the great review (podcast) at http://www.money-guy.com/2012/10/best-529-college-savings-plans/ and http://news.morningstar.com/articlenet/article.aspx?id=570349
Learning about better financial management is great. Thanks, GRS.

Sara
Sara

I didn’t look through the previous ones, but what my grandparents did for us four grandkids was set up a trust fund managed by an accountant (I think). My mom was the trustee for my brother and I and (due to some familial awkwardness) my great-aunt the trustee for my two cousins. The trustee makes the decision on distributions. There was some kind of subdivision within the trust so we each got an equal share. This is by no means a fully fleshed out thought or opinion, just a summary of what worked for my family. (Worked aside from the… Read more »

charles who
charles who

I recall reading an article about parents helping their child retire well. Deposit 50$ a month from birth to age 18.. they used and S & P 500 index I recall. Stop at 18. Around the age of 45 to 55 the conservative amout was $500,000 or so. The magic of compound interest. I would let the richer folks fund the education.

Lincoln
Lincoln

That would require more than 8% returns over 55 years. Who knows if the next 55 years is going to look anything like the last 55 years. Note: the last decade hasn’t been great — even for S&P 500 index funds. I don’t find 8%+ returns over 55 years as being particularly “conservative,” even with historical averages being at or above that. Use the same facts but with a more conservative 3% return and you get around 45K at age 55. All that being said, I literally do this exact same practice for myself, my spouse, and my children. Every… Read more »

Steve
Steve

In my ever so humble opinion, I think your concern about “losing control” of money in a 529 is probably misplaced. Mathematically, if you think there’s a 90% or greater chance that the child will go to and finish college, then that balances out the 10% penalty you would pay if you guess wrong.

Also, to resolve the “sticky” third question: share all your research, but have them make their own decisions and open their own account(s). There’s little reason to “combine forces” on this, so why get into such sticky issues? You can combine dollars later.

partgypsy
partgypsy

If you read the article it is very much a concern for her to have control over the money, in regards with decisions about investments. Frankly if a set of parents or grandparents were financially savvy enough to open a 529 for their child I would be happy that that the work had been taken care of and contribute to the same place. But that is not the case for her. Better for her to open up her own 529 and feel comfortable about it (even if it means multiple pots of money) than her to have reservations and not… Read more »

Jake
Jake

I’m a god parent to a wonderful 1 yr old. Because I’m not sure if he will go to college, his father and I set up and Ingdirect account (soon to be Capital 360). It is a kids account in which he is the caustodian. I transfer $40 over each month, and $100 on Xmas and birthday. I have full faith in my friends ability to save the money for my godson’s education or if he chooses to use it for something else when he’s 18 (travel the world, trade school etc.) then so be it. We opted not to… Read more »

Mom of five
Mom of five

We have some money saved in a 529 and some money saved in a Roth IRA. Our oldest is a sophomore in high school now and so we’ve been looking at college costs. What we’ve found is that unless there is a horrible turn for the worse in our finances, it’s unlikely we’ll qualify for any aid. We are telling our kids that we will pay up to what it costs to attend Penn State, which of course is a well ranked school. That means they can either go there or they’ll need to look at schools which perhaps aren’t… Read more »

jim
jim

Here’s my take on it: You can setup a 529 and retain control. The money is still owned by you. Its not the property of the child. You control when and if they get the money or not. I’d setup individual 529’s and not combine them with your relatives. The 529 is owned by one person and it could get messy if people disagree or worst case if someone passes. Setting up more than one 529 should not be hard. Just fill out a form and mail it in with a check. (or do it online) Easy. I would save… Read more »

Lynn
Lynn

I have set up 529s for my two nieces and one nephew. I decided on a set amount that I want each one to have and have set an automatic contribution each month that will get them that much by the time they graduate high school. I don’t count on the account making any money so when they take the money out they will probably have more than the amount I set. I am thinking of changing my nephew’s to a savings account because it is looking less and less that he will be able to attend college due to… Read more »

Stonalino
Stonalino

Lynn, don’t rule your nephew out just yet. I have personally worked with quite a few students with Autism who have gone on to be successful in college.

There are also programs developed specifically for students on the Autism spectrum.

Please be sure to encourage him to continue his education beyond high school just as much as you encourage your nieces!

🙂

Meghan
Meghan

For the person whose niece just got her GED (I’m in the same boat and my niece lives with me), I’d say make her plan for it. Honestly yes it is a lot of work to take out a loan only to have a family member pay it off, but the learning experience is almost as valuable as what she will learn in college. If I ever have kids (am not helping my niece other than a place to live, dog sitter, and coach), I will not tell the child that I intend to pay. I want them to learn… Read more »

Paula
Paula

This is a great topic and I can only share our family’s experience with 529 plans. They are market-based and my children lost about half of their investment during the economic downturn. We had two separate plans for each child, Hartford and American Fund. They are university students now and both have had to take out student loans, in order to get their degrees, after the 529 funds were depleted.

Ellen K.
Ellen K.

Good question. I think it would be best to ask the parents how they plan to save for college and let them know that you are willing to contribute. Some 529 plans require a relatively large initial deposit of several hundred to more than a thousand dollars (e.g., $3000 initial investment for Nevada’s well-rated Vanguard 529), which isn’t easy for many parents of young children. A little “nudge” can really help. My parents jump-started their grandchildren’s 529 plans with financial gifts at baptism. They have made additional contributions directly to the account through a “gift” link on the website. My… Read more »

slinky
slinky

I set up a 529 account for each of my nieces and nephew. I own the accounts, which gives then an advantage when it comes to the fafsa. An aunt’s savings don’t count! I contribute $100 to the account whenever a gift giving occasion comes up. Right now that’s birthdays and Christmas, but I’ll deposit money for graduations or other occasions as they come up. I may do some sort of matching when they get older. If they don’t use the money, I’ll transfer the account to their names and they can save it for their own children or give… Read more »

Lynn
Lynn

I am looking to set up a 529 for my 10mo old niece and have a few questions. 1) She lives in Michigan and I live in California. If I own the account, can I get tax benefits for my contributions? Or would I own the account in California, get the tax benefits, but then can she use the earnings in another state (IE: Michigan)? 2) Can you set up a 529 in any state (someone above mentioned Utah has low fee’s) but then can the money only be used for college in Utah, or can it be used wherever… Read more »

Steve
Steve

1) All 529’s have the federal tax “benefit” that withdrawals are tax free when used for education. Some states have further tax deductions and/or credits; generally the owner (i.e. you) has to both reside in the state and open an account with the state’s provider. However, California doesn’t have any extra tax benefits or credits, so this doesn’t apply to you.
2) The beneficiary (your niece) can attend college in any state.
3) It can be used for trade school.
Source: http://www.savingforcollege.com/articles/20100409-7-myths-and-realities-of-529-plans

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