My husband Carl and I married late and had a child in our 40s.
During our son’s first year, Carl and I sat down with a broker and opened a run-of-the-mill custodial college account (there were no 529s then) with $5,000.
I’m the one who would do most of our college investing, but at the time I wasn’t as knowledgeable about investing as I am now.
So I let the broker manage that one investment, which probably wasn’t the best idea.
For one thing, our broker kept half the amount in treasuries as the conservative part of the investment.
I realize now that I could have bought these myself and not paid him a commission.
For another, he made my son the owner of the account.
When the stock market tanked in 2008 and the account incurred a loss (a big loss), our son got the benefit on his tax return instead of us.
As a result of the loss, he was able to get a refund. Who knows whether we could have, instead?
I know now, after talking to Road2College’s founder, debbie Schwartz, that if 529’s had been available, there is no real impact on financial aid if the account is under the child or parent’s name, since 529 accounts are considered parental assets from a financial aid calculations standpoint.
And if there are losses in the account (like we had in our custodial account), no one can claim the loss since it’s a tax exempt account. But any money not held in a 529 plan that is held in a child’s name can have a significant impact on financial aid since 20% of a student’s assets is expected to be used towards their EFC (expected family contribution) as opposed to 5.64% of parents’ assets.
When the broker initially said the account should be in my son’s name, I’d like to think I researched it before I agreed. But instead I signed, without doing any research. As a new mother, I had new-baby brain and was focused on our new addition. I went back to work soon after he was born, too.
So while I’m the one with the MBA and more self-directed about investing than my husband, who prefers to use brokers, I didn’t research the matter well enough and believe we made a mistake with that fund.
First, Pat can’t be upset with herself about not investing in a type of plan that wasn’t available 24 years ago. The first 529 plans came into existence about 20 years ago and most of us in financial services knew nothing about them when they were introduced. In addition, 529 plans from yesteryear didn’t have some of the tax advantages of the current 529 plan (i.e., the IRS was contesting their tax exempt status at first).
In addition, paying for college was very different 20 years ago. I might have suggested that you put the money in the child’s name because I wasn’t focused on the implications of money in a child’s name for college at the time. My advice to new parents is to start immediately putting aside money for college. What typically happens is life comes up and 1 year goes by, then 2 years go by, and the next thing you know your child is entering kindergarten and you’re still putting it off. So the most important thing is to get started. The vehicle that you used to start to save for your son’s college may be subject to debate, but the most important thing is that you got started putting money away for your son’s education and for that you are to be congratulated.
My bias as a Certified Financial Planner®practitioner is for you to have talked to a CFP® professional sometime over the last 24 years who could have provided fresh eyes and an updated perspective on your investment. Depending on where your son went to college, you might have benefited from transferring the account balances into a custodial 529 account if the college used the FAFSA to determine aid, but that would have had little effect if the college used the CSS Profile. The 20% of a student’s assets is expected to be used towards their EFC (expected family contribution) as opposed to 5.64% of parents’ assets applies only to colleges that use the FAFSA and not the Profile.
Two other thoughts are that 1) you could have bought the Treasuries yourself. However, using a broker you may have gotten a more competitive rate than you could have gotten on your own. You also might have needed less money to invest than purchasing the Treasuries directly. Without more information, I can only speculate at this point. And 2) you should always keep your eyes on factors like commissions, management fees and fund expenses. Over a period like 24 years, the less you paid in those types of expenses, the more money you would have had for college expenses. Ultimately Pat was able to honor that mental commitment most new parents make to the tiny little bundle of joy in their arms, that we will do the best we can for them. If she did that, my best advice is not to second guess herself 24 years later.