College Savings

[Sugarfree]

Quick question on college savings. Does it make any sense to contribute $2000 to an ESA or just add the amount to what I am already contributing to my kids' 529s? I would have to gift the $2000 to my children for the ESA. My plan is to send them to private high school. I know I can use the ESA on high school tuition which makes it appealing.

[MedSchool Financial]

Hey Sugarfree,

 

This is a great question and I would say it does make sense as part of the future cost planning as you intend to send them to private high school as long as you research the criteria and fees associated with the ESA and where the funds are allocated, and who manages them.

Otherwise adding the funds to a 529 may incur penalties when highschool rolls around: I recently wrote an article on the use of 529 in future cost planning and the full article can be seen at  http://www.medschoolfinancial.com/529-plans-can-minimize-impact-educational-debt/

In it I mentioned the need to be cognizant of appropriate uses for this very reason, as this example was on student loans but applies to costs that are not eligible:

It is important to be aware that using 529 plans to pay back student loans can be costly and thus best to avoid if possible. As existing student loan payments do not qualify as an eligible college expense, using them for this purpose results in having to pay taxes on gains as well as a 10% federal penalty on those gains.

Additionally, as you sound like you would like to send her to a private high school, if you envision send her to a private college or university as well. I would check out https://www.privatecollege529.com/OFI529/ . They have a compilation of about 270 participating private colleges and universities.

Best regards,

Dr. J

[jfoxcpacfp]

Sugarfree wrote:

Quick question on college savings. Does it make any sense to contribute $2000 to an ESA or just add the amount to what I am already contributing to my kids’ 529s? I would have to gift the $2000 to my children for the ESA. My plan is to send them to private high school. I know I can use the ESA on high school tuition which makes it appealing.

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How old are your children? If they are fairly young (pre-school), I would recommend the ESA ($2k per child) to be used for high school. You can also use it for supplies, such as a computer (or whatever devices they will be using by then   - I can't even begin to imagine). Of course, how you invest will make a big difference in whether the ESA will be valuable by the time your children start high school. If they are only a few years away, I wouldn't recommend it because of the temptation to take short-term risks.

[The White Coat Investor]

Yes, if you want to burn it in high school than use an ESA.