I have a cousin with two elementary-school-age children. He and his wife are doing very well financially. Not investment-banker well, but well enough to own a home and take several nice vacations a year comfortably.
I raised the subject of college saving with him, hoping to impart lessons learned. I encouraged him to open 529s. He said they are saving, but not in 529s because he expects his children to get “scholarships,” and if the funds are in 529s then the funds won’t be fungible. Okay dokey.
His logic is wrong. If kids get scholarships that leave unused funds in 529s, there’s an exception to the qualified educational expense rule. You pay taxes on the earnings, but no penalty. So, no different from saving in other financial vehicles. That’s why I was encouraging him to save in a 529 – if they get “scholarships,” no harm, no foul.