Spend the 529 plan on undergraduate degree, or save for grad school?

Parents Forum
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DS21 is debating whether to apply to his dream school, U Chicago, ED1 or EA. If accepted (long shot, for sure), it would require his entire 529 plan plus an additional estimated $24k annual contribution from mom & dad (which we can afford), as well as whatever income we require him to scrap together. At the same time, as an expected NMF, there are several opportunities at strong public universities where he could get full tuition+. If he takes the scholarship money, he would have a nest egg in the 529 to help with grad school expenses (not to mention we could buy him a car instead of paying tuition). Applying EA to U Chicago is an even longer shot than ED1. Applying EA seems to mean he’ll have even less of a shot of having an offer to consider from U Chicago. Applying ED1 means we are making the decision to spend all his education dollars on undergrad (if accepted, of course). By the time he enters grad school, he will have two younger siblings in undergrad and I don’t anticipate that we will him with grad school expenses.

Grad school would likely be in genetics (MS or PhD), or possibly an MFA in creative writing. Maybe both, who knows?

What is the likelihood of a student getting grant money to cover grad school tuition and living expenses? I assume it varies by the subject area and degree being sought.

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Any PhD worth attending should be fully funded. Masters programs tend to be cash cows for the Unis, but some do offer limited merit aid and tuition can be offset by getting a ‘job’ as a TA or RA. (PhD students get first dibs, however)

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Don’t underestimate the benefit of your kid having money in the bank to support himself in the first years out of college. The penalty for using 529 money for that is not so great.

If he might pursue creative writing then the advantages of being able to spend more time writing rather than working in Starbucks to pay rent could be very significant. For my D who wants to pursue a career in dance, the advantage of having her college costs paid for by a merit scholarship, and keeping her 529 for later on, is enormous.

4

^ Good point.

I am a big fan of the U of C, and yes, any decent STEM PhD program would be paid for, but:

  1. At this point, none of us (including him) likely have much of a clue what he will want to do in life later on (even if he thinks he knows).
  2. Having that 529 money around is kind of like having an ace in the hole if ever he wants to pursue a career change (much better than a ton of debt to change careers). The U of C does have grad programs (not the College experience, but often the same great faculty)
  3. I know that for the business world, I would rather spend money on an M7+ MBA than Ivy/equivalent undergrad (HBS/GSB over HYPSMW if you're talking about the very tippy-top), and the top MBA would cost less than top undergrad (2 years vs. 4).

That said, I would lay all that out for him but still let him decide whether to take a shot at the College or not. See if he’s fine with taking one shot and saving up for the future if that shot doesn’t hit.

BTW, among full-ride NMS schools, I particularly like NCF and UT-Dallas.

5

You also might keep in mind that you can use 529 money for a sibling (if there are any). I believe that it is also okay to use a 529 for other close relatives.

I think that it depends on what alternatives are available. It sounds to me as if you are very likely to have very good affordable alternatives. If this is the case I would be tempted to keep some 529 money for graduate school. As mentioned above PhD’s are usually fully funded. Master’s degrees, MDs, DVMs, and law degrees I think usually are not.

Another thing to keep in mind is that the highest ranked school that a student can get accepted to is not necessarily the best fit.

I see that Solomon did have kids. Perhaps even he was not able to know what the best choice was between cost of college, the ranking of a college, versus best fit.

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Without a strong hook, UChicago EA is a pipe dream for most students. If he has a strong interest in going to Chicago, then binding ED1 will be his best shot.

A UChicago degree will definitely open doors for him. Doing a masters in creative writing won’t really have a strong ROI. A masters degree in a STEM field, on the other hand, will. If he gets accepted into a decent PhD program, most of them will have good grants. Also note that in many STEM fields, a masters degree is very highly desirable.

You mentioned DS21 - he is really 21 years old as a high school senior? Has he considered schools for non-traditional students?

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DS21 means he graduates from HS in 2021. ?

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First off.
Keep the money and don’t buy him a car. Just doesn’t need one in Chicago.

Secondly, if he has a free ride or school mostly paid for elsewhere, do that and save for your other kids /graduate school. If he doesn’t have a clear path of what he wants to do UChicago is just an expensive way to find out.

Don’t get me wrong. Know a few kids there now and it’s an amazing school. If this is where he wants to go 100 % then go for it. As stated most graduate PhD programs should be fully funded but… Who knows what will happen in the future especially if the virus raises its ugly head again. I know some kids lost funding for this year.

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^ Unless the monetary difference just isn’t a big deal to you (I would say that only if I had 8 figures or more net worth), it’s hard to justify spending $300K+ for any undergrad degree when that money could be spent or saved (what you have in the 529 would likely grow to a sum he could almost retire on by 60 if you invest in equity, even with the penalty).
On the other hand, spending that money on someone else like a sibling would be a terrible message to send for earning a full-ride scholarship through the PSAT (unless he is OK with essentially gifting away what is his).

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I would take the shot at UChicago. If you were talking loans it would be a different story.

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Thank you to all for your thoughtful responses. I’ll continue the conversation with a few follow ups.

First, the 529s were funded, and are owned, by his grandparents (all 3 of our kids have one with similar funding levels). We are very blessed to have such generous parents, and to have had excellent returns over the investment period. (As an aside, I know distributions can affect financial aid and we will plan around that as needed.) I believe the expectation by the grandparents is that the funds are to be used for his education. If not used due to scholarship and/or grant money, my expectation is that we would let the money grow for his own kids’ education, when that day comes. I hadn’t considered it as a potential retirement or rainy day fund for him, but it’s an interesting idea. If he doesn’t use the 529 funds, we’ll work with a financial planner to figure out how to change the owner of the account since my parents do not intend to retain the money for themselves in any event.

The idea of buying him a car is only if he takes a scholarship at a state school and we don’t have any out of pocket expenses for him. If he goes to Chicago (or any other school with an out of pocket over $35k/year), there would be no car. My parents bribed me in the same way to take a scholarship and forgo the T20 school. They came out way ahead in that deal, but so did I.

He isn’t chasing prestige. U Chicago is a certain type of school that has captured his imagination. It’s the academics first, quirky/nerdy culture that he loves the most. The thought of being surrounded by similarly intellectual, bright, curious minds is what excites him more than anything, and I know that’s the environment in which he thrives. He won’t be applying to any Ivy League schools. He may apply to Rice (likely) or WashU (exploring). I think the other 9 schools on his current list are mostly safeties in terms of admission, and then the conversation would turn to cost/benefit based on any scholarship offers. Kenyon and Wooster are two LACs that are on his list and, if granted scholarship, might be a good middle ground for him. My fear is he’ll get lost in the crowd at a large public uni. Kentucky and UoSC seem to have good honors programs and both have generous awards for NMF. TAMU covers tuition for NMF but might not be the best fit. (UTD is too close to home and doesn’t have an English major; I’ve mentioned UCF to him but that idea hasn’t stuck yet.)

Underlying the entire debate is whether an undergraduate degree is ever worth this kind of money. But more than anything in the world, I want him to be happy, to thrive, and to have the best opportunities we can afford to provide.

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I think UTD has the nerdy vibe, but my daughter chose UCF as her NMF option. I think UTD will be an awesome school in a few years but she didn’t want to be there while they finish all the construction. We were very late to the game and didn’t really find out about all the NM scholarships options available. One thing we missed out on, in terms of timing, was the various scholarships available for merit from family foundations (Stamps, Jefferson Scholars, McDermott, etc) and university groups. Many of those require scholarship applications in Sept/Oct as well as university admission apps that are EA/ED.

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Definitely look in to NCF, which would be a full-ride for NMS with Benacquisto. It’s essentially the (public) Reed of FL. Like Reed (and Swarthmore and the old U of C), it sends a ton of kids to grad school (80% of grads eventually get a grad degree).

Like most publics, they have to deal with the vagaries of politics and funding, however.

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BTW, UTD has a literature major.

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We have had the “save it for grad school?” conversation several times. Remember that grad school isn’t a given. I’d also consider the alternative in which it is paid out with the penalty.

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@PurpleTitan, I thought you meant UCF, but I understand you are referring to New College of Florida? And UTD has a literature major? I had trouble even finding the English department last time I looked at their website. But in any case, 20 minutes from home isn’t going to work. He does need to spread his wings. Within Literature, he’s specifically looking for creative writing, which seems to be more of a focus at some schools than others.

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That’s right. New College of Florida. They’re on a beach. Also very tiny. No grades. They have Oxbridge-style tutorials. They’re unique in many ways.

Even without the Benacquisto, their automatic OOS scholarship knocks costs down to similar to an in-state public.

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My undergrad experience was life-altering. My grad degree (from a top 5 program) has opened doors for sure and paid out very quickly financially (I wasn’t earning a lot of money when i quit my job to go to Business School, and the differential between an MBA and a BA in those days was really huge). But I barely remember the names of my professors, have stayed in touch with exactly one person from my program (by accident- our kids went to the same high school), and other than the financial upside (which was very significant) didn’t leave much of a mark on me as a person.

So I’m a big fan in investing in the undergrad experience IF you can afford it (sounds like you can) and IF you have a kid who is interested in the life of the mind and all that jazz.

Your kid wants to become a middle school gym teacher and doesn’t care if he ever reads another book? Save your money. Your kid wants her ticket punched to become a CPA and focus on tax strategy? Save your money. A kid like yours? It’s at least worth the discussion, an application to Chicago, and an exploration of the two dozen or so colleges that could give him a Chicago like experience.

I have seen in the last 40 plus years since graduating from undergrad that there is ALWAYS a way to figure out grad school. Sometimes it involves debt (mine did, my spouse’s did-- on top of big undergrad loans). Sometimes it means working full time and taking one class at a time (many of my colleagues-- the workload is significant, but the employer often pays 100% for the degree). Sometimes it means waiting- working for a few more years than you anticipated but building up that nest egg. And sometimes it means “trading down”-- a nephew who turned down law school at one of the top 3 for another good (top 14, but not one of the top 3) for a full scholarship. People thought he was crazy, but it worked. Paid off his undergrad loans very quickly once he started working, and had no loans from grad school. Trading down was a great deal for him.

So unless it’s med school which means HUGE debt-- life-altering debt-- there’s usually a way to finance grad school. And I have seen a dozen instances in the last few years of kids who did not get funding for a PhD and are now struggling BIG TIME in the job market. If you get into grad school for a doctorate and they won’t fund you, it is the universe’s way of telling you “pick something else”.

Your son sounds really special!

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@Culbreath : We’re having the exact same conversation in our house.

My D21 is an almost-certain NMF (has the SI, confirming SAT score, grades, etc) and while we are also fortunate enough to have very generously funded 529s, I don’t think any undergrad school is worth over $300,000, at least not for us. We are ‘full pay’ at even the most generous schools but not true 1%-ers, so if she goes to a really pricey undergrad, there wouldn’t be any funding left for her for grad school.

As I have posted elsewhere, I attended an Ivy for undergrad before attending med school, so I recognize that I have a particularly biased view. My Ivy undergrad didn’t help me one whit to get into med school, and medical school is god-awfully expensive. (I recognize that an Ivy or Ivy-equivalent undergrad may be worth more for those planning a career such as IB, in which school prestige and connections really do matter.)

And ‘what about funded graduate programs’, as people always say. Well, I have several friends who are subsidizing their adult kids in supposedly ‘funded’ grad programs, since the $ isn’t really enough to cover the true cost of living in many parts of the country. And if anything I bet that grad funding will drop further as Universities will struggle for years with massive budget deficits as a result of COVID-19.

Finally, for those who don’t know, 529 funds can be withdrawn penalty-free (although not tax-free) in the amount equal to any merit scholarship accepted. My daughter knows that it’s HER money, so if she chooses a less-expensive school, she can keep all her leftover 529 money for grad school, or to save it for her future kids, or for non-educational expenses up to the sum total of any merit scholarship she received. She’s already pretty much over pining for the high-prestige fancy name schools (including my alma mater) now that she really gets that.

Just imagine – a mid-20 something who’s finished grad school, is completely debt-free, and has money left over for a down payment on a house or to start a business, etc. I think THAT would be the best gift I could give to my future young adult kids.

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In terms of how life-altering a school is, I would say it depends on the person and the program. For some, it’s HS. For some, undergrad. For some, grad school. Heck, for some, it’s their 2-year CC.

BTW, in terms of intellectual quirkiness, I would put the U of C, Swarthmore, Reed, and NCF in the same category but they differ in costs and selectivity. LACs that give out some merit money like Oberlin and Kenyon may be worth considering too.