It's Sunday morning and a rather warm morning here Michigan.  No sun yet but today I'm heading over to my parents house to celebrate my dad's birthday!  He's 71 today.  My mom is making spaghetti and my brother and I are big fans of home made spaghetti.  So I'm in a really good mood today but I'm going to step up on my soap box because I saw this article

College 529 is not always the answer to fund everyone's college education.

Yet here is a banker telling parents to go get a 529 plan. He even says the grandparents should go get a college 529 because it does not count in the financial aid formula. This banker is partially correct...but then again the bankers were the reason we are in this economic situation.

So I'll give you the pros and cons of the college 529.

First let's look at the pros.

• College 529 plans are a way a family can save tax advantaged for college.  It's similar to putting money in your 401k.  The government does not count the money you put into the plan as income so you don't pay taxes on it.  You can then pull the money out for college and use it to pay the bill.  Pretty cool!
• Grand parents can start college 529 plans of their own and it will not count against a family for aid....maybe!

Now let's look at the cons.

• Banks make money on these plans.  That's probably why this banker was talking to parents about them.  The problem is these college 529 plans are not guaranteed.  THEY CAN LOOSE MONEY.  Yes that's right, I've seen families who have lost tens of thousands of dollars in their college 529 plans just as their kids are ready to go to school.  This is not a cool but most of these bankers don't tell their clients this.  I always use the analogy of your retirement fund.  When your 5 years from retirement are you going to risk ANY of your principle or will you have moved your money into more safe investments. Right, more safe investments.  The bankers, however, are recommending to go for growth in these college 529 plans even when kids are less than 5 years from needing the money.
• Grand parents can use the plan as well without it technically affecting FAFSA aid.  However, if a university knows you are getting money from an outside source, they will lower the aid they give your family.  You see the colleges have a formula.  You can find out this formula by  downloading my free FAFSA calculator.  That formula will give you a dollar EFC contribution that will have to come from your family.  The college views this as your responsibility.  If you in fact get money from a grandparent or even an outside scholarship they view this not to lower your contribution but to lower what they have to give you!  It seems bassackwards I know but this is our system.
• Finally, if a parent has saved a lot of money in a college 529, it will affect them in the financial aid formula.  It's considered an asset of the parent so it counts.  The college will assess it at 12%.  So if you have $100,000 saved, they will say you can use $12,000 of that for the current school year.

Okay, i've got that off my chest!!  But the next time a banker gives you advice just think of the economic situation we are in and push him/her for the truth. The Bank of New Canaan hosted a seminar on Tuesday, Nov. 3, on "How to Pay for College," presented by financial advisor Charles Wareham of LPL Financial of Hartford.