What does it take to go to college: An update on DH’s relatives

One of the things known by economists is that a lot of people have some college, but only ~30% of people in the US have an actual college degree from a four year school.  People go to college or start college or take classes at the local community college.  Most don’t finish a full four years.  Many don’t finish any sort of terminal degree (like an associates or vocational degree).  There’s some controversy in economics right now about whether starting and not finishing is worse than not starting at all– the answer seems to be complicated.  Some college does increase earnings even if there’s not a degree… probably causally, but not as much as finishing, and the disruption that going to school can do to finances in terms of loans and earnings potential in terms of not working is real.  It’s hard to say if it’s worth it.

DH has a relative with 5 kids.  We have tried to get all 5 to get a degree.

The oldest dropped out after having a baby a year and a half into a two year degree.

The second, who was the only one who was state flagship eligible (close to a 4.0, high SAT scores, a full year of dual credit from the high school under her belt) got pregnant at 17 and again at 19 and college was out.  She’s currently married, living in another state, and the family breadwinner (and had baby #3 a couple weeks ago).

The third is legally blind and has not started any education yet at 21, though this year his friends have been taking the train with him to places with public transportation and it’s figuratively opening his eyes to worlds where he doesn’t have to be driven everywhere, which is helping with his depression.  We still have some hope that he’ll go to college.  He has high grades and reasonable SAT scores — maybe not flagship eligible (though with an essay he might be) but should get into any of the regional schools without having to write an essay.

The fourth is in the middle of her second year at community college.  Her SAT score was too low to be able to go to their closest state schools– she just needed 10 more points to make their minimum cutoff.  There was a kerfuffle with one of her required math classes last semester and the school gave everyone their money back and struck the class from their transcripts, but now she’s behind on credit hours.  We asked about transferring to a 4-year school as had been her initial plan, but she says she wants to do a sketchy sounding program at a private school that would enable her to get all of her classes at the local community college but call it a four year degree from their school.  She has some friends who did this 10 years ago and are teachers at the local elementary.  I wonder how much this will cost compared to finishing at a state school.  (Her father wonders if this program still exists.)

DH’s relative had told us a couple years ago that it wasn’t worth trying to do anything with the fifth.  He wasn’t sure he wanted to even graduate high school and ran with a bad crowd and was flirting with getting in trouble with the law.  But a couple months ago he went to a presentation at school that clearly laid out how much people without high school diplomas make compared to those with and to those with bachelors degrees.  He decided then and there that he was going to be staying in school.  DH and I naturally pounced on this.  Unfortunately, we don’t know what his GPA is– he thinks somewhere in the Bs since he gets mostly As and Bs on his report cards (but who knows), and his SAT score is pretty low.  Fortunately for him, one of the state schools nearby no longer requires the SAT and if he does have the GPA he thinks he has, he should get in.

So this break, we dragged him over to our in-law’s house and pulled out my laptop and sat there while he applied to the two closest 4-year colleges.  Then we paid for his applications.  He talked about how he decided on a business major because everyone said engineering was too hard but there are still jobs in business.  He talked about the dorms.  He seemed excited and to have done a lot of research about the school closest to them.  We talked a little about the second closest school as well.  Then we printed off the checklist for what he needs to do with his counselor after school gets back in session to complete his application in time to be eligible for financial aid.  (We will be sure to check on that with his dad as well.)

It’s especially important for him to go to one of these schools instead of the local CC like his siblings because he’s been being preyed on by a married woman more than 10 years older than him.  There has been some drama there and the police somewhat got involved but won’t prosecute etc.  But removing him from the situation will be a good thing.  We pretended we knew nothing about this situation and just focused on the $$ and jobs and learning etc.

I hope he gets in.  I hope he completes a degree.  I hope he drags his brother to school with him.

I don’t know if going to a 4 year school is better than starting at a 2-year in terms of completing (there’s a lot of selection into who does that so the correlation is that it’s better but we don’t really know).  I know his siblings have gotten horrible homesickness when they’ve been away from home even for a week (the second is the only one who has moved out of the house!).  And he didn’t want to apply to any of the farther away schools, even though we’re told that he’s been threatening to move out once he turns 18.  I hope he pays attention to his schoolwork and doesn’t have to drop out.  I hope that the kid his dad thought least likely to start a four year degree finishes one (not first– I’m still hoping for kid #4 to complete and she has a 2 year start on him).

But other than paying for it and these periodic nudges, I’m not sure there’s much we can do.  As my MIL reminded us, they’re not our kids.  We can only do so much.

Should I put lump sums in the 529 instead of dollar cost averaging?

One of the reasons this blog seems to have become a spendapalooza is that there’s really not any obvious place for extra money to go.

But there actually is one place for extra money to go– the kids’ 529 plans.  (A 529 plan is an awesome way to save for college or vocational school such that the earnings are tax-free.  But, it’s a good idea to max out your retirement before setting money aside in 529 plans because retirement accounts aren’t included in college financial aid calculations and you can take out loans for college but you can’t for retirement.)

In the past, I’ve always said, “and the kids’ 529s are on track to pay for the school of their choice [by the time the graduate college].”  What I mean by that is that we’ve been putting away $750/month in the accounts, even in the summers when I don’t get paid.  (It used to be $500/month, but we increased it when we paid off the mortgage and stopped paying for daycare.)  But we haven’t *actually* put enough money to be able to cash flow the remainder of the cost of (a four-year private) college yet.  We’re just on track to.

Over the next 4 years before DC1 starts college, $750/mo works out to $36,000 (actually a little less than that since it’s November, but it’s an estimate).  Over the next 8 years before DC1 ends college, it would be $72,000.  (That’s a LOT of money!)

We could just put in $36K (instead of $9,000) over the course of this year and then either start contributing again once we know where DC1 is going to college or not based on the cost of hir chosen school.  (Given hir struggles in English, it is likely that HMC is out, but also out with HMC is its insanely high $72K/year tuition.  I told DC1 we could get hir a unicycle anyway.)

Doing it this way loses some dollar-cost averaging benefits, but it gains the benefits of a longer period of untaxed earnings.

There are some wrinkles to doing BIG 529 account transfers.

The first is that even though the account is a custody account and doesn’t actually belong to the child, it still is subject to the annual gift tax.  For 2019, the amount that can be given annually without tax is $15,000.  Each parent can give that amount, so a married couple can give $30,000 in one year.  $36K is more than $30K, but there’s a loophole with the 529.

This wrinkle has its own wrinkle:  An individual or couple can give a larger lump sum, so long as the total given in that five year period is still less than 5 times the annual exclusion.  So DH and I *could* give $150K this year so long as we didn’t contribute again for another 5 years.  (Of course, that’s a moot point because we don’t actually *have* $150K to give, but you get the idea.)  That means when DC1 actually gets into college, we should be able to continue to contribute to hir 529 without penalty.

So our plan is to do a lump sum of $36K this month to DC1’s account (this gets rid of all our excess cash and digs pretty deep into our emergency fund, but the emergency fund doesn’t actually have to be full until May since we can cash flow most emergencies when we’re both being paid).  Then we will stop contributions to hir account entirely.  We will continue as normal with DC2’s account (contributing $750/month) until we build up excess cash and I start to feel like forcing DH to buy all the Apple products again.  At that point we will re-evaluate and decide whether we want to do a lump sum to DC2’s account or if we just want to increase the monthly contribution.  I’m sure I will post about what we end up doing.

In ~4 years when we know where DC1 is going to college, then we’ll decide whether or not to start contributing to that 529 plan again, and we will have a better idea about how much DC2’s account can bear without going over.

Grumpy Nation, I don’t have a good question for this post.

Honors English and ponderings about the importance of AP tests

At the beginning of the year, DC1 was signed up for all the hardest classes zie could be signed up for as a Freshman.  AP World History instead of Human Geography.  Algebra II pre-AP honors.  Biology pre-AP honors.  JV Orchestra.  Honors Computer Programming… And Pre-AP honors English.

This English class quickly had a detrimental effect on our entire family.  After four years of zero homework (other than the Year of Crafts) and taking half a year to read a simple YA novel in middle-school English, zie was suddenly getting nightly essays, heavy reading assignments, and lots of things zie had never been trained how to do.  Instructions were vague and confusing.  Grades were low and seemed capricious.  English was taking all of DC1’s time and all of our time too trying to figure out what the teacher wanted.  (This is in heavy contrast to AP History in which the teacher is scaffolding essays and giving clear instructions about what she is looking for in every assignment– there’s a lot of work but it doesn’t seem so random.)  One of my work friends had a kid in AP English I with the same teacher the previous year and said it never got any better in terms of time, though hir kid did eventually figure out how to earn As in the class.  She spent all last year complaining about the class and is not really sure what was gotten out of it (other than the ability to do assignments quickly at the last minute and to use tiny words and very simple sentences so as not to get points taken off for spelling/grammar/usage).  So it’s not DC1!

The final straw was an essay on why DC1 wanted to take English Pre-AP.   What zie came up with was that zie wanted to get into a good college and taking an AP English class and getting a high grade on the AP English tests would help.  And… as an educator, I kind of think that’s a piss-poor reason to be spending all this time in such a terrible class.  In fact, if it lowers DC1’s grades in other classes more related to hir interests, or keeps hir from inventing something or exploring extra-curriculars or even just getting enough sleep, then it might hinder DC1 from getting into a good college.

So, we found out that there was a second level of English class that is still honors English, so still on the 5 point scale.  Sadly, it had had fewer assignments and they had all been easy 100s (ex. sign up for turnitin.com), but DC1’s low grades transferred over instead of allowing hir to do those assignments for credit, AND the weighting was different so DC1’s grades dropped even lower. But it’s been slowly moving up, though not to an A.  This English class also seems to be equally capricious on subjective things and there have been several quiz questions in which DC1 picked the correct multiple choice or T/F question but the teacher said it was incorrect even when DC1 backed it up hir answer with textual evidence.  So DC1 is still getting a B, though the B is now higher than it was in the previous class (and hir grade is literally 10 percentage points higher than the class average, which is a C).  I have resigned myself to the more and more likely possibility of not having to pay for MIT or Harvey Mudd.  DH’s alma mater and my sister’s alma mater both have very good computer science/engineering programs and if DC1 keeps up As in all hir other classes, never getting an A in English might still be ok.

Although the grading is still capricious, the instruction is much better.  They’re taught things before they’re asked to do them in an assignment.  They spend a week on things that the other class would do in a day before moving on to something completely different, so there’s time to review and reflect and apply feedback.  There’s also more choice in assignments and MUCH more literature written by people who aren’t dead white dudes, and the literature for the non-pre-AP class has been updated since 1970 (I’m looking at you A Separate Peace).  They’re still cramming what seems like all of Midwestern 7th and 8th grade English into a single semester along with Freshman English (minus the two Shakespeare plays– they only do Romeo and Juliet this year, which we also did as Freshmen), but it’s not at quite such an insane pace.

My friend says English Pre-AP II is almost but not quite as bad as I, so we’re not sure if we’re going to have DC1 switch back in the future.  Non-Pre-AP English II sounds pretty good– they do a big section on modern World Literature that I think could broaden DC1’s horizons a lot.  It is true that getting 3s or higher on the English AP exams would allow DC1 to waive English requirements if zie went to a state school, but they’re pretty useless most of the places zie is looking at applying.  Or if they are useful, zie would need 5s for them to help at all.  I did take one of the AP English exams despite not having AP English (it was an accident– I’d meant to cancel the exam for a refund but somehow didn’t when I cancelled the other AP tests that the college I was going to didn’t accept), and somehow managed to get a 4 even though I guessed most of the multiple choice answers since they were full of terminology I had never heard before in my life.  (This is what I was supposed to be learning all those years, I thought.)

In the mean time, we will keep trusting the AP history classes to teach DC1 how to write.  We’ve heard amazing things about AP US History which zie will be taking next year.  I have to say, I learned a lot more about how to write clear and concise essays in my history classes than I ever did in an English class.  Probably because I never had a deconstructionist history teacher.

Did you take AP exams?  Do you think they’re useful?

Ask the grumpies: How much to save for different long-term priorities

Ali asks:

How much to save for college vs retirement vs other savings, etc.  Basically, tell me what to do.

The vast majority of our readers should max out their retirement savings prior to saving for kids’ college.  The reason for this is that you can get loans for college, but you can’t get loans for retirement AND US colleges don’t include retirement savings in their financial aid calculations.   That means every dollar that you hide in retirement is a dollar the universities don’t take into account for their financial aid calculations.  If worse comes to worse (ex. student loan rates are high), you can contribute less to retirement while the kids are in college (because you already have so much saved up) and cashflow some of those college expenses with what you would have contributed to retirement.

Disclaimer:  This is not what we did.  Originally I paid a lot of attention to the “recommended” savings percentages in various books and made sure we were putting away 20% of our income for retirement (recommended is 10-20%, we were on the “went to graduate school and need to save extra to make up for low savings years” track).  Then some extra money went into 529s (tax advantaged college saving) for our kids and then the stock market went crazy in a bad way (remember 2008?) and we started prepaying our mortgage as well.  It wasn’t until later that we started contributing to a 457 plan, even though that would have made more sense than contributing to the 529s.

The following assumes you have no debt other than a low interest mortgage.

  1. Save an emergency fund that will get you through a missing paycheck or late reimbursement or small emergency.
  2. Put money into retirement up to any employer match.
  3. Save an emergency fund that will get you through a reasonable job loss or other large expense.  (A Roth IRA is a good place to stash this when you’re just starting out since you can tap the principal without penalty and it can go to retirement if you don’t have a major emergency.)
  4. Save 10-20% of your gross income for retirement (or the max if are a high earner).  Play with retirement calculators to get more specific on the percent.
  5. Start putting money away in a 529 plan based on how much you’re planning to contribute and what schools your kid is considering.  We have more details here, and also more generally with other 529 posts.  The short is you’ll want to play with some college savings calculators AND the financial aid calculators at individual schools that you’re looking at.  (You might want to pay down your house at this step instead because colleges don’t use most housing wealth in their calculations for financial aid, but play with those different assumptions with the calculators.)

I DO think it is important to have a 529 for relatives to put monetary gifts in if you have relatives who are likely to think that’s a good idea, and don’t just have one for the oldest boy even though the money is fungible across kids.  That’s not how gifts work– people want to give to both kids, not just one.

So… I guess that’s the basic advice.  There are exceptions to the above– people who have access to a backdoor 401k at work but don’t have high incomes might never be able to max out their retirement, for example.

Grumpy Nation:  What advice would you give?  How do you decide how much to save where?

Ask the grumpies: Retirement vs. college savings

Alice asks:

How do you decide at what income level to begin funding a 529? I know the mantra of ‘max out tax-advantaged retirement accounts first’, but that is a lot of money to put away (~30% of income) before starting any college savings…I assume we’ll be in the ‘squeezed’ middle on college, with too much income for aid but not enough to pay full freight outright. It seems that at least some dedicated college savings are worthwhile after 15-20% retirement savings, even if not optimal as far as taxes go…We’re assuming private or out-of-state public are in the cards, and want to avoid student debt. I’ve heard the ‘Roth contributions can be used’ chorus, but that won’t go far with current tuition rates.

TBH, if I had to do it all over again, I would max out retirement first instead of regularly contributing to 529s. Because of financial aid.  You can read about how our minds have changed on this topic via this cut of our archives, though I’m not sure we ever spelled out the history in one concise post.  (For an alternate cut, here’s the college tag.)

If you’d asked us this question when we started the blog, we’d have told you to make sure you were (getting any employer matches and) saving 15% of your income for retirement (more if you need catch-up savings– we’d have recommended you play with online retirement calculators to see whether or not you were on track) and then put a regular amount away for college with every paycheck.  We’d have told stories of how we knew people whose parents had spared no luxury (cds, cars, clothes, regular vacations to Hawaii, etc.) but then the kids couldn’t go to the fancy college they’d gotten into because their parents made too much money for decent financial aid and they had nothing saved.  And that’s not terrible advice– make sure you’re on track for retirement and then put money away for college to give your kids more options.  I don’t completely regret having taken it when the kids were younger.  Their college savings have grown at a nice clip, and it’s likely both will be on track to go to the private schools of their choice even without financial aid.

These days we’re much more attuned to the importance of College Financial Aid (Forbes Magazine has a great series on the topic– click here for the latest updates).  You can ignore this concern if you prefer to think of tuition as a donation to the school (which for us depends on the school… I’m always irritated at the fundraising letters we get from DH’s graduate alma mater given their endowment).  Will you be squeezed?  It turns out there are calculators for that, and those calculators depend a lot on how much money you have that can be tapped for college.  Formalized retirement savings (even the Roth savings) do not count for financial aid.  This Forbes article from 2017 is a little out of date, but should give you a good idea of how your income translates into financial aid (or not) for different types of schools.

To get an even better idea, you should pick a set of colleges that you could see your kid potentially attending, and spin through their financial aid calculators.  These individual aid calculators have become quite sophisticated and you can see how different colleges will treat your different levels of assets vs. income etc.  So you can run the counterfactuals to see that, for example, if my DH loses his job and makes no income, that won’t at all give us any more aid at Harvey Mudd (which is stingy for high-income folks and extremely expensive) or our local state school (which we could cash-flow), but would make a big difference at Harvard (which is generous up the income distribution).  (Here’s us doing those exercises and contemplating how much we would need to save for a set of private schools .  I just spun through the super simple Harvard calculator and for spendthrift high income folks with no savings, your kids can still get a scholarship at a joint parental income of 260K!  You can play with how hiding assets in retirement changes aid compared to having to report them like with a 529.  Note that Harvard is a bit of an outlier both in terms of generosity and how easy it is to use their calculator.)

Loans for college are not a terrible idea, especially if you can get subsidized loans.  You can put money away for retirement now and then take out loans for college that you can repay more quickly by contributing less to retirement later when the contributions will no longer count for college.  If you’re maxing out your retirement options today at 30%, then you can drop down to the match later when your children need the money.

Many people feel uncomfortable using money for purposes that they have not initially dedicated that money to.  For this set of people, putting money in a 529 is the only way to guarantee that a child will be able to go to something other than the cheapest college option.  If this feeling is acknowledged, however, and planned for in advance, I think it can be gotten around.  You can decide now what money you want to earmark now for college, put that in retirement funds instead, then take out loans and repay them later for the amount in question by putting less in retirement later and cash-flowing.

In terms of using a Roth to save for college– there are a couple of wrinkles to doing that.  Drawing money out while your child is still in school can decrease your financial aid eligibility because some of that hidden money turns into income.   Here’s another post with more details on the pros and cons of Roth IRAs for college savings.  Note that these cons can be gotten around by delaying when you use the Roth until the child is close to graduation, assuming that doing so will not affect a younger child’s financial aid eligibility.  (And the principal rather than the earnings can be withdrawn after college is complete for no penalty.)

College is not cheap, and it may be worth saving 30% or more of your income now knowing that some portion of that is being saved for college (in terms of needing to save less than 15% of your income later) even if you’re not earmarking it.

Now, I noted that today we regret not having put the $500/month/kid in our kids’ 529s (not to mention mortgage pre-payments) in our retirement options instead.  The reason for that is that we are now high income and we are maxing out our retirement options (DH also has much less space to save than he did when he was working for the university).  Any money we save over that amount cannot be hidden from colleges.  There are a number of pricey schools out there that we will not get financial aid at should DC1 get in and decide zie wants to attend.  (DC2 may be better off in terms of financial aid since DC1’s tuition and living expenses will do a good job of eating all of those assets.)  We’ve paid off our house, have replaced DH’s car, will replace mine sometime in the next two years (Financial aid starts counting 2 years before college starts), and are renovating our kitchen, but even after all of that we will have assets leftover that could have been hidden in retirement accounts.  We could in theory buy a bigger house or I could get something other than a sensible car, but I guess I’d rather donate tuition to a university than make those changes.  (#richpeopleproblems)  (Note that if our income goes up more, then we can ignore all of this because we won’t be eligible at any asset-level, but if DH loses his job and our income is halved, then all of this becomes extremely important.)  Here’s our most recent recommendation of what order to save for multiple big financial goals, and here’s our recommendation of what vehicles to use.  Finally, if you haven’t opened up a 529, here’s our thoughts on which one to pick.

Grumpy Nation, what are your experiences with saving for college?

 

Ask the grumpies: Things to help a kid get into the college of hir choice

Sandy L. asks

If a kid has his heart set on a college, what things could help them get in besides academics. For example, MIT has these science camps for kids that are expensive but could they also help with admissions later on?

We truly don’t know.  Take everything we say with a HUGE grain of salt.  I mean, we know people who got into Stanford but not Harvard and vice versa.  It really seems to be a crapshoot at a certain level, even if you’re your state’s math champion and have straight As, etc.  I don’t actually think it’s that hard to get into MIT if your grades and testscores are good and you have a true love of math and science compared to getting into Harvard (at least, I know a lot of people who got into MIT as undergrads who didn’t get into any ivies to which they applied).  It’s more difficult than getting into your state’s flagship, but there’s a lot less competition for those slots.  So I wouldn’t think that the science camps would be necessary.  Whether or not they help, I don’t know.

Back when it was called the Westinghouse science award, it helped to have won the Regeneron Science Talent Search.

It helps to have top scores and grades at a known-name school and to have come from nothing.  If you’re first gen, low income, and have fought your way to the top, that makes it easier for colleges to decide.  Particularly if you’re a scholarship kid at Eaton or at one of the state public boarding schools for GT kids.

One of my colleagues’ kids got in to our (state flagship) school (for engineering/CS) late admissions despite being low on grades and testscores because he did an after school club with a professor in the computer science department and did a very good job at said club, and the professor was able to pull strings.  I don’t know how universal that is– certainly I have never had any contact with undergraduate admissions– but some professors at some schools might have some pull.

If Caltech has the same application it had 15 years ago, you’re more likely to get in if you take it seriously.  Fill out that page that says, “put something interesting here” with something interesting!  I filled the entire thing in very tiny writing with math jokes.  My ex-boyfriend drew a comic showing the path of his life complete with adorable stick figures interacting with the line representing the timeline of his life.  I forget what my sister put in there but I’m sure it was interesting and entertaining.  We all got in.

On the application, if there’s a place for it, have an interesting story to tell that illustrates your interests and your academic path.  One of my college ex-boyfriends got in everywhere (he picked our SLAC over Stanford) partly because his admissions essay was a delightful story about how he built a trebuchet.  My sister got in everywhere she applied (including ivies) probably partly because she talked about how physics informed her dancing.  It probably also helps to be focused and to pretend you know what you’re going to do with your life and why and you have a path mapped out to get there.  Extra points if you are unusual– a young woman in an award winning Poms squad and an all-girls math team who has taken as much math and hard science as she can who really wants to design more energy efficient engines.  (Again, that was my sister.)

Many schools will make their final waitlist/admit decisions for people on that margin based on who has visited the campus/had an alumni interview.  I think this is unfair to low income kids who CAN’T just hop on a plane or spend two weeks in the summer driving up and down the East Coast from the Midwest, but it’s policy at many schools.

Applying early action, particularly the kind where you swear to go if you get in helps, though it decreases your financial aid offer many places.

Playing (and being really good at) the right instrument/sport can help.  But it is hard to predict what the school of your choice will need the year you’re applying.  (And this probably doesn’t matter at MIT, but I don’t actually know.)

Not needing financial aid can help at some schools.  I don’t know if MIT is one of them, but MIT is notoriously stingy when it comes to financial aid.  (Harvard is exceedingly generous!)

Being a member of an Olympic team or the child of a celebrity or owning your own profitable business or app or nonprofit that you started as a teen can make you more attractive.   So can having published a scholarly paper in an academic journal.  Or having a patent.  Or a parent who gives a multi-million dollar donation.

Passing the AMC 10 or 12 and doing well on the AIME can help.  Taking college classes and doing well in them doesn’t hurt (though as this becomes more common, it may no longer be as strong a signal as it once was).

We’re told that leadership experience, state and national awards, and volunteering can help, but I’m skeptical.  I don’t know if these are necessary, but they’re definitely not sufficient.  There’s just too many people each year who have these things.

Some people swear by college coaches.  I don’t know how to find a good one or what kind of value they add to someone who is already doing well.

I don’t know what we’re going to encourage our kids to do.  This is more timely for DC1 who starts high school in a year and a half.  Zie is really into math, but not competitions.  Zie like robotics, but not competitions.  Zie loves computers and games and likes programming but needs more formal training in programming.  Zie loves music but although better than I was at that age, is not at competition level either in piano or violin (the piano teacher is pretty lax and zie just started violin a year ago), and again, is not crazy about competition.  We might be able to get hir an unpaid summer internship with a professor at my school, or zie can do more work for me, possibly even something publishable.  Zie could take summer classes at the community college or the university (I still haven’t figured out how to do summer student-at-large classes, though it’s pretty easy for high school students to take college classes during the school year).  It is hard to say what’s best.  Most likely we’ll just let hir interests guide hir and focus on learning rather than on getting into a specific school.  Because for high income kids of educated parents, the specific school isn’t that important for earnings.

Anybody know more about what undergraduate admissions offices are looking for?

Ask the grumpies: if I want to give my kids a huge amount of money as young adults, how should I do it?

Sandy L asks

Should I buy my kid a house or pay for tuition?

Student loans can be deferred etc. if the kid is paying their own way they may be more serious etc.

Tuition. The pay your own way thing is BS. Here’s our deliberately controversial post on that topic. You can compromise by having them pay their own extras (clothing, meals out, etc). Then they’ll have the same experience of learning how to budget and not living high on the hog but without the huge amounts of debt at the end.  Also, note that if you’re paying tuition directly, it isn’t subject to the gift tax.  “Under current IRS rules, a payment made directly to an educational institution to pay for the tuition of a student does not count as a gift to the student for gift tax purposes, ” according to fastweb.

Buying a child a house could lock the kid in place and create additional expenses.  A house is a lot of responsibility when you’re just starting out, and trying to deal with selling and repairs on top of job searching and dating and hobbies and anything else that young people do might be more hassle than help.  (And if the kid decides to sell the house in order to pay off hir education, basically you’ve just given realtors a bunch of transaction fees and paid gift taxes for nothing.)  If you’re only talking about providing a downpayment, that’s even worse because a mortgage is a big fixed expense and the kid might not be able to sell very easily if the house goes underwater and they get a job elsewhere.

What do you think Grumpy Nation?  Any experiences with either?

Ask the grumpies: How best to save for kids’ college

First Gen American asks:

I would love a post on savings bonds as a vehicle for college savings…pros and cons vs 529. Also is one better for high earners. There seems to be some language about earning limits on the tax deductability of the earnings but no penalty if not used for educational expenses.

Disclaimer:  We are not professional financial planners.  Before making important financial decisions, talk to a fee-only financial planner with fiduciary responsibility and/or do your own research.

According to this page from the treasury:

For single taxpayers, the [education] tax exclusion income limit [for savings bonds] is an adjusted gross income of $92,550 and above. For married taxpayers filing jointly, the tax exclusion income limit is an adjusted gross income of $146,300 and above.

So to me that says that savings bonds are not a good vehicle for college savings for high earners.  Maybe if they’re the kid’s and the kid is not filing as a dependent, but that seems risky too given how FAFSA and CSS heavily weight the kids’ savings (exceptions here).

Savings bonds are also a less risky, lower earning asset.  Given the lack of tax advantages for higher earnings and current interest rates, they’re not much better than CDs or high interest savings accounts for low-risk low-earnings savings and will also show up in financial aid decisions.

So… for both high and low earners in the “may get some financial aid” range, the best thing to do with your money is to put your savings in places that won’t count against your financial aid– so fill up retirement accounts (especially IRA Roths if you can since you can take out the principal on those in case of emergency), pay off credit cards, put money in home equity below what CSS forms pick up, fill up your HSA, and so on.  (Forbes magazine is probably the best place to look for these kinds of limits/suggestions.)  That may seem counter-intuitive that the best way to save for college is to hide money in ways that it is more difficult to tap for college, but financial aid is powerful and you can take out (short-term) loans for college but you can’t take out loans for your retirement (and taking out loans for your mortgage can be expensive and problematic).

AFTER you’ve hidden as much as you can, I still think the 529 in a state that either gives you a state tax break or, failing that, a state that has good Vanguard options with low fees is your best bet.  You could also do a Coverdell if your income is low enough (<220K in 2017 and 2018), but they’re not really any better than 529s unless you have private K-12 tuition that it could go towards, and the limit is pretty small.

If you are too high income to qualify for financial aid (and note that that income may be higher than you think) then you don’t need to play games hiding your income and savings because there’s not anything you could do to get things low enough for colleges to pitch in.  It may also be worthwhile in this case to push some savings onto the child so as to take advantage of the child’s lower income.  If you’re in this situation, don’t just read free advice from the internet– pay for a fantastic fee only financial planner with fiduciary responsibility and get all of your financials in order.

High earners and grandparents cutting down their estates may want to look into frontloading 529s with 5 years worth of 14K gift exclusions or, if they don’t want to force the money to be used for college, they can look into a gift trust.

How are you saving for kids’ college (if applicable)? 

College Savings are hard to plan

If DH and I remain employed at our current jobs for the next ~6 years (something that is not incredibly likely given DH’s job situation), then we will not qualify for financial aid at most schools.  (IIRC, we’ll be in the phase-out range for Harvard and Princeton and may be able to move money around to get some aid there.)  If one of us loses a job, then DC1 will qualify for about ~10K/year in aid at many private schools, which isn’t that much given sticker prices (although on just one income, hiding moving money around will have a larger effect).

We currently (barring weird changes in the stock market between the writing of this post and its posting) have around 98K in DC1’s college account.  That’s $500/mo for the last 10 years invested in Vanguard.  That’s enough to go to our local flagship schools for 4-5 years if we stop saving now.

And that really sounds like a lot.  But in the world of private schools it isn’t.

It’s hard to tell what DC1 will want to do in 6-10 years, but current indications are that computer science or some form of electrical engineering will be involved.  Zie might want to go to MIT or Harvey Mudd or Stanford (and zie might get in– it is hard to say).  These schools are not cheap, and at >55K/year in total costs (and rising), there’s not enough in the 529s to pay for even two years of school. We have another $170K in taxable stocks (that’s from the 50K we had in 2005 and the leftover money from leave we just put into the market) that presumably we would use for the remainder.  However, we will be taxed on that remainder, so it might make sense to start saving *more* in the 529 vehicle while we still have six years for earnings to accrue.

Indeed, the simple saving for college calculator suggests that we would need to more than double our monthly contribution for MIT and almost triple it for Harvey Mudd.

If I drop DH’s income, then the college calculator suggests we should start putting away $638/mo, which is still more than the $500 that is currently going towards college.

Both Harvey Mudd and MIT have 5-year BS/MS programs that are a good deal.  DC1 is so young– maybe we should be open to funding some graduate school.   It is also true that we have two children, and by the time DC2 is ready for college, we should know how much DC1’s experience ended up costing, so we’d be able to move some money over.  As of this typing, DC2 has $33K in hir 529 plan.  We’re on an oversaving path for hir for state school (the calculator recommends cutting back to ~300/mo), but would need to put away more for the average private school– for my alma mater, for example, zie would need more than double what we’re putting away (same for engineering schools, though it’s harder to tell if engineering is likely with a preschooler compared to a 6th grader).

Looking over all my old 529 posts, I usually contemplate putting less money into the 529s.  This is the first time I’ve addressed putting more money there.  I’ve been assuming we wouldn’t pay for any graduate school and have been worried about the risk of over-saving.  But with only 6 years left before college, I think it is unlikely I’ll end up moving to work for a university that pays even part of school tuition.  And college costs have been increasing, as has our net worth.  Maybe it makes sense to get more tax advantage, especially given that in 6 years taxes may have to go way up (or inflation may be sky rocketing).  It’s hard to say.  Not to mention that $500/month isn’t worth what it was 10 years ago.

And we’re no longer paying $1200/mo in principal and interest on a mortgage.  If DH doesn’t lose his job, that money has to go somewhere.

Under what circumstances would we regret putting more money in the 529s?  1.  If we move to the bay area for DH’s job and want to buy a house.  That scenario suggests needing loans for private school and DC1 being on hir own for graduate school.  2.  If for whatever reason neither DC1 nor DC2 end up using the money (ex. tragedy, one or both of the DCs becoming successful entrepreneurs, both DCs deciding they prefer much cheaper college options).  3.  The world goes to heck and we have to leave the country (in which case money in the 529s will be very low on our list of regrets).

Ugh, I keep going back and forth on this.  I could increase our monthly contribution to be more in line with what the simple calculator thinks we should be contributing, and then we could cut if off if DH loses his job.  We could put in a lump sum (though dollar-cost averaging seems much less risky given the current uncertain political environment).  I could split the difference and put in, say $750/month per child instead of either $500 or $1000 (which is about what we would need if I kept my job and DH stopped bringing money in entirely).  Or we could just keep doing what we’re doing, which is usually the easiest thing to do.

*note for newer readers:  We are already maxing out our easy retirement options (required contribution, one 401K, one 403b, one 457) and will pay off our house very soon.  So don’t worry about our retirement savings or debt loads!

What are you doing in terms of college savings?  How do you decide to change what you’re doing?

529 plans and astonishment at compounding

Club thrifty had a post recently about funding her kids’ college education, which caused me to take a look at how my kids’ 529 plans are doing.  We’ve been putting in $500/mo since each of them was born.  At the time of writing this (though not the time of posting), DC1 is 7.5 years old.

So if we’d just put $500/mo away in our mattress, we’d have $45,000.  That’s a lot of money, and would currently fund in-state tuition for four years at many state schools without any aid.

That’s not how much my 7.5 year old has in hir 529.  How much is in there, do you ask?  $69,874.56.

Let me say that again.

$69,874.56

That means the stock market and compounding has added something like $25,000!

~$25,000 just because we put $500/mo in the stock market instead of in a mattress (or instead of spending it!)

Doing this exercise has given me a few scattered thoughts.

1.  Compound interest from stocks over a long period of time is AMAZING. It’s just in one of the Vanguard target date funds from the Utah system, so we’re really just matching the market with a little bit of adjusting to bonds as ze gets older.

2.  This kind of thing is how the rich get richer.  The best truly passive income is reaping profits from the sweat of the proletariat.   Rent-seeking is where it’s at.  Getting those returns to capital.  The poor get poorer by comparison because they have to spend their money to live and can’t have their money make money.  It’s terrible.  At the same time, as a member of the upper middle class, it’s something we need to do to keep from sliding down the income/wealth scale.  Because if you only have a choice between rich and poor, it’s better to be rich.  We need major political change in this country.  Yes, charitable donations are nice, but the entire system needs a new Great Society overhaul.

3.  Sacrificing early and starting early with savings is the way to go.  We never really felt the $500/mo cut to our income because it coincided with our employment.  We made our decisions based on a smaller income.  When you get a new job, if you can max out your retirement funding before you get used to the higher paycheck, that’s definitely the way to go.  (Of course, high interest debt is also worth paying off– the trick is not to get used to a higher level of spending that you then cut down.)

4.  I don’t think it’s time to stop contributing yet.  We suspect DC1 will end up going to a private school (or, less likely, an out of state public that costs just as much).  Right now with both of us employed we’re in the middle area of whether or not we’d be considered for any financial aid at all, and there’s that hope that by the time DC1 gets to college we’ll be in the “no financial aid based on income alone” bracket (we can dream, right?).  If not, we still have time between our two kids to adjust based on what kind of aid the eldest gets or doesn’t get.  If DC1 gets aid, then we simply stop contributing to DC2’s plan at that point.

5.  Because of the way that financial aid is calculated, most people should max out their retirement savings before contributing to a 529.  We’re doing that now, but we weren’t doing that this entire time because we had *too* much room for retirement and didn’t realize that DH would be getting a better job that paid more, so we didn’t put away all 72K/year that we could have, figuring we’d need some of that money to pay for college! [Note:  For those who haven’t been following our finances for the past few years, DH no longer works for the government so we can no longer put away anywhere near 72K for retirement because he no longer has a 457 option or a second 403b option, just a really lousy 401K with high fees and a lousy match.]  Yes, you can withdraw ROTH contributions to pay for college, but it would probably not be enough.  The 529 is still a much better place for your child’s money than a savings account in your child’s name, for financial aid purposes.  That’s because the 529 in your name counts as your savings whereas any savings in your child’s name is expected to go 100% to college, which cuts down financial aid from the school.

6.  Regular savings that you don’t miss because you’re used to that money not hitting your checking account really add up.  However, if you can’t afford auto-deducting any of your paycheck (though automatic retirement savings should be a priority), 529s are a great place for monetary gifts for your kids to go.  A little bit early on really does go a long way.

What are your thoughts on retirement and 529s and compounding stealth saving?  Also, how often do you look at your accounts?