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?

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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?

A post for Ana on 529 plans

We were poking around on medical moms blogs when we came across this comment from reader Ana. She said she wanted to just be told what to do with 529 plans because she’d hit the paradox of choice and everything was all complicated.

The post was almost a month old so  we felt silly for replying to it there, so we figured we’d reply to it here and hope that Ana saw it.

Also:  a disclaimer.  We’re not financial advisers.  Take our “advice” such as it is at your own risk.

Step 1:  Check to see if you live in one of these states that offer tax breaks for 529 contributions.

1a.  If you do, then go with your state’s 529 plan.

1b.  If you don’t, then go with Utah.  There are some other 529 plans that are now just as good as Utah’s but Utah’s has always been ranked among the top and we hope will continue to be ranked so.

Step 2:  Pick a plan company within the plan.

2a.  If Vanguard is one of your options, go with that.

2b.  If not, then look at the fees.  Pick one with low fees.

Step 3:  Pick a fund from your choices.

3a.  You want to look for terms “age-based”, “life-cycle” or “target-date”.

3b.  If there are multiple choices among these options, then it doesn’t really matter which one you pick.  They’ll be different in terms of risk and possibly fees.  You’ll again want to focus on the lowest fee plan first.  If your kids are little, more risk is better, if they’re closer to college, less risk is fine.  Don’t worry about the risk if you can’t decide– flip a coin or something.  It’s better to pick something randomly than to pick nothing at all because you’re worried about getting the “best”.

So, if you’re in a state that doesn’t give a tax advantage, you want the Utah UESP Vanguard Age-Based Aggressive Global fund.  And you’re done.  If you’re in another state we’d be happy to poke at their options for you.

Put in what you can.  We like putting some away automatically each month.  Something is better than nothing.

Are you saving for your kids’ college?  How?

Thoughts on Harvard

The other month on Wandering Scientist’s blog, an anonymous poster told me that I would regret it when the dean at Harvard calls to tell me that my child has flamed out, if ze gets in.  (Why did said anon do that?  I think because six year old DC1 does workbooks on weekends, and therefore must not be enjoying childhood?)

I responded that Harvard is a cakewalk for kids who get in and my kids most likely wouldn’t have any trouble there.  And I wouldn’t encourage them to apply there because I’d hope they would go someplace where they’d get a better education.

Seriously, Harvard has really high grade inflation (yes, there “have been studies”).  They have large lectures taught by graduate students with little practice, both their own and graduate students from other schools who they hire for peanuts.  (What they offer to adjuncts in my field is a joke.)  Many flagship state schools give better undergraduate educations, and, depending on your parents’ income and the state you’re from, at a considerably lower price.

Harvard is great for graduate school.  But undergrad, it’s an easy A.  Very difficult to flunk out or even to get more than a few Bs.  You have to work at not getting As.  I suspect the grade inflation is to keep parents happy given that so many classes are large lectures taught by people who are not yet famous professors.  (They argue it isn’t really inflation, just the student body quality, but outside metrics disagree.)  [Exception:  One of the colleges doesn’t have the same grade inflation that the others do– it curves to a B rather than to an A- or A.  I always feel sorry for those students.  They can actually show up to class and do the work and still get the occasional C!]

Now students at Harvard do run themselves ragged, but not with schoolwork.  Harvard tends to accept students who did a million extracurriculars as high school students and who try to do the same as college students.  Many of them fail at that and do mediocre jobs at several things rather than focusing on doing well at a small number.

That’s not to say that Harvard isn’t a good school or there aren’t reasons to go to Harvard.  Certainly the student body is elite and a kid can make great connections that will last a lifetime.  There’s also the imprimatur on the resume.  Exceptionally good students can get research assistant work.  But all in all, I would put it up there with Michigan or Berkeley (both great State schools with the same problems at the undergrad level, though perhaps not so much killing with extracurriculars) in terms of the educational experience.

Personally, I prefer the SLAC model, and I know that ‘tech schools are far more challenging.  If my kids want to go into a field that isn’t offered at a high quality SLAC, we’d be looking for schools with strong supportive programs in their area of interest.  I can’t really see a good reason for recommending Harvard to my children.  As a parent, I have concerns about the big ‘tech schools too, but if they really want to go, we’d have to talk about it.  DC1 would definitely have to be able to emotionally manage that perfectionist streak that shows up from time to time.

Now, for a kid whose parents make under 75K [update:  see comments for actual numbers], I think is the current number, Harvard is free.  That would push it above the state flagship.  There’s also some evidence suggesting that having an ivy on a resume helps out children with low SES although it has no effect on those from high SES backgrounds.  (Our kids are high SES, even if their parents were not.)

As for whether or not my kids could get into Harvard, I know as well as anybody that at those levels it’s a crap shoot.*  One of our friends from high school had straight As, perfect SATs and was the state math champion.  He didn’t get into Harvard.  After all, there are 50 state math champions.  So he went to Stanford.  (And did very well.)

Parents with gifted kids generally aren’t about competition.  We’re more concerned about helping our kids fulfill their potential, something that can be a precarious business when the K-12 system isn’t set up to work with you.  (Also, we’re too exhausted!)  And no, a Harvard education isn’t a holy grail for us.  We know better.

*Legacies, apparently, have a much higher chance of getting into Harvard.  So there’s that.

May Mortgage Update and housing’s effect on college choice

Last month (April):

Balance: $81,065.97
Years left: 6.5
P =$887.38, I = $327.03, Escrow = 621.66

This month (May):

Balance: $79,508.51
Years left: 6.333
P =$893.52, I = $320.89, Escrow = 613.58

One month’s prepayment savings:  $2.66

Our escrow dropped.  Yay.  (Though boo that’s because our property value continues to drop!) Also: Note we’re below 80K!

It turns out that your housing wealth affects your college choice.  A recent paper by Michael Lovenheim and Lockwood Reynolds finds that a 10K increase in housing wealth in the 4 years before a child goes to college increases the likelihood that the child attends a public flagship by 2 percent compared to less expensive public schools.

They found no relationship between housing wealth and where a student was accepted, and they suggest that the relationship comes between housing wealth and where students apply.

This effect of housing wealth on college choice was strongest for lower income families (under 75K, which isn’t actually low income, but it is generally eligible for financial aid at colleges).  For this group, a 10K increase in housing increased the probability of attending a flagship by 8.3 percent and decreased the probability of going to a community college by 3.8 percent.

They also found for lower income families that an increase in housing wealth decreased the amount that students worked outside of school and increased the probability of earning a BA rather than dropping out by 1.8 percent.

They found no effect of housing wealth on families earning more than 125K/year.

Do you think increases in your housing wealth would change your decisions about where you or your children could attend school?

Ask the Grumpies: College advice

Sasha asks:

I am interested in majoring in [awesome social science] with a specialty of criminology.  I’ve been looking at schools like [state flagship with top awesome social science program] and [overpriced NYC school with a reputation for poor financial aid] and other schools but I haven’t grown attached to any so some help would be fantastic.

    I have some regulations about school and stuff and here is list the I have come up with:
                          1) I want to go to a big school with many opportunities. I realize that I will probably change my mind about my major and I want to make sure that if I do I have a lot of options to choose from.
                          2) I’d like to go to a school that does not require the SAT. I need to work my ACT score up (since it is only a 26 so far) and I don’t have time to study for that and have a job and school. I realize that already cancels out some schools but I’d rather work on ACT than SAT.
                         3) Out of state is totally a possibility. In fact I would really like to leave the state if I can.
Are these reasonable guidelines?  What other advice do you have for me?
First off, the redacted state flagship school just happens to be one of the best places in the country for your proposed major.  It may be your best option.
The emphasis in criminology limits your options considerably, but as that emphasis is generally is only taught in graduate programs or outside the major in interdisciplinary criminology courses, you may want to consider waiting to take those classes until after college, or perhaps over the summer at a different school.  We don’t think you should apply only to programs that allow you to take a course in that emphasis.
In addition to big universities, you may want to look into smaller schools that are part of consortia.  These often combine the best features of large universities and smaller schools.  Some of the better known consortia schools are also generous with the financial aid.
We think that not taking the SAT is a big mistake for several reasons.  The first is that your ACT score is good, but not great.  It’s probably not going to earn you big money from schools desperate to have you– that may conflict with your regulation 4.  #2 and I both did way better on the SAT than we did on the ACT (I don’t think I broke 28 on the ACT but got in the upper 700s on the SAT).  Some people do better on one test vs. the other.   The second reason is that reg 2 conflicts with reg 3.  The ACT limits you geographically– it is much more popular in the midwest than in other regions.   Third, you don’t have to send your scores to schools until after you’ve seen how you did if you’re worried about getting a low score.  Fourth, if money for testing is a problem talk to your guidance counselor about getting financial help to take the test. Finally, remember that colleges will count your savings from job earnings at a higher rate than they will count your parents’ earnings.  It may be a better use of time to study for the SAT than to have a job that first semester if it translates to more money for college.  (Second semester you will have already turned in your FAFSA… senioritis ho!)

The actual cost of tuition may not be what is actually important if you are eligible for need-based aid.  If your parents truly do not make a lot of money, you should be eligible for a lot of need-based financial aid.  This aid often comes from the schools in the form of grants.  Some schools have more resources to give this aid than others.  As you are applying, find out how generous these schools, especially private schools, are.  One of us went to a pricey private school and it cost her less than going to the state flagship because her parents made very little money and she got huge grants from the private school but only moderate grants from the cash-strapped state school.  Her sister, otoh, went to a less generous private school and it cost more than the state flagship would have (said sister makes like a bazillion dollars now and loved college and didn’t drop out of her major like every female we know who went to the flagship in that major did, so it was probably a good choice… however, your proposed major is warm and fuzzy at the flagship).

So those are our thoughts on your guidelines.  We’d like to open it up to the readers now– what advice would you give Sasha?