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?

 

An unexpectedly high bill

The other week DH’s relative called DH at 10pm on a weeknight in a bit of a panic because kid #4 had signed up for community college next semester unbeknownst to him (she’s graduating a semester early and we are impressed with her initiative!) and the bill was due. Was our offer to pay it still valid? DH said sure, no problem, and we went back to sleep.

The bill turned out to be for $1,800!

So we said, we can pay this, BUT we think it’s really unlikely that you actually have to pay this much given that daughter #1 was free and #2 was something like $300/semester after financial aid. (This is more like the bill we would expect should one of them go to a 4 year school.)

Looking closer, it appeared that financial aid had not been included in the bill, even though they had done the FAFSA and everything else. Kid #4 also said two of her friends had gotten similarly scary bills. So something was messed up. (Also it turned out the deadline posted on the bill was a month earlier than the actual deadline!)

After several days of phone tag, DH’s relative finally got someone on the phone, but they said that they couldn’t talk financial aid with him, only with his daughter, even though she’s 17 and still a minor. She needed to come into the office to sign a bunch of forms.

So she went into the office, and instead of giving her forms, they emailed her forms. But they don’t have a printer, so she had to go back to the office (but the office’s printer cuts off the bottom of every page…). There was a lot more back and forth and in the end, the relative and his daughter both went into the office together. And a month later, everything got sorted out. All we have to pay for is books. Whew.

Our hope is that this daughter will get her SAT score up at least 10 points so she’s state school eligible and then go to a 4 year school (neither of her sisters finished their associates degrees because they dropped out after having babies and the oldest son didn’t start because he couldn’t drive himself… our hope is that maybe the 4-year college environment will be more appealing than dropping out… but we have learned we can only do so much nudging and we never truly know what the right thing to do is).  She’s interested in an education degree, but might change her mind.

So… I guess the moral is … if you get a bill that is way larger than expected, chances are something went wrong?

Facts and Opinions are not the same thing: Part 2

Part one from five years ago at the private school where they do not teach untruths about the civil war but still do not understand the difference between objective statements and opinions.

As promised, DC1 ended the semester being tested on the idea that the cause of the civil war was not reaaaaalllly slavery, but state rights.

I read out the reasons for the civil war given by the southerners who withdrew from the union.  They are PRETTY CLEAR that it was about slavery.  On top of that, South Carolina was pretty pissed off about NY getting to keep its state right of not allowing people to be property in its borders so that Southerners couldn’t take slaves with them to do business in NY.

Then DC1 said, “people have a lot of different opinions”.

And that led to a really lengthy discussion about what is an opinion and what is an untrue statement of fact.  DH and I threw around a lot of terms like “subjective” and “objective”.  Also “hypothesis”.  We talked about climate change.

It drives me nuts that people label incorrect statements as “opinions” and don’t seem to understand the difference between objective truths (which are true no matter what we believe, but sadly cannot always be tested) and subjective opinions.  (“Can an opinion ever be wrong?” DC1 asked. “Sure,” I said, “Saying ‘Eggnog is the best drink in the world’ is an example of a wrong opinion.”)  And this is codified in the South through the K-12 system and reinforced by Fox News.  It is in the airwaves.  I hate it.  And I don’t want to have to add it to my stats class, but maybe I should.

Last year I asked my grad students if we should spend some time on what is “fake news” and they all said no, they understood.  This year they’re not as sure.  Last year “fake news” really was fake– spewed out by what we now know were Russian bots.  This year Republicans have labeled reputable news organizations as “fake news” so it’s more confusing.  On top of that, even formerly reputable news organizations like WSJ have been taken over by ideologues so there’s a lot of crud coming out.  (NYTimes has always had a contingent of crud, and NPR started to kind of suck a couple of years ago.)

How do you all deal with the difference?

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 to save for multiple kids’ 529s?

First Gen American asks:

Once our mortgage is done again, we’ll swap that out with a 529 auto deposit option that comes out of both paychecks….which brings me to another question…Should we funnel a ton now into older kid and worry about younger kid later (he’s 4 years younger) or should we fund both at the same time now? I’m assuming we can roll over older kid’s excess into younger kid if we over deposit but then if we die before kids do, an uneven distribution would screw things up for kid 2. Not sure what to do yet.

I have also spent some time thinking about this.  I am not sure it actually matters that much.

Yes, if you have too much money for kid #1, you can easily transfer the leftover amount to the second child.  (An added wrinkle–if you undersave for DC1, will you take from DC2’s account?  You can, but would you be willing to?)

A quick check on the internet suggests that the 529 does not automatically go to the child who is named on its behalf– you can name a beneficiary.  It is also something that you can talk about with an attorney for a trust if you do not have a successor that you trust not to just liquidate it at a loss.

We have target-date accounts for our children in their 529s, so it makes sense in terms of risk to fund them separately.  That means DC1’s account has less risk in it right now (a larger bond to stock ratio) than DC2’s does because DC1 is closer to college.  But I’m thinking of them as separate buckets and we’re aiming to fully fund 4 years at a private school given that we’re not expecting much financial aid.

If you’re not thinking of them as separate buckets, then you might want to think of it as if you are going to “retire” and you know you’re going to be alive for 8 years after “retirement” and then suddenly “die” (if you’re planning on funding post-college education, or your DCs might take more than 4 years to graduate, then you might want to add some years to that).  What kind of investment portfolio would be optimal in that scenario?  It’s going to depend on your risk aversion, but you probably could pick a single fund that would fit your risk preferences given that scenario.

In terms of how we’re funding, I don’t actually think that our method of putting in $X/month to each child’s fund is necessarily optimal.  It would make better sense while we have excess cash to put in lump sums right now and stop contributing later (allowing for more tax preferred earnings).  But $X/month/kid is predictable and is easy to fiddle with should our situation change.

The important thing that gets brought up in the comments when we talk about this kind of situation is the perceived fairness of the situation by the kids.  Pick some rule that seems fair for both kids and stick to it.  If you have to make adjustments, make sure that you adjust for the other kid as well.  For us, we’ve decided that fully funding tuition without loans is what we consider fair, so we will be ignoring the actual costs and financial aid for the schools.  Our kids will get college paid for by us no matter what college they choose.  Other people choose a specific dollar amount (though I hope they adjust it for inflation!), or may have a rule like, “we will pay up to the cost of state school X”.  What you don’t want to do is pay full freight for one kid and force the other to take out loans for the full amount because that can lead to them writing about how you don’t love them on money forums, and nobody wants that.

Grumpeteers– How do you think First Gen should save for two kids’ college?

Programming for kids

I think there’s a part one to kids programming from a couple of years ago, but I cannot find it anywhere in the archives, so maybe it was a discussion in the comments section of another blog.

Computer programming is fun and extremely important.  Even as a social scientist, having a modicum of programming knowledge makes life a ton easier.  Doing statistics requires data cleaning and statistical programming knowledge.  Just knowing what is possible — being able to think in a way that allows programming to make life easier– means big efficiency improvements.  And that’s just social scientists.  Engineers and scientists often have to deal with much more complex coding structures.

Added to that, having a good background in programming also means that your code is much easier to read, understand, and to pick up later and figure out what the heck it was you were doing.  I can usually tell when someone has programming background because they do useful things like comment their code or put carriage returns between sections or indent their code properly when doing loops.  I *wish* more of the people I work with had programming backgrounds!  (She says, after spending a day putting in comments, carriage returns, and tabs so as to be able to read a program before adapting it for this year’s dataset.)

Anyhow, our first foray into programming a couple of summers ago was to try out Scratch.  Scratch was a lot of fun, but it’s more of a toy that teaches some programming structures (ex. loops) than actually teaching programming technique.  I know there’s a lot of thought that playing is the right way to go with programming, and I’m not against playing at all, but there’s a *lot* to be said for getting good technique in while you play.

So now that DC1 is 8 and has spent a couple of summers playing with Scratch, we decided to try something more systematic in.  After some amazon searching, we settled on Python For Kids: A Playful Introduction to Programming. We didn’t want to make this a chore like DC1’s homework books (which sometimes cause angst) and we didn’t want a time limit like piano practicing, so we just said ze has to do some each day, but as much or as little as ze wants.

So far it seems to be working out.  It takes the best parts of Logo (remember the turtle who made boxes?) and combines them with Python.  DC1 is pretty excited about it, and occasionally asks DH for help.  If you don’t have a professional programmer in your house, the same publisher also makes a Python book for parents, Teach Your Kids to Code.

Do you use programming or programming techniques for your work or hobbies?  Any suggestions for introducing people to coding?

School districts, housing, and having a grade-skipped kid

So, DC1 is grade-skipped by two grades.  Ze is in a private school.

That means that we have no idea what grade ze is going to be in next year when ze goes to public school in a new state.

Which means we’ve been calling around a lot.

And getting a bizarre range of answers about how schools would determine grade level for DC1 in our situation.  How big a range?

1.  DC1 starts in 3rd grade, period.  Then the teacher observes for 6 weeks.  Then a team including the principal discusses the situation and most likely keeps DC1 in 3rd grade, even though ze would be the oldest non-red-shirted kid in the grade.

2.  It’s up to the principal.

3.  The administration would assess DC1 to determine what would be appropriate.  If ze is ready for 5th grade, that is where ze would go.  In additional to educational components, they will assess emotional and social components.  Writing it out this way makes it sound a lot nicer than how they sounded over the phone, which hit both DH and me with a lot of bad memories about our childhood, with the emphasis on emotional/social.  (Because if you’re out of synch with your same-age peers, you’re failing at emotional/social which means they won’t let you skip… Catch-22.) (#2 is still mad about people not letting me skip a grade for social reasons… guess what, I didn’t have friends in school ANYWAY so at least I could have learned something… grumble.)  (#1 would have had friends if she’d been grade skipped.)

4.  Need to take educational documentation including letter from teacher/principal and report card.  The documentation will be reviewed by school administration.

5.  Based on age it would be 4th grade (different cut-off date?), but school records indicating completion of 4th grade would allow DC1 to be placed in 5th.

6.  Ze would be placed in 5th grade automatically.

7.  Ze would be placed in 5th grade and then given a placement test for homogeneous math grouping placement.  Bring materials to help teacher/administration work with DC1.  Would need special reasons to be placed in a grade below 5th.  (“Is it because you’re calling from the South [and worried that a blue state education would be too advanced]?” the confused administrator asked.)

8.  Skip approved with proof of why skipped for special reasons.

So we’re narrowing down our search to #4-8, mainly because #3 gave off such negative vibes.  #7 sounds great, but has very few, if any, houses, mostly apartments and the apartments are interspersed with undergraduate housing.  So we might look out there, but not until we get closer.  #6 is a substantial commute for me and very suburban… not unlike where we live now.  #5 has fifth grade in middle school, not elementary school like all the other districts in the area.  #4 is a pretty good bet in terms of houses, commute times, and walkability, but I’m a bit nervous about where they would really place DC1.  Still, they have some really nice (not cheap!) houses and the commute is great.

I guess the moral is that different places do things widely differently, sometimes even in a smallish geographic area?