Author Topic: College Savings  (Read 531 times)

dwc1852

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College Savings
« on: January 11, 2019, 11:42:25 AM »
Hi everyone,

First time poster on the forums here and I am excited to hear everyone's inputs.  I am a 25m and that has been married for 1 year.  I don't have kids yet, but will be starting the adoption process shortly.  (Any suggestions on this front are also appreciated!)

As we all know college is insanely expensive , and from my experience the actual value it provides is pretty low.  I went to school for accounting, have a CPA and Masters in Accounting and worked at a CPA firm and I was pretty surprised about how little impact going to college had on my ability to perform at my job.  Accounting is not the most technical field, but there are a ton of rules/nuances/accounting changes that come along to make it just hard enough that maybe a crash course could be the basis for a career in the field.  Other fields may actually benefit from more schooling, but that was my experience.

I plan on saving up for college payments, but only for a fixed amount of money around $100k per kid.  Is it too big of a decision for an 18 year old to choose between having the college funding versus not going to college and pocketing that money for themselves?  I would do the max gift allowance each year so that no additional taxes will have to be paid, taking around 4 years to payout in total.  I was also wondering if 529 plans would be the best option, since they have to be used for higher education or else you get penalized.

Thanks for your time and inputs

Laura33

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Re: College Savings
« Reply #1 on: January 11, 2019, 08:22:23 PM »
A couple of thoughts:

First, beware of anything that starts with "as we all know. . . ."  It may be true, it may not.  But groupthink is groupthink -- even when it's Mustachian groupthink.  ;-)  College may or may not be insanely expensive, depending on how you approach it; but in the vast majority of cases, the value it provides is quite significant.  For example, you may have been able to do your job just fine with a crash course in accounting -- but you'd never have gotten an accounting job in the first place without your degree.  There is value in being able to get that first job, quickly and at decent pay.

Now, there are a lot of folks who would tell you that that reality is a bunch of corporate bullshit, and that we should judge people on what they can do and not on the letters after their name.  And I agree!  At the same time, I want my kids to be able to get jobs.  And since I don't make the rules, well, for so long as the jobs require credentials, I'm going to put my kids in a position to get those credentials.

But I also think some of those complaints are short-sighted.  Getting a college degree isn't just about the substance of what you learn; it is a demonstration that you have the intelligence to get into college in the first place (there's a reason people chase degrees from "name" schools), the work ethic to do the assignments, the executive function to manage all of your coursework and the logistics of managing your education, the attention to detail and mental flexibility to please a bunch of different professors, and the fundamental ability to learn new stuff that is reflected in your grades -- and, frequently, the self-discipline to manage all of these things while working a job, playing a sport, and/or pursuing a variety of other clubs and activities.  All of these abilities are characteristics that companies value.  Do you need a college degree to have all of those characteristics?  Oh hell no.  But the degree is a nice short-hand way for an employer to cut down the pool of applicants, without having to put in the effort to figure that out for themselves. 

/Rant.  Putting all that aside, all I can tell you is how I look at it:  I see my job as putting my kids in a position to succeed in whatever they decide, within the realm of my own capabilities.  Because I make a good salary, because college seems to be the most common path to success (it certainly was mine), and because my kids seem to be academically inclined and interested in the college path, I feel a moral obligation to use some of the benefits my own education gave me to give my kids the same opportunity I had.  That doesn't mean that I will fund $300K for Harvard.  But it does mean that I have put away enough to cover tuition, room, and board at a state school (in fact, I have done more than that, because both my income and my investments did better than I anticipated 18 years ago). 

Your own approach will vary based on your own beliefs and means.  $100K is quite significant (at least in current dollars -- who knows what it will be when your kids go to schoo?l?!).  But rather than focus on a specific dollar amount, I would suggest you consider what your actual goal is, in words -- is it "pay for state school"?  Or "pay for the best school they can get into?  Or "be able to cover 2 years of community college and a transfer to a state school for the remaining two years"?  Or "cover enough of college costs that my kid will be able to cover the rest with manageable loans and a part-time job"?  That will give you a way to measure your progress over time against the ever-changing college costs to see if you are still on track to give your kids what you intend to.

The good news is that you don't have to figure all this out now -- you have many years to figure out what your kids are going to be like, what higher ed is going to be like, what jobs are going to require, etc. etc. etc.  So just start putting money aside.  And yeah, start with the 529.  Sure, there are limits -- but that doesn't matter when you're just getting started, so might as well take advantage of the tax benefits while you're figuring everything out.  FWIW, we had similar concerns, so we targeted the "state school" savings in the 529, and then saved extra money in our general VTSAX account, so it would be there if we found out we needed it, but would be accessible for us to use if we didn't.  As of now, looks like we won't need it, so now it's a nice extra pot of savings for us!

reeshau

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Re: College Savings
« Reply #2 on: January 12, 2019, 03:23:38 AM »
FWIW, we had similar concerns, so we targeted the "state school" savings in the 529, and then saved extra money in our general VTSAX account, so it would be there if we found out we needed it, but would be accessible for us to use if we didn't.

I have a similar approach to Laura.  I call it "The Price Is Right" strategy--come close to covering in-state college costs, all in, without going over.  So, "college," as much as I can generalize it now, is "covered."  My son turns 4 in March; I started 529 contributions when he was "0" (year of his birth) at $10k per year, our state's maximum deduction (as MFJ).  2019 happens to be the last of the 5 planned contributions I will make, with an expectation that this turns into $100-something k.  (it turns out we have moved state to one without income tax, so this just about lines up)  And if reality is spectacularly different than this, then I will look at other resources or other means to fund it, including possibly re-starting the 529 contributions.  Or if, in the end, he chooses a very frugal education choice (apprenticeship / trades, as two of his uncles have) or gets scholarships out the wazoo so that we oversaved, then I will simply consider "Mission Accomplished" and enjoy the windfall--taxes, penalties, or not.  (including the option of rolling over to a relative, as a way to help make their lives better)  This is part of the plan, not substituting or at the cost of any other, so there will be no regrets.

nereo

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Re: College Savings
« Reply #3 on: January 12, 2019, 12:25:00 PM »
As is often teh case, Laura33's comments above are pure gold.

Here are my comments in bullet form, many of which overlap with what Laura and dwc have already said

  • College can be expensive, but it doesn't have to be. There are ways of getting a top-notch education from a tier-1 school for under $100k all in.  Or it can cost $500k if you pay the maximum, include graduate school and your kid flounders for a few years.
  • Generally you want to first fund your own tax-advantaged accounts before funding a 529 account.  See the investment order for details.
  • All kids are different, but I'd recommend talking openly with them about what level of support you are willing to give and your expectations early on, starting in elementary school. I'm shocked how many teens enter their last year of high-school with zero idea about whether their parents will pay their tuition (and if so to what extent). If you want to give them the option of pocketing the money it's up to you to make sure that understand the financial ramifications. An 18 year old should be able to understand that $100k lump sum will only last 3-5 years if they live responsibly, less if they go all spendy.  But if at age 17 they've shown no ability to manage money don't give them that option. Until you sign it over the money is still legally yours, and came from you.

secondcor521

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Re: College Savings
« Reply #4 on: January 12, 2019, 03:52:47 PM »
FWIW, we had similar concerns, so we targeted the "state school" savings in the 529, and then saved extra money in our general VTSAX account, so it would be there if we found out we needed it, but would be accessible for us to use if we didn't.

I have a similar approach to Laura.  I call it "The Price Is Right" strategy--come close to covering in-state college costs, all in, without going over.  So, "college," as much as I can generalize it now, is "covered."  My son turns 4 in March; I started 529 contributions when he was "0" (year of his birth) at $10k per year, our state's maximum deduction (as MFJ).  2019 happens to be the last of the 5 planned contributions I will make, with an expectation that this turns into $100-something k.  (it turns out we have moved state to one without income tax, so this just about lines up)  And if reality is spectacularly different than this, then I will look at other resources or other means to fund it, including possibly re-starting the 529 contributions.  Or if, in the end, he chooses a very frugal education choice (apprenticeship / trades, as two of his uncles have) or gets scholarships out the wazoo so that we oversaved, then I will simply consider "Mission Accomplished" and enjoy the windfall--taxes, penalties, or not.  (including the option of rolling over to a relative, as a way to help make their lives better)  This is part of the plan, not substituting or at the cost of any other, so there will be no regrets.

Emphasis added.

To the extent your child gets scholarships, you can withdraw money from 529 penalty free.  You would pay ordinary income tax to the extent that your withdrawal represents earnings.

Unique User

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Re: College Savings
« Reply #5 on: January 13, 2019, 04:48:11 PM »
Another thing to keep in mind is that there are 14 states that either have no state taxes or don't offer tax benefits for funding a 529.  Several other states have minimal deductions, so if you are in one of those states then it might make more sense to do a Roth or a mega backdoor Roth in addition to the 529 so you have alternatives in case you don't need the money for college.   

I'm also all in favor of telling kids how much money you have.  We told DD how much we allocated for college and emphasized that if she did not use it all on college, the money would be there to help with a car, grad school, a wedding, etc.  We'll help beyond that I'm sure, but I really wanted her to think there was a finite amount of money and the best way to use it. 


Blissful Biker

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Re: College Savings
« Reply #6 on: January 13, 2019, 05:36:28 PM »
2018 was a milestone year for us in that we "turned over" ownership of the RESP (Registered Education Savings Plan) funds to our kids, who are 13 and 14.  We will not longer be contributing, focusing instead on our retirement savings.  They have access to view the investments and watch them fluctuate but not make trades, yet.

A four year degree would cost about $80K CDN and the RESP balance is $130K, or $65K each.  So they know there will likely be some shortfall and have already made steps to start savings of their own.  I am glad to give them a big leg up, while not making it a free ride.  They need to value their education and contributing is a good way to achieve that.

Coincidentally, this afternoon we did our annual rebalancing of the RESP.  My son sat at the computer and did the math while I drank tea next to him.  In the morning when the markets open he will make the trades, while I supervise with coffee.

The guidelines I have provided are:
- If they obtain a 4 year degree and have money left in the RESP, through either frugality or investment returns, it is theirs to keep.
- If they obtain a diploma (often 2 years) or even if they choose not to pursue post secondary education, they have our support and encouragement, but any remaining RESP money comes back to us.  DH and I will blow it at a rave in Greece (to which they asked "what's a rave?".  Either they are entirely too straight laced, or we are no longer hip.  Obviously it must be an issue with the kids)