Saving for kids college - is it too late

[mashrach]

Hi all, first post. I'm late to the game here and I'm trying to get on the right track financially, and I'm loving the blog and forum.  I have 2 kids, 13 and 10 years old so college is not a long way off. I contribute 8% of my salary to my 401K and my company matches 100% up to 4.5% and contributes an extra 4% on top of that. My emergency fund is currently around 4 months of expenses so I need to get that up. I'd love to get my emergency fund up to 6 months expenses and start an IRA or just max out my 401K but I haven't saved anything for my kids college expenses.
I make a good salary and so does my ex-wife (joint custody though realistically I pay for most expenses) so I'm not sure how much aid we will qualify for but neither one of us has much in savings (like I said I'm late to the game...but trying).
I hate to not be able to help my son up front with college costs, but even if I saved $3K per year I'm only looking at like $18K by the time my oldest starts college which is just a drop in the bucket (we are in the US).
Sooo...is it too late to even start? Should I just worry about my retirement savings and deal with college when it gets here? Anyone else have a similar situation?
Thanks

[Chrissy]

It's not too late to start, it's too EARLY to start!  You have to get yourself squared away first.  Focus on your emergency fund and 401k.

Listen, if I see a penny on the ground, I stop to pick it up, so 18k is NOT nothing.  Every little bit helps, and, with that in mind, it'll never be too late to start, so don't freak out.  Even when your son is 18, you'll still have 4 years to save for his senior year expenses. 

College costs depend a lot on how/where the student goes to school.  If I were you, I'd explain the situation honestly to your 13 year old (wait until a similar age for the 10 year old).  Educate him about the terrible burden of student loans.  Explain the cost difference between in-state and out-of-state tuition.  Stress good grades in the hopes of scholarships.  Bring up community college and living at home as perhaps unpopular but financially wise options.  His education is ultimately HIS responsibility, not yours.

[ysette9]

Welcome to the forums! Personally I don't think it is too late to save for college until your kid is enrolling, but it is a bummer that you missed out on earlier years of compounded investment returns. That said, that is all water under the bridge so you should only focus on what is ahead of you.

Perhaps a case study would be a better way of doing this because my first question is not anything to do with college savings, but how well are you on track with your retirement savings? Never sacrifice college savings for your own financial security. Do you know how much you will need in retirement and how close you are to getting to that goal? If you are on track with your own retirement, do you know how much you can afford to set aside for college?

That said, if you can save $3K a year then that is great. Even assuming a conservative 4% return on that savings, that puts you at $27K 8 years from now. In your case I would highly recommend your local junior college for the first 2+ years. That will save a ginormous amount of money (just looked up my own junior college's current tuition and it is quoting $1280/year for in-state). Personally I went to junior college for free due to the scholarships I was fortunate enough to get.

Junior college shaves the total bill in half and then I would encourage your kids to work, even just a little bit, while in college to help defray costs. If you have a college nearby that they can attend while living at home then that cuts down costs quite a bit more. This isn't even talking about scholarships.

My point being: yes, start saving now, but only once you have your own financial house in order. Looking into alternatives from the 4-years-in-the-dorms "typical" college experience and setting those expectations up front with your kids can go a long way.

[onlykelsey]

Saving 3K a year for college in a college savings account also has the doubly helpful effect of lowering YOUR taxable income for those six years.  No reason not to.

[Gone Fishing]

+1 for getting your own finances squared away first.

I've saved quite a bit, but I'm not saving anything exclusively for my kids' college education, it all goes into one pot (mine).  Admittedly, I have passed up some potential tax savings for the sake of flexibility.

Our financing plan is as follows:

If and when the time comes, we will encourage them to attend one of the more affordable, quality, public universities our state has offer.

We will probably back off of overseas travel while they are in school and make a contribution out of our general operating budget. 

We will  expect them to work 10-15 hours a week to cover a portion of their living expenses.

Finance any remaining expenses through student loans. 

We will strongly encourage them to pick majors that have a historical track record of providing decent employment opportunities. 

A modest amount of student debt for a student that completes their major and finds gainful employment is not a bad thing.  It teaches responsibility, dedication, and appreciation.  Where the system breaks down is when naïve parents send their naïve children to overpriced universities to get majors with questionable job prospects, which they don't complete (or change 3 times before completing), all while financing 120%+ of the cost because, after all, you've got to have clothes, booze, and spring break trips, too!   

[mashrach]

Thanks a lot for the replies. I'm really enjoying learning from this community. I actually went to a smaller local college and commuted and then lived at home for a few years and paid off my debt fairly quickly (started out well, made some mistakes later on, if anyone wants so have a beer I'll tell you all about them), and I've started the conversation with my kids about avoiding debt. Actually a post on MMM inspired me to start a 'bank account' for my kids where I'm the banker and I pay them 10% interest, I seeded the account with like $100 each and this has really gotten them interested in saving rather than getting rid of their gift and allowance immediately. So I think they are getting it.
I've brought up the one or two years at a community college as a great idea, I'm not sure why I didn't think of that when I went to college.
Just posting this question here made me look at the situation in more detail. I've organized everything lately in a way that allows me to save about 9% to my 401K AND save about $1K per month savings...I just started so hopefully this lasts. I figure if I keep spending down and my salary goes up I should be able to pay say $800 / month for my son's schooling when he starts in 6 years, if I round up that's $10K / year. I just looked up my states public university tuition/fees/room and board and it's about $26k. His mother should also be able to help some...maybe. So if he has to pay/borrow for less than half of his education that's not bad..obviously the exact numbers will change but I think we should be ok (and of course I have 2 kids so I'll be doing this for like 7 years straight with one year with both of them in college...oh boy) So I guess I will continue to focus on my retirement, not save anything exclusively for education, and  hope my son's learn enough from me to make good decisions about where they attend school and what they study.

[MsPeacock]

As others have said, not too late. I also agree that you have to put your own financial welfare ahead of college savings for the kids.

My kids are about the same age as yours. I have shown them the in-state and out-of-state tuition for the big state university near us. I have talked about how much 4 years would cost. I have talked about taking college credit courses in high school. I have talked about 2 years at community college. I have talked about grades and scholarships and grants. I've talked about student loan debt. I have set the expectation that I will have X money saved (joint custody here too) and I don't know if their Dad has/is saving for them. I show them their college savings account balance. Basically, as the matter comes up I am frank w/ them about the costs of college and where money comes from to pay for it. I have strongly encouraged them to pick an in-state school and to keep loans to a minimum. They know they can live at home for college if they want.

I think you can be quite open w/ kids about the costs and their plans. Back in the day (like 1980s) when I went to college I worked full time and paid my tuition (the kids know this too). But, the way tuition rates have gone up it really isn't possible for most 18-19 year olds to make enough money to pay college tuition any more. Helping them plan realistically is good parenting.

[mashrach]

I agree with putting my financial welfare ahead of college savings, but what does that mean to you? I've read that I shouldn't save anything until I; have 6 months emergency fund, maxed out 401K, maxed out IRA contributions...then save for college. Would you agree with that? Or should I strike some sort of compromise, like increase my emergency fund,  get my 401K up to 10%, then start saving. I know it's all dependent upon the individual situation but I'm curious if most think it's a good idea to max out all possible retirement saving contributions before thinking about saving for college? I guess one good byproduct of maxing out retirement savings is you decrease the income reported when you fill out the student aid form?

[Dee18]

Also look up what high school gpa and ACT scores they would need for automatic tuition discounts if your state has those.  Encourage your kids to reach those goals.

As you go through the teen years, weigh expenditures against saving money specifically for college.  For example, a good friend of mine was lamenting that her son will have to take out loans next year, his junior year in college.  I know my friend bought her son a car ($16,000) when he was 16.  She said he "needed it" to get to school and work.  Both his school and work were within 2 miles of his house.  She also told him it was fine for him to be a camp counselor with his friends this summer (net pay $1,000), instead of working construction as he did last summer (net pay $4,000+).  This boy's best friend is the son if a psychiatrist and my friend (who is divorced with unemployed ex) wants to give him the same kind of life his wealthy  friend has. 

I am happy that my daughter will be able to graduate from undergrad without debt, but that is because of making choices (no buying that teen a car) and being realistic about college choices.

[meyling]

Do your kids do well in school? Theyre still really young. I didn't even know what college was when I was 13. If they can manage to get a really good gpa in high school and high test scores they should be able to apply to schools that will offer them significant scholarships.

[teen persuasion]

I agree with putting my financial welfare ahead of college savings, but what does that mean to you? I've read that I shouldn't save anything until I; have 6 months emergency fund, maxed out 401K, maxed out IRA contributions...then save for college. Would you agree with that? Or should I strike some sort of compromise, like increase my emergency fund,  get my 401K up to 10%, then start saving. I know it's all dependent upon the individual situation but I'm curious if most think it's a good idea to max out all possible retirement saving contributions before thinking about saving for college? I guess one good byproduct of maxing out retirement savings is you decrease the income reported when you fill out the student aid form?

Not exactly.  Funds already inside a retirement account are not included in assets reported on the FAFSA.  The amounts you contributed to retirement accounts in the year applicable to the FAFSA application are added back to your income.  Which year is applicable is changing - for the FAFSA I filled out a month ago for DS4 (entering college fall 2016), it used tax year 2015 numbers.  They are switching to an October application date, using prior-prior year's tax info, so next year's application will be this October again using 2015 tax data (one time only double use).  So going forward, your tax year info from your student's sophomore HS year will apply on his first college year FAFSA.  IOW, age 13 is not far off from college planning.

Google "EFC formulas 2016-2017" to get the guide with the actual formulas.  Then you can see what is affecting your calculations, and where you can influence it.  Putting more in retirement accounts now is useful, since the totals already in the accounts are not included in assets.  Building up a good balance before college could give you the room to back off on retirement contributions a bit to cash flow college in the future if needed.  Then ramp back up to make up for it after college.  Putting money in either taxable accounts or 529 accounts now is less helpful, since both of those are included in assets on the FAFSA.  I would only consider funding those after completely filling retirement and HSA accounts.

Strategies can be slightly different at lower income and larger family size.  We aggressively save in the HSA and 401k to get our AGI below $50k, so that we qualify for the Simplified Needs Test, which does not require us to report assets at all.  There are other requirements to be eligible beyond the $50k, but  look into it.

Also remember that the FAFSA rules change every year.  Look at it now to develop plans, but watch for changes each year, too.  I've been watching since DD1 began college in 2008, and I'm really curious how this big change coming up will play out for DD3 and DS4. DS5 is only 11, so I've got many more years to watch and plan.

[mashrach]

I agree with putting my financial welfare ahead of college savings, but what does that mean to you? I've read that I shouldn't save anything until I; have 6 months emergency fund, maxed out 401K, maxed out IRA contributions...then save for college. Would you agree with that? Or should I strike some sort of compromise, like increase my emergency fund,  get my 401K up to 10%, then start saving. I know it's all dependent upon the individual situation but I'm curious if most think it's a good idea to max out all possible retirement saving contributions before thinking about saving for college? I guess one good byproduct of maxing out retirement savings is you decrease the income reported when you fill out the student aid form?

Not exactly.  Funds already inside a retirement account are not included in assets reported on the FAFSA.  The amounts you contributed to retirement accounts in the year applicable to the FAFSA application are added back to your income.  Which year is applicable is changing - for the FAFSA I filled out a month ago for DS4 (entering college fall 2016), it used tax year 2015 numbers.  They are switching to an October application date, using prior-prior year's tax info, so next year's application will be this October again using 2015 tax data (one time only double use).  So going forward, your tax year info from your student's sophomore HS year will apply on his first college year FAFSA.  IOW, age 13 is not far off from college planning.

Google "EFC formulas 2016-2017" to get the guide with the actual formulas.  Then you can see what is affecting your calculations, and where you can influence it.  Putting more in retirement accounts now is useful, since the totals already in the accounts are not included in assets.  Building up a good balance before college could give you the room to back off on retirement contributions a bit to cash flow college in the future if needed.  Then ramp back up to make up for it after college.  Putting money in either taxable accounts or 529 accounts now is less helpful, since both of those are included in assets on the FAFSA.  I would only consider funding those after completely filling retirement and HSA accounts.

Strategies can be slightly different at lower income and larger family size.  We aggressively save in the HSA and 401k to get our AGI below $50k, so that we qualify for the Simplified Needs Test, which does not require us to report assets at all.  There are other requirements to be eligible beyond the $50k, but  look into it.

Also remember that the FAFSA rules change every year.  Look at it now to develop plans, but watch for changes each year, too.  I've been watching since DD1 began college in 2008, and I'm really curious how this big change coming up will play out for DD3 and DS4. DS5 is only 11, so I've got many more years to watch and plan.

Wow, thanks for this. I wasn't aware of that. Seems like they are discouraging people from saving for retirement but oh well. I definitely need to bone up on the formulas used.

[Dezrah]

I would just like to suggest that you start bringing at least your oldest into the conversation now. Make it clear that you want to help as much as you can but you still have to think about yourself and his brother too. You expect to have $x saved by the time he graduates and various schools cost $y-$z. You guys can then work together through the years to watch the money, get odd jobs if needed, or change course altogether. Don't make it entirely his burden to bear, just make it clear there are lots of choices ahead and the two of you can work through it together.

If you're worried he'll resent that he has to take loans or a job because you didn't give more, just explain that the greatest gift you can give him is the freedom to know YOU won't be a burden to him in the future. By taking care of yourself now, you're ensuring he's free to move across the country, risk his life savings in a business venture, be a happy starving artist, or anything he wants because supporting you won't be necessary.

[teen persuasion]

I agree with putting my financial welfare ahead of college savings, but what does that mean to you? I've read that I shouldn't save anything until I; have 6 months emergency fund, maxed out 401K, maxed out IRA contributions...then save for college. Would you agree with that? Or should I strike some sort of compromise, like increase my emergency fund,  get my 401K up to 10%, then start saving. I know it's all dependent upon the individual situation but I'm curious if most think it's a good idea to max out all possible retirement saving contributions before thinking about saving for college? I guess one good byproduct of maxing out retirement savings is you decrease the income reported when you fill out the student aid form?

Not exactly.  Funds already inside a retirement account are not included in assets reported on the FAFSA.  The amounts you contributed to retirement accounts in the year applicable to the FAFSA application are added back to your income.  Which year is applicable is changing - for the FAFSA I filled out a month ago for DS4 (entering college fall 2016), it used tax year 2015 numbers.  They are switching to an October application date, using prior-prior year's tax info, so next year's application will be this October again using 2015 tax data (one time only double use).  So going forward, your tax year info from your student's sophomore HS year will apply on his first college year FAFSA.  IOW, age 13 is not far off from college planning.

Google "EFC formulas 2016-2017" to get the guide with the actual formulas.  Then you can see what is affecting your calculations, and where you can influence it.  Putting more in retirement accounts now is useful, since the totals already in the accounts are not included in assets.  Building up a good balance before college could give you the room to back off on retirement contributions a bit to cash flow college in the future if needed.  Then ramp back up to make up for it after college.  Putting money in either taxable accounts or 529 accounts now is less helpful, since both of those are included in assets on the FAFSA.  I would only consider funding those after completely filling retirement and HSA accounts.

Strategies can be slightly different at lower income and larger family size.  We aggressively save in the HSA and 401k to get our AGI below $50k, so that we qualify for the Simplified Needs Test, which does not require us to report assets at all.  There are other requirements to be eligible beyond the $50k, but  look into it.

Also remember that the FAFSA rules change every year.  Look at it now to develop plans, but watch for changes each year, too.  I've been watching since DD1 began college in 2008, and I'm really curious how this big change coming up will play out for DD3 and DS4. DS5 is only 11, so I've got many more years to watch and plan.

Wow, thanks for this. I wasn't aware of that. Seems like they are discouraging people from saving for retirement but oh well. I definitely need to bone up on the formulas used.

I see it as encouraging you to save aggressively for retirement early (before college), but when college is here you do have choices in how you allocate your current income.  Adding back the current year's retirement contributions is just a way to get a better picture of your total income, since they start with AGI.  It WOULD be nice if they ignored retirement contributions, but I can understand why it is done the way it is. 


Use a long term approach, so you don't get blindsided when filling out the FAFSA.  Make financial plans that won't unknowingly sabotage your EFC during college years.  Looking at the rules, I realized IRA conversions to Roth would be very bad in FAFSA years, increasing our AGI.  Even worse would be utilizing a Roth pipeline, since even tax free Roth withdrawals are added to income.  So I am planning lumpy (rather than even) conversions, and no Roth withdrawals at all during certain years.  I've got a window of 3 years between my youngest boys to maximize.

[nobody123]

I would start by having a discussion with his mother.  I would think this is something that you both need to agree on and perhaps jointly communicate to your kids.  I can only imagine the strife it would cause when a kid blurts out "daddy says he is going to give me $18K for college, why aren't you too?"

I wouldn't divert any money to a college fund until my own emergency fund is at a level I was comfortable with.  Once that's achieved, you can spend your money however you want.  If you want to save it all for RE, or buy a new car, give it to your kids for college tuition, travel, etc., it's up to you.  There are all sorts of opinions on this board about how much / when / if to save for your kids' college, and the only one that matters is your own.

[mashrach]

I will most likely pay for most of their college, their mother is actually attending school to get a masters now and I know doesn't have much if any retirement. I did just find out that when it comes time to apply for financial aid I will not have to report her income which will be a help. Thanks for all of the replies. My plan is to get my emergency fund up and then increase my retirement savings to a percentage I'm comfortable with...and then save in a non college tuition specific way, what that is I'm not sure of yet but hopefully I eventually have enough to actually have to make that decision :)
Thanks everyone.