Author Topic: How much to save for kid's education  (Read 6059 times)

alphalemming

  • 5 O'Clock Shadow
  • *
  • Posts: 23
How much to save for kid's education
« on: August 13, 2014, 03:28:09 PM »
We have a pretty healthy college fund set up for my two boys.  The goal is to give them the opportunity to finish college without  debt.  Both boys (twins) are 11 and we have $40K each invested in a 529 plan.  I'm thinking of ending the investment in the 529, as it might be a bit too restrictive.  Options:

a. Call it good and let the current funds appreciate over the next 7 years before they get to college age
b. Continue funding the 529, but at a lower contribution rate
c. Continue funding their futures via a different savings mechanism that gives them more flexibility for schooling, etc
d. Use the extra funds to aggressively pay down the mortgage
e. Other

Any suggestions or advice welcome.

Some other background.  Mortgage is our only debt, other than credit cards, which we pay off every month.  401(k) and IRAs are fully contributed to.

Lkxe

  • Stubble
  • **
  • Posts: 130
Re: How much to save for kid's education
« Reply #1 on: August 13, 2014, 05:19:41 PM »
I played with some calculators (TVM, College costs) and 40000 held for 10 yrs ( it would be a little less but that time period gets them through 4 yrs) is the sweet spot for tuition and fees. Assuming 7% growth in costs (in state) and 7% growth in investments, tuition and fees are covered and you are out of money in the 529. Of course they will start earlier than 10 years so if this was the exact scenario you would have to cover some in the last year. And room and board would still needed to be covered. Hope that helps. I have the same amount(80000) saved for my 9 year old ( his father will have retired by the time he gets there) and just stopped his funding. I planned for it to help with the older as well but he got a full ride.

not_a_trex

  • Stubble
  • **
  • Posts: 108
Re: How much to save for kid's education
« Reply #2 on: August 13, 2014, 07:49:26 PM »
Are you planning on applying for FAFSA? I don't have any kids so I haven't looked into this much, but word around the water cooler is that it may be better to give the money to someone else to hold onto within their 529. The FAFSA will treat your 529 as income that will be used towards a kid's education, and it may bar you from financial aide. They won't look at money set up by a grandparent for your son(s)/daughter(s) however. The risk though is that other person/spousal group dies and you lose that advantage.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1211
  • Age: 39
  • Location: Texas
Re: How much to save for kid's education
« Reply #3 on: August 13, 2014, 08:24:38 PM »
Could look at a Coverdell ESA. Or just tell the kids to get a free education on YouTube and use the money to start a business.

Dee18

  • Handlebar Stache
  • *****
  • Posts: 1619
Re: How much to save for kid's education
« Reply #4 on: August 14, 2014, 05:16:46 AM »
You are wise to be thinking about this early.  I have a child about to go to college and just learned that what I consider college expenses is much broader than what the 529 rules consider to be college expenses. 

bo_knows

  • Pencil Stache
  • ****
  • Posts: 819
  • Age: 38
  • Location: Fairfax, VA, USA
    • The Crowdsourced FIRE simulator
Re: How much to save for kid's education
« Reply #5 on: August 14, 2014, 05:54:15 AM »
What does the in-state tuition look like where you live? Will $80k (between the 2) after 10 years of appreciation be close to paying for 4 years of college for both kids (is that the goal?) ?

My personal opinion, having 1 child and aiming for a 2nd, is that I'd be afraid of saving 100% of college savings in a 529 for BOTH kids. It's very possible that 1 kid doesn't go to college, maybe goes to a trade school, maybe goes into the military, etc etc, which would cause you to incur a 10% penalty when you withdraw extra cash.

If the answer to my first 2 questions is 'yes', then I'd consider just redirecting your savings into whatever other avenues you have (it appears you've maxed out tax-advantaged accounts, so brokerage account time?) and consider that a possible pool of money for college if it's really needed.

svosavvy

  • 5 O'Clock Shadow
  • *
  • Posts: 33
  • Age: 42
  • Location: Western NY
Re: How much to save for kid's education
« Reply #6 on: August 14, 2014, 09:32:23 AM »
I found this helpful.  Tapping Roth for college expenses.  You will have to bear with this guys tenor which is: why tap your Roth when you can get a perfectly good LOAN.  Personally I have twin 8 year olds and a Coverdell for each.  Yes I have done the research which clearly states Coverdell ESA's are the dumbest idea on the planet and partially agree.  I opened the accounts in 2008 and maxed each year.  I am frugal and want my children to learn to make their own way in the world.  Unfortunately college debt seems the new form of indentured servitude.  I don't need them battling ozma when they should be attaining liftoff.  Aiming for full ride 4 years at state, if they want more they can take it on themselves.  36 yrs old w/2kids & lower middle class income so I am a big fan of paying my taxes now not later. 

http://www.bankrate.com/brm/news/529/20051024a1.asp

alphalemming

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: How much to save for kid's education
« Reply #7 on: August 14, 2014, 09:52:59 AM »
We live in California and the university system here is good.  Tuition + room and board at a UC is running $27K for 2013-2014 school year.

Like many others here, I expect my kids to be financially responsible, yet at the same time, don't want them to exit college with life-limiting debts if at all possible.

I think I will be scaling back on the 529 and putting the same amount into some other vehicle that gives me more flexibility.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2223
  • Location: EastCoast
Re: How much to save for kid's education
« Reply #8 on: August 18, 2014, 11:05:18 AM »
We live in California and the university system here is good.  Tuition + room and board at a UC is running $27K for 2013-2014 school year.

Like many others here, I expect my kids to be financially responsible, yet at the same time, don't want them to exit college with life-limiting debts if at all possible.

I think I will be scaling back on the 529 and putting the same amount into some other vehicle that gives me more flexibility.
Note that college costs rise about 5% annually so for a $27k college for 4 years you would need $163,749. per child!
http://www.savingforcollege.com/college-savings-calculator/index.php?current_cost=27000&years_until_college=7&years_attendance=4&attendance_rate=100&coverage_rate=100&save_until=ends&starting_balance=0&contribution_rate=12&inflation_rate=5&investment_performance=6&page=results

Since we're counting inflation, assuming 9% growth your 529 plans would be about $73k each at that point.

College cost is a big fear of mine. Since we're having a kid now the site projects we'll need over $450,000 to cover cost of an average private school once my child is 18! Since my wife went to a pretty prestigious college she feels that is important for getting a job (I don't know...) and it's been difficult to sell her on the idea of state schools being good enough.

edit; holycrap. My wife's college costs $60k/year now. In 18 years we'd need over $600K!! I hope she does not want 2 kids ($1.2M!), or we will never be able to retire..
« Last Edit: August 18, 2014, 11:31:13 AM by Scandium »

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: How much to save for kid's education
« Reply #9 on: August 18, 2014, 12:02:51 PM »
One thing to consider is how financial aid is calculated.  There are merit based scholarships/aid that does not take into account the students and guardians ability to pay and then there are need based scholarships/aid that do take into account the students assets and guardians ability to pay.  Most Ivy league schools only provide need based scholarships.

529 accounts that are in the name of the student are weighted more vs guarding income and assets.  So the more they have in 529 accounts the less aid they will receive.  Since you are on this site you might be FIRED by the time your kids go to college and could get significant aid if you keep your income under a certain level, for Princeton income under 120k tuition is fully covered http://www.princeton.edu/admission/financialaid/how_it_works/who_qualifies/.

However if they have 529 accounts then their aid will be reduced by that amount.  You can always change the beneficiary of the account to yourself and then change it back if they decide to graduate school.

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: How much to save for kid's education
« Reply #10 on: August 18, 2014, 12:58:01 PM »
I'd stop contributing to the 529, and instead put funds toward general aftertax savings/investments.

I'm no expert, but it seems like a headache if you overfund the 529 and have money left over (that you don't want to give away to someone else).


missj

  • Stubble
  • **
  • Posts: 133
Re: How much to save for kid's education
« Reply #11 on: August 18, 2014, 09:05:22 PM »
I know you didn't ask for this type of opinion, but I really think there is something to be said for paying your own way in college.  I don't mean paying 100% as that is pretty suffocating but contributing SOMETHING...so that you are a partner or an investor in yourself.

My parents agreed to pay half my tuition, half my books, half my rent up to $200, half my car insurance and nothing else.   Food, gas groceries, bills etc was up to me.  I think this was a pretty good deal because it made me really think twice about which classes I really "needed". 

I had friends who would sign up for a summer class, decide to skip a couple days for a summer trip or something, then come back and bomb a test and so they drop the class with no refund to avoid a bad grade on their transcript.  I NEVER did anything like that. 

I had calculated how much each hour of instruction was costing ME and always showed up on time because I was paying something like $10 an hour of my own money (plus interest) to learn what they had to teach me so DAMMIT, I was gonna get my money's worth.  I had lots of friends who either had free rides from FAFSA, sports, or mom and dad and they strolled in when they felt like it, texted their boyfriends during lecture, slept during class etc. they just basically did the minimum necessary to get a B.  They weren't investing in their own learning, they were  completing tasks to keep the checks coming and accumulate credits toward an arbitrary degree that many of them had no idea how it would make them any real income.

now, I'm not suggesting your kids will do this (though let's be honest, the might) but my parents had enough money to put me through 4 years of university without batting an eyelash.  But they both worked their way through college, and wanted me to build the character that comes along with that.

As a result I chose to take my first 2 years of pre-reqs at a community college before completing my degree.  I worked 15-25 hours a week at Starbucks and paid as many expenses as I could as I went (I also got some tuition reimbursement from Starbucks which was a nice perk).  I came out of school with $13,600 in debt and a professional license that earned me $57,000 my first year.  Now I earn $92,000 a year off that same frugal 4 year education and haven't had student loans in many years.

I realize you may be looking for tax shelters, but if you end up not using it all you'll be worse off.  And it will be hard to "enforce" your rules or ideals about how you want your children to behave in college if you've got the underlying worry about "all this money" sitting tied up in an account....you won't want uncle sam to get it so you might tolerate less than scholarly behavior as a result...

Just a thought.

alphalemming

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: How much to save for kid's education
« Reply #12 on: August 19, 2014, 02:39:11 PM »
Your input is welcome too.  Both my wife and I are products of the public school system and I paid my own way though school.  Of course, it was also a lot more affordable when I was going to school.

My kids have a pretty good appreciation for money and there is certainly as expectation that they will work and save towards their college expenses ... however, I also want to make sure they have the opportunity to start their post college careers without significant debt hanging over their heads.

Mister Fancypants

  • Bristles
  • ***
  • Posts: 296
  • Age: 42
  • Location: New York
Re: How much to save for kid's education
« Reply #13 on: August 20, 2014, 11:28:26 AM »
We have a pretty healthy college fund set up for my two boys.  The goal is to give them the opportunity to finish college without  debt.  Both boys (twins) are 11 and we have $40K each invested in a 529 plan.  I'm thinking of ending the investment in the 529, as it might be a bit too restrictive.  Options:

a. Call it good and let the current funds appreciate over the next 7 years before they get to college age
b. Continue funding the 529, but at a lower contribution rate
c. Continue funding their futures via a different savings mechanism that gives them more flexibility for schooling, etc
d. Use the extra funds to aggressively pay down the mortgage
e. Other

Any suggestions or advice welcome.

Some other background.  Mortgage is our only debt, other than credit cards, which we pay off every month.  401(k) and IRAs are fully contributed to.

@alpha... Thanks for posting this... I was just thinking of starting a thread with similar questions. I too have twins a lot younger than yours however. I am torn too on the best way to save for their college. They are not in school yet so it is hard to really tell where their college futures might lie, however based on family academic history and "how advanced" they are so far Princeton is not out of the question. I use Princeton as my Ivy of choice as I just love the campus, I would not be opposed to other Ivies per se if they have the aptitudes and desire.

That being said I myself am the product of a state school education and would not be against that either, but am someone who will plan for the high end and adjust downward later if it is not needed. I would hate to not be prepared for the expense if they make Harvard or Yale etc...

I don't want to hijack your thread with my questions... so I will start my own

Mister Fancypants

  • Bristles
  • ***
  • Posts: 296
  • Age: 42
  • Location: New York
Re: How much to save for kid's education
« Reply #14 on: August 20, 2014, 12:18:27 PM »
I don't want to hijack your thread with my questions... so I will start my own

Link to thread with my questions if you are interested:

http://forum.mrmoneymustache.com/investor-alley/structuring-your-kids-asset-while-saving-for-college-and-thinking-about-fafsa/new/#new

davo

  • 5 O'Clock Shadow
  • *
  • Posts: 30
  • Age: 34
  • Location: Tallahassee, Fl
Re: How much to save for kid's education
« Reply #15 on: August 26, 2014, 08:20:41 PM »
I'd stop contributing to the 529, and instead put funds toward general aftertax savings/investments.

I'm no expert, but it seems like a headache if you overfund the 529 and have money left over (that you don't want to give away to someone else).

529 plans can be used to transfer assets to your children or grandchildren without paying gift or estate taxes. They can become your grandchild's or great grandchild's college fund.  To the extent your adult children are financially successful a 529 plan already set up for their kids means more money they can use elsewhere.

sleepyguy

  • Pencil Stache
  • ****
  • Posts: 671
  • Location: Oakville, Ontario
Re: How much to save for kid's education
« Reply #16 on: August 27, 2014, 09:06:14 AM »
University/College isn't as crazy expensive as it in Canada here compared to the US.

We'll help our 2 kids if they decide to go.  Projection wise, we should be at around $100k when my son hits 18yrs old, then my daughter 2 yrs after.  They are both using the same RESP account.  If they decide to do an MBA or whatever it's on them.  Also housing is on them as well, we aren't funding that.