Follow up question to college savings thread

[tweezers]

I have a follow up question for those who indicated they were saving for college in the thread below.  We have a 6 and 8 year old and are currently saving nothing for college.  Instead, we're following the investment order guidance (also below).  My assumption is that college help would come out of whatever is saved for #8 (assuming we get there...we're not there yet, and may never be because we're a single income household), although I'm not convinced that this is the best strategy.  I don't think they'll be eligible for much financial aid.  If you are saving for college, where do you place college savings on the 0-8 scale?


https://forum.mrmoneymustache.com/mini-money-mustaches/how-much-do-you-put-away-for-college-each-month/

0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund mega backdoor Roth if applicable           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.         

[MDM]

My assumption is that college help would come out of whatever is saved for #8 (assuming we get there...we're not there yet, and may never be because we're a single income household), although I'm not convinced that this is the best strategy.

That is essentially what we have done and are doing.

We probably should have done a little more with 529s, but that's based on hindsight and what the market has done in the recent (several years) past.

One can invest in a 529 ~18 years before needing the money, and in that case can reasonably be somewhat aggressive in asset allocation.  If, however, one takes care of one's own retirement first, then the 529 investing window is shorter and the asset allocation "ought" to be more conservative - thus reducing the likely gains.

Early contributions to 529s can work out well, so...?

[Laura33]

I don't think the standard order focuses on college at all, so I don't think it is even addressing the question of 529 vs taxable accounts.  For me, I would do 1-8 all to the point of funding what I think I need for FIRE on my designated schedule.  Then I would add a 529 (and possibly more post-tax savings) to save for my college target.

Of course, I should also say that my FIRE timeline specifically includes getting the kids through college (i.e., I am willing to work longer to get my kids through school).  If I were prioritizing FIRE at the earliest possible date, that would basically mean no college savings and putting all that money in a post-tax account for my own future needs.

[Ricksun]

If you're sure you're going to pay for some/all of college, I'd fit it in between #6 and #7. 

6. Fund mega backdoor Roth if applicable           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. 

There is some tax advantage in a 529 account, similar to your Roth IRA if using it for education.  Additionally, there may be some savings from state taxes as well, depending on where you live.  There's no tax advantage in #7.

If you're inclined to let them pay their own way (not bad approach), I'd follow the traditional method, as there's a penalty to withdraw for non-education expenses that would mostly erase all of the tax advantage.

Ricksun

[shawndoggy]

I don't think they'll be eligible for much financial aid.

Have you checked out: https://fafsa.ed.gov/FAFSA/app/f4cForm?execution=e1s1 ?  If you could get to FIRE *before* the tax year used for the first kid's FAFSA, is it possible you could get your taxable income low enough for aid?

We have two in college now and neither is eligible for meaningful financial aid either.  We were able to stuff away a pretty sizeable chunk in 529s for each kid, and then each kid also has a UTMA account made up of assets that were gifted from grandparents / great grandparents when they were little.

If I had it to do over again I'm really not sure whether I'd do the 529s.  The appreciation in those accounts wasn't that much, and now there's a bit of a "use it or lose it" feel to the money that encourages spending (the threat of the penalty).  On the other hand it's nice to know that that money is "theirs" for education.  While we could've plowed the same money into after-tax savings, I think from a mental perspective I'd be a lot stingier about spending it for college because it'd feel like "my" money instead of "theirs."  I think if we had gone that route (brokerage savings vs 529), knowing what I know now, I'd definitely suggest keeping the college money in a different account, even if it has your name on it (i.e. your retirement $$$ with vanguard, your college savings with fidelity) just from an emotional accounting perspective.

Unfortunately you don't have to make THAT much to be in the same financial aid situation as Bill Gates.  I cannot fathom spending sticker price for a four year private education at a name brand school.  Shoot for your 6-8 year olds it wouldn't surprise me at all if the top schools were 80k a year "all in" by the time they are heading off to college.  Unless you KNOW your kid is going to be the next Speilberg or Zuckerberg or Gates or Clinton, I can't see spending that kinda cash on an elite college.

My oldest has certainly been challeged at a state U in a nearby state where she got some decent scholarships and kept the price roughly inline with going to the local U.  My son will be attending a four year private school (not quite "elite," but selective) next year on an academic scholarship.  Haha be better be able to maintain the required gpa because it would be very difficult to pay the retail price.

[little_brown_dog]

We have made it through all of the earlier steps and are now on 7 & 8 (mortgage pay down and taxable investing, which I view as being interchangeable based on the person's preferences/goals/etc). This is the point where we also started saving for college. I personally would not save for my kids' college if I was still paying off my own student loans or if we were not maxing our own retirement accounts. We follow the "secure your own oxygen/life vest/etc first before helping others" rule as we know that our financial stability is actually more critical to our kids' future financial security than the amount in their college funds. Right now we are front loading the funds with a relatively high amount every year, and then as we know more about our kids (health/development, academic aptitude, etc) and the changing higher education environment, we might reduce the contributions over time in order to prevent massive over saving.

[Pigeon]

Our situation was somewhat different in that we've never had appreciable non-mortgage debt, and our retirement savings vehicles are different.  We prioritized funding our kids' education along with saving for retirement.   Being FIRE was much less important to us than providing a college education for our kids though.  We have 529s, a taxable account and are cash-flowing some college costs.  The 529 is state tax deductible for us, and that's been helpful.

[tweezers]

Thanks for your responses, everyone.  I think we (I) need to sit down and really look at the FAFSA guidelines, and do some real FIRE calculations.  We've been focusing on maxing my 401K and HSA, and both our IRAs (and minimizing spending) without specific objectives/time frames for FIRE. We're doing pretty well and have ~50% savings rate, but need to sit down and do some math to see where we are.  My husband and I are both Canadian and have zero experience with US college tuition and loans, and admittedly we've sort of been willfully ignorant on the subject while we prioritized our own retirement.  I think we're going to pay for some of college, but haven't come to a consensus on the extent which we will do so (I fully funded my undergrad and graduate school and my husband's parents paid for his schooling, but Canadian tuition is a fraction of that in the US), or a plan for actually doing it.  Your thoughts and insight is greatly appreciated!   

[Beriberi]

@shawndoggy- I believe that you can take money out of the 529 without penalty equal to the amount of scholarships earned.  So, if kiddo attends school with total cost $30k, gets scholarship for $20k, you can take up to 30k out that year.  Most people don't do this because they are going to deplete the 529 without any help. However, if you are feeling that you need to "use it or lose it" there is a way to extract more.

Also, if you have a child living off campus, there are some ways to purchase a home with 529 funds.  I don't know the mechanics, but I am pretty sure google does. Finally, if there is still money left over, change the beneficiary to yourself and use it for "lifelong learning" vacations.

[Morning Glory]

Does a tuition waiver count the same as a scholarship for 529 purposes?