With as many assurances that my concerns are unfounded - specifically that a FAO will not alter our package based on a perception that we are able to pay a higher amount since we have deferred a high percentage of income in base year - I am beginning to feel a bit more at ease and perhaps more confident to continue with our usual income deferral.
To thumper1’s point, all of the NPC we filled out took home equity and assets into consideration. Regardless, our comfort limit for tuition is $30,000 x 8 years ($240,000) for our 2 sons’ educations. We may be ignorant, or out of step, but for us, it is just so hard to imagine the benefit of spending more than $240,000 for two undergraduate degrees.
It’s helpful that you have defined your college budget for your two sons. But the challenge is that it will be hard to know what $120,000 will buy you for an education 3-6 years from now. That’s why folks are emphasizing the concern about applying AND being accepted to meets full need schools. If those aren’t in the picture then you need to apply to schools where COA is less than or equal to $35,500 freshman year (your $30,000 plus the $5,500 your son can borrow).
If merit aid is a possibility than the list can include schools where the cost of attendance is $35,500 plus whatever merit aid your son can get.
Or…if you are feeling that $30,000 a year for each of two kids is going to stretch your budget…then have your kids start researching colleges where the cost to attend includes substantial merit aid for them.
For example, if your first kid is really a strong applicant and competitive admit for those meet full ends school you are looking at, that same kid might garner a significant merit award at University if Alabama…and you might end up paying less than $20,000 a year for him to attend.
i’m guessing that you are living very frugally as you are saving so much each year. I’m impressed! You have a strength of “maximizing” – and are doing very well at it. Are you a “mustachian”?
Here’s something to think about. If your student doesn’t get into a school that meets needs and gives institutional aid – and he is headed to a state school – I’m guessing that your frugal/maximizing aspect is going to react when you hear how much room and board costs at a state school. It can be around 11-15K per year for 1 kid, which is almost half of what your family of 4 is living on.
That cost is going to go against everything your family has worked for and saved for. It irks me - and i’m not a saver as much as you (but i am a maximizer)! It’s mandatory for many schools at least freshman year.
So — to feel like you are maximizing the most you can, i’ll encourage you to make sure you have in your back pocket a list of schools that offer good merit that your kids will qualify for. Encourage them to do their best with grades and testing in HS; study for that PSAT – and with merit possibilities it might take the sting off that expensive R&B cost. Make sure there are some financial safeties in your list.
( I have 2 in college now. 1 in the dorms. 1 in a greek house which costs less than the dorm. It’s pricey all the way around. As a maximizer, i have gone around and around with the FA and scholarships department; it gets me no where. All about the AOTC (tax credit for qualified expenses) and scholarships, and if they REALLY wanted to help, they would put a dept. scholarship toward R&B and not towards fees/tuition which one kid has mostly covered already and makes it a wash for us. Makes no sense!)
If you think you can pay $30,000 a year for college…I would strongly suggest you start NOW putting that amount in some 529 account or something…so about $3000 a month. See if it’s a sustainable amount for you to spend out of pocket. If not…rethink your plan.
Hi thumper1: Thanks for sharing helpful perspective and suggestions. Yes, that is the new direction where we are headed - after taking onto consideration suggestions made here we are building up enough savings to fund up to $30,000/ year tuition (through accrued savings and annual income savings as we go). This will require us to reduce income deferments starting next year - 1st base year - although we are going to continue HSA deferrals going forward for the tax savings since we have 12-years of unreimbursed medical expenses since we opend an HSA that we could reimburse to effectively free up cash flow during college years - since as we are learning on another thread qualified HSA distributions do not effect EFC.
Hi bgbg4us: I have looked at the Mr. Money Mustache and agree with much of what is discussed there. We are also maximizers, and live simply - not so frugal as might appear since we have been living off an ever diminishing level of previous years savings to enable such high % of income deferral. Our in-state tuition fits into our current budget.
I am in a similar situation as you, but a little ahead of you time wise. I have 2 in college (one at a meets full need school) and 1 in high school. For many years I maxed out 1 401k, 2 Roth IRAs and an HSA (my wife’s 401K has high fees, no match and not so great choices so we passed on that one). Here are some observations:
I would not assume your kid will get into a meets full need school. My kid had great grades, solid SATs and many extra curricular activities. He got shut out of all but one of the meets full needs schools. He was pretty disappointed not getting into to some of those schools (he is very happy where he is now).
I have seen thumper1 make his “financial gymnastics” comments a few times. Although I think it’s solid advice, I do feel some of the gymnastics are worth it. This is certainly true at meet full needs schools, but could (you will never know for sure) be at other schools too. You will find when your kids go to school the temptation is even greater to do things with assets. Proceed carefully as the financial gymnastics can have a long-term affect. For example, any potential extra FA you get discontinuing tax-deffered savings could be offset by losing on years of compounding tax-deffered savings.
I think I am in a similar situation to you in that I feel I am 401K/IRA rich but current asset middle class. Although it was not my plan (I never really expected to get financial aid), it is a good place to be for financial aid. I came to the conclusion that I needed more cash available during the college years. So I backed off on my retirement saving the past few years. The tax factor (paying lee in taxes affecting aid) and the need more cash factor made that decision easier. In fact, many years of maxing out the various plans have put me (and sounds like you) in a position to do that. One correction to something someone said above - Jan 1 of a child’s sophomore year is when you can max out tax-deffered giving without any impact to FA.
When factoring what you can pay for a school, it is important to take everything into consideration. You mention 529 savings and income getting you to around $30K. There’s also AOTC which effectively adds $2,500 to what you can pay. In addition, cash flow becomes important. You don’t get that AOTC money back till the next year. Loan’s also are a consideration. I have always maxed out on any subsidized loans offered and plan to pay them back in full before any interest is charged.
I have wondered how I feel about putting myself in the best position to get as much FA as possible. Am I taking aid away from other students who need it more simply because I did the research? This is certainly an individual feeling. There are times I knew of financial gymnastics I could have played but didn’t partly because of this feeling.
To be honest, I think it is great you are investigating all these things now.
Hi private ID:
Yes, it sounds like we are in similar situation. Replies to your numbered observations. A few questions under #4.
“Do not assume your kid will get into a meets full need school.” Yes, this was my main takeaway from this thread - an ah-ha moment that made me realize we need cash flow and to back off deferrals.
RE: “financial gymnastics”. For peace of mind, interest in the subject and realizing one should know fully where your earnings go, we have always employed some degree of tax and retirement planning. While this can certainly - if taken to extreme - lead to “financial gymnastics”, to me it leads to less regret and a realistic lifestyle/ spending within means.
Yes, sound like we are in a similar situation - concluding we need more cash available during the college years and so are reducing retirement saving during college years.
Thanks for the helpful heads up on the AOTC, I had not factored that into cash-flow - this is a full tax credit - offsetting $2,500 in Federal tax liability and not offsetting income, correct? RE; Loans - We would also plan to max out any subsidized loans offered and plan to pay them back in full before any interest is charged, but are having a hard time determining if we/son is likely to qualify for interest deferred/ subsidized loans on $84,000 AGI/ $84,000 earnings. Any perspective here?
RE; “feelings about putting yourself in the best position to get as much FA as possible”. I can see how “financial gymnastics” could lead to gaming any system, if one were dishonest and learned how to exploit a situation. I don’t feel I am taking advantage of anyone or any situation. I feel a certain level of responsibility to educate myself about consumer finance, behavioral finance, taxes, health care, social security, retirement planning, etc… and now college funding. Otherwise I feel it would be like walking into a party without speaking the same language as those in attendance or onto a playing field without knowing the rules.
Yes, a tax credit is a dollar-for-dollar reduction in the tax liability, as opposed to a deduction, which reduces taxable income. $1,000 of the AOTC is refundable.
Thanks BelknapPoint. Are there any income level thresholds or phase outs for the full $2,500 AOTC? In general does it work along the lines of if one had exactly $2,500 in Federal tax due and qualified for AOTC they would pay $0 Federal tax after the credit? Under another scenario, if one had $1,500 in Federal tax due, the credit would result in a $1,000 refund? I realize I should just read the IRS rules here.
Financial gymnastics- tax planning, estate planning, retirement planning- all important tools to a healthy financial lifestyle. It’s when you make dumb decisions (annuities when they are inappropriate for your age and other considerations; single premium life insurance, moving assets around to random family members to shield them from having to be listed on Profile or FAFSA, titling property in the name of someone who in no way should have ownership of your primary residence, etc.) that people get into trouble. I have seen people make $50K mistakes for the sake of an extra 2K in financial aid. I have seen people take losses when they have no gains to offset them, and don’t need the cash, except “I need to get my Exxon shares off my balance sheet”. Then they have cash- which they use to buy stuff they don’t need.
And the worst (in my opinion, only because it’s somewhat irrevocable)- retiring from a job you like and are good at, to reduce your income and start collecting social security as soon as you are eligible because your kid will get more aid.
College lasts for four years. If you retire in your mid sixties, you may need to support yourself for another 30 years. It won’t take long for you to wish you still had your nice paying job, and that you could defer your social security which leads to higher monthly payments (for as long as you live).
Educate yourself, sure. But being shortsighted about how much aid your kid will get when he gets into Harvard is betting a LOT of your financial future for on the slim chance that it pays out for you.
privateID; That is helpful perspective. I seem to remember reading (I can’t find it now) that depending on school priorities FAOs have the discretion to award subsidized loans or not - even if there is unmet need present and a student is accepted. Is this understanding accurate?
My understanding was along the lines that each school is allotted a certain amount of Federal aid to award and that they are able use their institutional priorities to determine how and to whom they distribute the subsidized loans. Is my understanding accurate?
I don’t think it is ‘gaming’ the system. It is the system. There are a lot of things that are unfair to one group or another. IMO, single parents are very disadvantaged on the AOTC as it doesn’t matter if you have 5 kids in college or 1, you get no AOTC at $90k in income, which isn’t a particularly high income when you are supporting a family. You could have a single mother supporting 5 people, 4 of them in college, and get no AOTC while a family of 3 earning $150k per year with one in college getting the full AOTC. Unfair. People in high COL areas feel they are disadvantaged in the EFC calculations.
It’s the system. You have to set yourself up in the best way possible.
Doing financial planning to get the most in FA is good money management. If a family decides to put the 529 accounts in the children’s names as owners, that allows them not to report younger children’s account on an older sibling’s FAFSA. The downside to that is there is less flexibility of moving the money around. What is good for one family is not good for another, but it is not ‘gaming’ the system.
I don’t worry about other students not getting the aid if my child does. Aid isn’t always redistributed if the aid is not accepted by a student (work study, SEOG). Many school offer the merit aid assuming only a certain percentage will accept admissions, and then do not reaward it.
Your child must have unmet financial need to get subsidized loans. So…if your EFC is $30,000…and the cost of attendance is $30,000…or less…your kid won’t get a subsidized loan.
If the college costs $50,000, and your EFC is $30,000 and your kid gets a $20000 scholarship, again…no unmet need.
If the college is $40,000 and your EFC is $30,000…and your kid gets no other aid, that would leave $10,000 in unmet need…and for freshman year, your kid would get $3500 in subsidized loans.
One other thing…YOU can pay the interest annually…it’s really not a huge amount…so you would be subsidizing the loans for your kid. That’s what we did.