Hi,
We have a HS senior and junior this year, so in two years will have two in college. We live in a high-cost state (CA) but have a relatively high income ($300K) with lots of retirement savings and home equity. We made the decision to not specifically save money in a college fund, since our 401k plans were so good, thinking we would just pay for college out of our earnings and cut back on the retirement savings for the 6 years that we have kids in college. Question, is this the best way to do this, or should we start now, one year early, and put money into a 529 fund? I believe the 529 only provides tax advantages on the earnings, of which there wouldn’t be much, so is this worth it over just going with the original plan of paying out of our earnings? Any other ideas? Thank you for any advice!
Rather that just focusing on ways to cough up the money, also spend time researching schools which cost less, i.e. schools which offer MERIT money.
Thank you for the reply! Yes, we are definitely researching schools that are either a better value for us (UC, CSU, WUE) or offer merit aid. Right now I am hoping for suggestions on the best way to save/pay whatever the total cost may be, in case there’s an option we haven’t considered. Thank you!
Are your 401k accounts matched by your employer? If so, I wouldn’t stop contributing because you not only lose the money for your retirement, you’re also losing the match.
I suggest you just save as much as you can outside the 401k for the next year, and then continue with that amount in payments while your children are in college too. Say you can save $2000 per month on top of your current payments and 401k contributions. You’ll have $24k each year to pay toward college, whether it is for one kid or two. It may mean not going on vacations to Europe, or not remodeling the bathroom. It may just mean cutting back on gifts or groceries. It really depends on how you live and spend. I did it. The child who wanted to play on a travel sports team didn’t get to go to Europe with their class, while the other one did. I set the savings goal and we only spent money on luxuries like camps and trips when the savings goal had been met. We still did a lot, just not everything. If opening that 529 makes you save, then do it. Some states also give a state tax benefit to the 529 plans.
You should also figure out how much you think you’ll need for your kids per year. If a state school is in the picture, you might be able to ‘pay as you go’ but most families can’t do that with 2 in private schools, unless there is a lot of merit involved.
Many colleges will let you pay tuition on a periodic /monthly installment plan with very low or no interest, which you could pay as you go from your income without needing a big lump sum in August. But the monthly amount will obviously depend on the cost of the school. This begs the question, what is your budget? USC at 67k per year will require a heftier monthly payment than ucla, which will in turn be a bigger monthly payment than cal poly.
I also vote to NOT to reduce your retirement contributions, unless you have an iron clad guarantee your kids are going to support u in old age.
FYI
List of schools that offer merit money:
http://www.kiplinger.com/tool/college/T014-S001-kiplinger-s-best-values-in-private-colleges/index.php?table=prv_univ
Make sure to look not only at the avg amount awarded, but also at what percentage of the students receive it. There are separate lists for universities & LACs.
Start hunting for merit money now. Look toward the Midwest and South +LACs downloader choices. Whitman, Willamette, Lewis&Clark, Occidental may have enough merit so check them out.
At this point, investing in test prep to ensure 1400/32 may be your best investment strategy.
Merit money and lower costs schools are fine. You might also consider the following.
I am a full pay parent and have used or looked into the following vehicles, all of which are cash equivalents
- The schools own tuition prepayment plan - many schools will give you the current tuition if you prepay 4 years. The effective return is tuition-inflation tax free. I’m in my 3rd year for D2 and so far tuition inflation has been about 3%.
- Colorado 529 has a stable value plan paying around 3% on cash open to folks in any state backed by MetLife
- Virginia 529 plan has FDIC insured accounts at two banks paying 1-1.5% open to folks in any state
- Private College 529 Prepaid Plan Participating Colleges www.privatecollege529.com
We used this to prepay D1’s senior year in college when D1 deposited.
It’s probably too late to put any college savings at significant risk at this point.
Enough to beat in-state costs at a UC?
Obviously, that would be possible at some schools, but I’m not sure the OP’s kid would be interested in those if a decent UC is an option.
Do you have Roth IRA that you may take out the contributions penalty free?
^ (8) true: the UCs are going to be the reference point. Other colleges, in order to qualify, need to cost less than 28-32K a year, or offer something UCs don’t, or a combination thereof. That’s why hunting for merit, starting now, is very important.
We did what the OP did. We did not save specifically for college. We had two kids in college for seven years…with one year overlap. We paid out of current earnings…using my full income to do so.
So to the OP…here is what I would do. Starting NOW…put aside in a bank account monthly 1/12 this of the cost of attending a UC. If you can do that now, you will know you can do it while your kiddo is in college.
To the OP: if you are not willing to pay list price to any college, be sure to tell your kids the price limit before they make their application lists.
Do you have a household budget*? Most families don’t, and it is the biggest tool in your college savings arsenal. If you don’t have a clear understanding of where your current income is going, you’re not in a position to figure out whether there are changes that can bring your spending into better alignment with your priorities.
- $2000 a month to Mastercard is not a budget item. Knowing how much you actually spend on different categories (grocery, fast food, ....) within that is what is important. Maybe you have a $250/month Starbucks habit that you've never actually thought about because each swipe of the credit card is only $6 or so. Perhaps you're spending a lot more on vacations/recreation than you expected, or didn't know how much groceries actually run for a month. In a swipe and go economy we can become very disconnected from actual spending, only knowing that there isn't much money left at the end of the month.
Personally, I like YNAB (You Need A Budget) as a way to get control.
I’m all in favor of giving students a college budget, but it works better if you and your husband actually invest some time in understanding your real financial situation. You live in a high cost state, but I’d be shocked if you didn’t find a number of areas where you could make very different spending choices if you could see the whole picture and think ahead to two kids in college at the same time.
It sounds to me like you had a plan - pay from current income - so, just do that. From a cash-flow perspective it’s pretty predictable and easy to manager. (I have one in college and a Jr in HS and receive no financial aid so, this is from my experience)
529s are a PITA and are really best as an accumulation and asset transfer tool - In CA, the tax benefits are only on earnings in the account. I wouldn’t bother. Just pay the bills from your checking account as they come in. For a CSU, tuition is due around Aug and Dec plan on $3500 per semester. Have your kid charge text books and incidentals on a credit card that bills you. Dorm expenses, you can pay monthly or in advance (expect $10k to $11k per year at a CSU). Note, that’s less than $20k per year. When they move into an apartment, you can just set up an automatic monthly transfer appropriate for their situation. In most cases, it will be less than the dorm. A UC will cost about $10k more. Full fare at a private, substantially more than that.
Don’t raid your retirement or take a HELOC, you will regret it. Tapering your 401k contributions will work but, increase your tax liability significantly. I’d try to find another source for the money.
As a CA resident - you have another really cheap option. Have your kid live at home, attend your local CC, then transfer to your local CSU. Even with a high income, CCs are virtually free. CSUs cost $7k per year for tuition. So, a well planned education will cost well under $20k TOTAL (books, parking, included) - So, jut $5k per year net cost. If you can’t squeeze that out of your budget - your kid can earn the money by working 10 hours week at Starbucks.
Your kid doesn’t get to go away but, for many, it is a trade off worth making.
Merit money is great if you can get it. In most cases, there are strings attached. Be careful heading to a school you wouldn’t otherwise pay for. I know students who lost their aid at pvt schools, forcing them to transfer on short notice or pony up $65k per year going forward.
The right course for you will depend largely on your daughter’s qualifications and interests.
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we would just pay for college out of our earnings and cut back on the retirement savings for the 6 years that we have kids in college.
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Look LARGE merit now based on stats.
What are your senior’s stats? What major and career goal?
I don’t think you should cut back on 401k, particularly if you don’t have pensions as well. do you?
We paid very little for our kids’ undergrad educations. They both took very large merit scholarships. Our older son is out of school now, but younger son is in med school, so he still costs us.
There’s a reason why there are 1000 Calif students at U Alabama. They can go there for about $12k-15k per year after large merit for high stats.
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UC GPA site is 3.25, and his ACT on his first try was 24.
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Ok…looks like he won’t be getting big merit at schools that you probably would consider.
CS major
sounds like a CSU is best for him…and your wallet. He can go for about $20k per year.
You’re a physician? If so, then likely you can pay out of pocket for a CSU and still contribute to your retirement.
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he has a physical disability
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Is it better that he not be too far from home? Will he need to be near his physicians?
It’s best that he go to CC and then transfer up to UC. I’m also pay college cost out of income. When I retire then I might have to dip into savings. But cost of attendance at a UC is so reasonable that it doesn’t make sense(to me anyway) for a private tuition cost.
This one is kind of silly -but if you are large spenders and pay off credit cards every month - then consider a Upromise master card. We put every thing on it and get a bit back for college.
Do both parents work full time? If not, the non-employed (or part-time employed) parent can get a job or up his/her hours. I’ve mulled around in my head a list of easy-to-enter jobs that a heretofore at-home parent can do to earn college costs. For example, real estate agent. Sell just a few houses a year and you’ve got a full year of college expenses. Another is a job in a nonprofit doing whatever your original profession was (finance, marketing, office management, research, etc.).