How are you saving for your kids education, if at all

Parents Forum
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<p>Doubleplay,
Thanks for your concern. A couple things I didn't mention make us comfortable borrowing even in my situation -- </p>

<p>1) our current mortgage payment is relatively low as a percentage of income, i.e., it's cheaper than the rent we were paying nine years ago, and the house has appreciated a good deal. You'd look at our 40+ year old split level house and say, "This house sells for WHAT?!?!", but we're in a major metro area. Happily, we bought at the bottom of the market. Taking 14 years to save a down payment (after student loans and day care) actually paid off. :) </p>

<p>2) I bought a term life policy in 1991 right after DS1 was born and increased it when I was pregnant with DS2. I wasn't working at the time and the insurance that came with my previous job ended when I left that position. It came with an automatic increase rider. The rider is now frozen so it won't increase any further, but the face amount is enough to pay for the kids' college educations in full, wherever they choose to go (or pay off the equity loan). BIG peace of mind for me!</p>

<p>3) It's relatively unlikely that my prescription coverage will be cancelled altogether -- the trend these days is to put the specialized drugs on a different formulary and charge a much higher copay. At that point, we'll move into the "professional review" part of FA determinations. </p>

<p>In my healthy days, I did employee benefits and pension work, so I knew of many horror stories about what could happen to folks. DH and I are both risk averse anyway (he gave me 17 financial reasons why it made sense to get married when he proposed, if that gives you any idea....:)). We have always spent the $$ to be well-insured (...trying to steer this back to the OP's question...buy good insurance!).</p>

<p>Onre thing I've been totally adamant about since becoming ill -- I was not going to let my illness affect my kids' plans. If they want to college cross-country, that is fine with me. If they want to turn down the full ride at the flagshiop, we'll make the money happen. They know they'll be working to pay expenses, taking out Stafford loans, and that there is no car included in the Family Financial Aid Award. My kids don't ask for much, and it will give me immense joy to see them fulfill their dreams at the school of their choice, wherever that may be. (The flagship is a very viable possibility -- we are lucky it's a great school, and DS1 has many friends who will be there this fall.)</p>

<p>Now I hope I haven't killed this thread!</p>

62

<p>DP--medical school loans are only a concern if you expect a "doctor" lifestyle.
We didn't. My H totally funded med school with loans, and we also used them for living expenses for our three then four member family.</p>

<p>He went into a comparatively low-paying specialty (pediatrics), then worked on an inner city clinic van before chucking it to be a teacher. We paid off the loans and put our kids thorugh the schools they wanted to go to. We just never lived like a doctor's family. Which was fine with us, because most of the ones we knew were pretty screwed up, anyway.</p>

<p>I definitely think the funds should go to undergrad--grad can pay for itself; no doctor can't pay them off if he/she is willing to accept a normal person's lifestyle.</p>

63

<p>"no doctor can't pay them off if he/she is willing to accept a normal person's lifestyle."</p>

<p>garland, I think (hope) you mean to say that if he/she is willing to accept a normal person's lifestyle, he can pay them off. That's what I'm hoping for- I don't wan't, and I don't think my son is after, an uber-executive super-high lifestyle.</p>

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<p>Right, that was built into the awful double negative in my sentence. :)</p>

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<p>Began a 529 plan in 1990 when D was 2 years old, this investment is enough to cover parent contribution for 4 years. D has renewable scholarships which replace student loans and work study for four years (although she plans on working several hours per week anyway) and a few scholarships which replace student summer income contribution freshman and sophomore years, probably through junior year if D budgets well; (yes, she will have a meaningful internship each summer - this year she is working with Summerbridge - National Youth Collaborative). Used Coverdall Account to help pay for private high school and a bit of freshman year, which begins this fall.</p>

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<p>Has anyone "borrowed" against their 401k ? I know all the "experts" say no but that is my major source of savings right now and college is drawing near.</p>

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<p>We began to seriously put money away rather late, because I was a stay-at-home mom and we just didn't have it to spare. We saved for 8 years to get into a small house, which we bought at the top of the market in the late 80s. We took a terrible loss on it 12 years later to get out and into a bigger place. That was a very expensive mistake financially. For several years we have put a couple of hundred a week away, hoping it will add up to enough. We only have $10K more to go for my older D's nursing school. Younger D's college is a year off. We're planning to take some equity out of our present house to make up most of the balance. Thank goodness we bought this house just before real estate went up in 2001. Our house has doubled in value in 6 years. I also require that half of my kids' income goes into a savings account for college. No matter how we do this it'll be a big hit to our finances, but I'm really happy that we have the house. I am advising both my girls to try hard to get into a property as soon as possible instead of paying rent. I plan on taking more equity out of this house to help them do that as a kind of preliminary inheritance. (AND advising them to start a college fund as soon as they have kids!)</p>

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<p>nothing new here ...</p>

<p>1) live way under our means ... and save the difference</p>

<p>2) pay off mortgage just as firsttogo goes to college ... so we can pay the equivalent of the old mortgage payment directly for school without it hurting too much</p>

<p>3) no debt other than our mortgage ... we always pay our credit cards each month; we also use no fee credit cards; net-net incuding cashback payments we are paid to use our credit cards.</p>

<p>4) live way under our means ... and save the difference</p>

<p>5) cars ... buy cheap and hold (and hold) ... our car buying pattern from the time firsttogo was born until thirdtogo finishes college is enough to pay a few years of the increment from our state U to an expensive private. Driving a 9 year old Civic versus flipping leased SUVs very few years was worth a lot to us.</p>

<p>6) Pay ourselves first ... we use payroll deductions for both our 529 and 401k payments to ensure we make the payments each month. </p>

<p>7) Bank our raises ... each raise increases the amount we save not the amount we spend</p>

<p>8) Bank bonuses ... each bonus is applied to a college fund, the mortgage, or a retirement fund. Now that we can see we're going to be able to retire we've moved to a 50/50 position on saving the bonus</p>

<p>9) live way under our means ... and save the difference (did I already say this)</p>

<p>10) one tricky one was deciding how much to put into 529 plans as we didn't want money to be trapped in the 529 if one of our kids ... goes to state school ... or gets some form of a scholarship.</p>

<p>11) For us we will be able to pay for our kid's colleges ... it will push out our retirement. Essentiallly every $2500 we put to mortgage, college, or retirement funds moves my retirement from industry date up by 1 month (I'll still need to work but will be able to have virtually any job I want).</p>

<p>12) Track progress ... I have a master spreadsheet that estimates our progress to achieving our financial goals .... I didn't like the tools from places like Fidelity ... I wanted to see our cash flow every year. Mortgage payents stop, 529 payments stop, the 10 years with college payments, social security kicks in, 401ks kick in, etc ... our cash flow jumps around quite a bit over the years ... and interestingly, the most challenging time will be (if I quit industry) the time between I quit my relatively high paying industry job and the time I can start pulling 401k and social security bucks. We should be OK in full retirement ... it's getting to full retirement that we're saving for now.</p>

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<p>We each have been fortunate to have small inheritances from our parents, which we'd never think of touching for anything but the kids' education. Between that and 529's that we'd set up hopefully by 2011 there will be enough for a private college if they go that route.</p>

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<p>hi i am a rising junior in college.</p>

<p>think about this: FINANCIAL AID!</p>

<p>As much as this hurts... saving $, does not save you $ if you are middle-class, persay. If you families, both make $60k a year (yes, I picked a low number) Family A saves up $40k for their kid, and Family B saves up $0. Both kids get into Cornell, which is like $45k a year. Who would FAFSA help more? FAFSA would help Family B more. </p>

<p>Get my point? Saving up money is only good if you are rich, and won't get financial aid anyway (like if your kid is going to a public school, you would not get aid(federal)) But for middle class folks, unless you wanna cheat FAFSA and give all your $ to a friend, before you file taxes / FAFSA... the money you save does not help you.</p>

<p>Example: my buddy got an additional $5k scholarship. Guess what... FAFSA deducted $5k from his grant... seriously.. why did he even get the scholarship then? Yes, the 5k the government took back could help others, but I still think that is not fair. like Affirmative Action ;) haha I am an Chinese-American male in engineering... it is not easy. bye.</p>

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<p>
[quote]
Has anyone "borrowed" against their 401k

[/quote]

HAHA! No, we certainly didn't do that. But surprisingly this was actually suggested to us by the financial aid office of a top college. You know, hinman makes a good point. We saved for retirement and colleges think it belongs to them! HAHA!</p>

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<p>Not the last word on this topic, but read this site on taking a 401K loan to pay for college expenses: </p>

<p><a href="http://www.money-zine.com/Financial-Planning/Retirement/401k-Loans/%5B/url%5D"&gt;http://www.money-zine.com/Financial-Planning/Retirement/401k-Loans/&lt;/a>
<a href="http://www.msmoney.com/mm/planning/marriage/college_planning.htm%5B/url%5D"&gt;http://www.msmoney.com/mm/planning/marriage/college_planning.htm&lt;/a>
<a href="http://www.babycenter.com/expert/baby/babyfinance/1296597.html%5B/url%5D"&gt;http://www.babycenter.com/expert/baby/babyfinance/1296597.html&lt;/a&gt;&lt;/p>

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<p>
[quote]
We saved for retirement and colleges think it belongs to them! HAHA!

[/quote]
For us I would use different words. We have 5 long-term goals for which we're saving/investing ... firsttogo's college fund, secondtogo's college fund, thirdtogo's college fund, paying off the mortgage, and our retirement. As we progress towards those goals whatever money we have in whatever accounts is essentially fungable ... the total we've saved is "X" and what we need is "Y" and the gap is "Z". Ultimately we will spend money from any of these 5 sources to pay for any of the 5 goals ... and in our case we had the biggest head start on the mortgage and then our retirement. So we may well end up in a situation where our choice for our last kid will be leave the retirement accounts alone and take out a loan ... or somehow leverage the retirement account immediately for the cash to pay for college. Ultimately the name on the account does not matter ... we are trying to 1) meet all 5 goals, 2) maximize returns, and 3) minimize taxes and penalities ... we will manage the money from these 5 accounts however best achieves these objectives.</p>

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<p>Borrow against 401K is not a bad idea. I've read somewhere like there are 6% of people working for MITRE have 7-figure 401K(I have a friend that works for MITRE).</p>

<p>But I think savings for college should take a 3-6 prongs approach like savings for retirement, so if one fails you have the others for backup:</p>

<p>1) work - brings salary/bonus/stock options<br>
2) Pay down your mortgage to 15-year - you can use home equity for college education
3) Maximize pre-tax savings like 401K, etc.. - you can borrow against it in the future.
4) External savings - it does not hurt to have them
5) Inheritances - What's better way to spend your parent’s money than education
6) live below your mean - why waste your resource or the earth resource ?</p>

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<p>We bought a home when our son was 3 and that was designated as the "college house." It has been rented out every day since 1993, and the value has more than doubled. Don't get excited, it was in a low cost area, great neighborhood, nearly least expensive house in the subdivision. Our son always knew it was there for college, but then he earned several scholarships and decided to attend the US Naval Academy, so the house will be his when he graduates. It is only fair, after what he has gone through! :). He can sell it or collect the rent, as he sees fit. We figure it will be a good nest egg for grad school if he decides to get out after 5 years. We'll see.</p>

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<br>

<p>How do you think middle-class people get rich? For some it is getting more income from the job. But for many others, it is by saving money and investing it...whether in real estate, stocks, etc....and letting the time value of money work for you.</p>

<p>I think colleges need to require kids take one class in financial education for graduation. If only I knew at 20 what I know now! I'd be RICH!</p>

<p>[PS: per se]</p>

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<p>Sounds like many of us are on the same page. One thing I would like to add, and would encourage you to have our kids do, is to start saving EARLY. My h had started saving early, and when we married he already had a nice nestegg. He was pretty frugal in college and was on a ROTC scholarship, so was able to bank money in school and in the military. I had student loans from grad school to pay off, but was still able to buy a small townhouse and furnish it, so we were a good fit when we married (I had the house and furnishings, he had the cash). And, ahhh, the blessings of compound interest! Investments (stocks, bonds, etc) have grown nicely, and we are in a nice position to have freedom of choice for colleges. Personally, I'd rather be in this position than having to juggle the need-based offers. Certainly scholarship $$ is nice, but I am glad we don't have to depend on it as our sole source of funding.</p>

<p>Some people really love real estate/rental property. We found that we hated it, so got out of it. However, we do have some"how'd we let that opportunity get away" pangs about some land we could have bought during the real estate slump inthe 80's for next to nothing in Fla by the beach that is now worth a small fortune. Oh well... Oh, additional issue, sadly we just lost my fa-in-law. But we will now have some inheritance $$ to help further defray college costs. The $$ will remain in investments (stocks, bonds, mutual funds, etc) and we will use the interest/dividends only, if possible.</p>

<p>We have also set up Roth IRAs for both boys. I strongly recommend, if they have any income, that you do this, as it grows tax free. My older s has been banking away spending $ that I give him, as well as much of his internship money. We just had him cash in some of his EE savings bonds, as they are earmarked for college expenses. They were earning about 4%. There is a nifty savings bond calculator on the web where you can easily calculate and update the value of your bonds. <a href="http://wwws.publicdebt.treas.gov/BC/SBCPrice%5B/url%5D"&gt;http://wwws.publicdebt.treas.gov/BC/SBCPrice&lt;/a> You enter the information in once, and can click "update" at any time (many are calculated monthy- some quarterly). It also helps you to determine what to cash in and when</p>

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<p>Right now, I am trying to maximize the money I can put into both Roth 401K (my employer just started this) and Roth IRAs (we don't earn above the limits either).</p>

<p>Why Roths?</p>

<p>The difference between the 2 types of IRAs is when you will pay the income tax, not how much you will end up with. I'll show you the math...</p>

<p>Person A puts $4000 in a conventional IRA and is in the 25% marginal tax bracket (for sake of simplicity but it applies to any tax bracket). So it costs him $3000 up front in take home pay.</p>

<p>Person B puts $3000 (post tax) in a Roth IRA and is in the same 25% marginal tax bracket. It cost him the same $3000 up front in take home pay.</p>

<p>18 years later their identical investments have quadrupled (they are OK investors), they both decide to withdraw money from their accounts for purposes not subject to penalty (like paying for college?).</p>

<p>Person A's $4000 deposit has quadrupled to $16000 and now pays 25% of that ($4000) in income tax leaving him with $12000 of spendable money.</p>

<p>Person B's $3000 deposit has quadrupled to $12000 and none of it is taxable, so he ends up with the same amount of money as Person A.</p>

<p>Now let's say they use the money they withdraw to pay for the EFC for Junior's college tuition his freshman year. </p>

<p>That $16000 ($12000 after taxes) Person A withdraws from his IRA to pay for Junior A's college ends up being reported as income on Parent A's tax return. And when Parent A files for FA for Junior A's sophomore FA, he discovers that his EFC has now gotten bigger because he "earned" $16000 more last year.</p>

<p>Person B's withdrawal of $12000 from his Roth account is invisible to the tax man and therefore does not harm Junior B's sophomore FA award.</p>

<p>BTW, taking loans against a 401k is a high risk operation as if your job ends, you are required to pay those moneys back on the spot or take the amount owed as income in the year you leave your job (with whatever penalties may apply if Junior has already graduated and you are still paying back those loans on your 401k).</p>

<p>If you are going to take out money from a 401k to pay for college (or a first home downpayment) take it as a withdrawal up front (and pay the income taxes if you are in a conventional account) so you at least you don't risk the penalties (and they can be stiff) for early withdrawal if your job goes south and you cannot pay back the loan immediately.</p>

<p>And of course IRAs (no matter which type) are invisible to the FA decision.</p>

<p>I only wish I could bury more money there...</p>

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<p>
[quote]
BTW, taking loans against a 401k is a high risk operation as if your job ends, you are required to pay those moneys back on the spot or take the amount owed as income in the year you leave your job (with whatever penalties may apply if Junior has already graduated and you are still paying back those loans on your 401k).</p>

<p>If you are going to take out money from a 401k to pay for college (or a first home downpayment) take it as a withdrawal up front (and pay the income taxes if you are in a conventional account) so you at least you don't risk the penalties (and they can be stiff) for early withdrawal if your job goes south and you cannot pay back the loan immediately.

[/quote]
</p>

<p>I think if you borrow against your 401K, it does not affect your FAFSA while a straight withdrawl might. But if you loose your job that is a different story. If you don't have money to pay back the loan against your 401K, the withdrawal amount is made up for the loss of income, so it's kind of even out. While a straight withdrawal while you're employed will make your income goes up automatically. I think the first case is prefer to the second case because you always want to defer paying tax until you absolutely have to.</p>

80

<p>
[quote]
so you at least you don't risk the penalties (and they can be stiff) for early withdrawal

[/quote]

Not sure what you mean by not risking the penalties. The minute you withdraw money from your 401k either early or as a loan you pay a penalty, there is no way getting around that unless you are older than 55( if your company is setting up that way).
I'm a little confused by the above statement.</p>