How much did/will you have saved for child by college time?

Parents Forum
181

My brother took a gap year - he had an opportunity to live abroad, work, have fun, and then dive into engineering when he came back. He also didn’t apply himself in HS (however from age 16 worked a FT factory job 3 -11 shift after attending high school from 8 - 2:30), he had a newspaper route very early, and then a job starting at age 14 (short order cook) and had a stock portfolio at age 15; smart, just applied himself in college and later career.

I see where a student ‘falls short’ first semester college, at a away college with football, fraternity, etc distractions, and maybe never having to study in HS - some parents pull the kid right then. If they bomb 2nd semester, they have pretty much scratched that college, lost their scholarships, and unless they have a number of semesters (perhaps CC or local school) and a few years to bring themselves up from the cellar in regard to GPA to ever return to that school or a similar school. I’ve seen a student get military service in after bad grades in college freshman year, and then return as a serious and focused student with fabulous grades. I have seen a very capable person (ACT 33, never cracked a book in HS - who also should have taken AP courses to develop the skills to learn more complex material) bomb out of college (full tuition scholarship and extra money scholarships, totally blown) and most likely will never return.

182

We have been fortunate enough to save about $100,000 for oldest and on our way to have same amount for younger sibling. I guess we could have saved more but also needed to save for retirement. Work also gives a small amount bonus to families with college bound students which is a nice perk. That said, college costs are out of control!

Both my husband and I could have paid for both of our tuitions with this savings with plenty to spare. There are so many people just trying to make ends meet working multiple jobs or working through some tough circumstances. The success of our country and future depends on students being able to get an affordable and quality education.

183

you are right

184

We have $0 saved specifically for college. My oldest is currently a freshman in HS. We are fairly frugal and have always saved a significant percentage of our household income (20% or more). It just never made sense to me to have funds segregated for this specific purpose, given such a broad range of possible outcomes and needs for each of my kids, and because I have always assumed I would have means to give them the help they need.

Currently sources of funds for college expenses would come from one of the following:

  1. Merit scholarships
  2. My income, suspending current max 401K contributions if necessary,
  3. My wife’s hypothetical income (she is currently a stay at home mom but could return to a career if we need the extra income, youngest will be in school full-time by then),
  4. Income or equity from rental property I own, or other savings
  5. Home equity (our home is paid for, and we have $0 debt)
  6. Penalty free taxable withdrawals from IRAs
185

@LOUKYDAD, congrats on being frugal, having your home paid by the time your oldest is a freshman in high school is a terrific accomplishment, especially under one income. I also applaud you for always saving 20% of your household income - this is not easy to do.

I have a few comments on your potential sources of college expense funding, as others may find your comments helpful. In your order:

  1. Merit scholarships are the best way to pay for college expenses - somebody else's money that does not have to be repaid. Depending on the school, this is conceptually similar to "need based financial aid", but there can be differences, as discussed elsewhere on CC. Since you have your home paid for, your child probably won't be getting need based financial aid.
  2. Your current income - this presumes of course that you are earning more than you currently need to live on. For many people, this is not the case. Suspending 401(k) contributions is generally not a great idea, but sometimes it is temporarily necessary. Depending on your age, some schools EFC calculations will not expect you to divert your 401(k) savings to pay for college expenses.
  3. Your spouse's hypothetical income. There are a lot of variables here, and I just wanted to point out that sometimes this can work against you. You can pretty much kiss any need-based aid goodbye if you go from a one-income to dual-income family. Friends of ours found that when the wife went back to work, for 35-40K, it brought their family income from 85K to 120K - not only their taxes went up significantly (10K), but their financial aid was reduced by 18K. This effectively mean she had gone back to work for net under 20K, or less than $10 per hour. She and her husband pointed out that the after-school daycare and increased commuting expenses, etc. easily ate up most of this.
  4. Other income from rental property or savings - If you have rental property or other income-producing assets, note that all colleges do not look at these even remotely equally when it comes to their EFC calculations. Liquidating these, if posssible, is sometimes preferable to suspending 401(k) and its match. I understand this is easier said than done, and you clearly have a good handle on your finances so far, so it would seem to me that you are likely to handle this well going forward.
  5. Home equity. Some people are opposed to putting their home at risk to help their children. But the tax advantages to this are definitely worth at least investigating.
  6. Penalty free taxable IRA withdrawals. This is one to be careful about, but it is clearly preferrable to some options. You might need to be careful about how much you withdraw, as it is not necessarily the full college bill, but only tuition and fees (and not room and board) that is exempt from penalty. If you put money into a 529 plan this year you may be better off.

My overall point is that the answer how to pay for college expenses, when there are multiple potential sources of funding, is something that should be considered carefully, and some decisions should be looked into ahead of time. Like my earlier comment about converting some type of tax-sheltered assets (like bonds) to another type (like a 529 plan), at least year in advance, can reduce your tax exposure in future years.

If we had known some of these details and options ahead of time, we might have saved ourselves some tax liability.

To that extent, it might make sense for you to think about a 529 plan, for the next few years. While you seem opposed to dedicating some of your savings specifically for future college expenses, if you consider doing so now, you might save some tax dollars down the road.

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3puppies - I think you make some very good points. You are obviously very knowledgeable on this subject.

I do like saving tax dollars whenever I can. Helping others do so is actually what I do for a living. My issue with the 529 plans has always been the strings that go with it. My best example is in situations like last year when a partner and I purchased a piece of real estate with the goal of selling it for a profit. I needed the capital to make this deal go, and I couldn’t have done that without putting my house at risk if I had the funds tied up in a 529 plan. I made more on this deal than I could have saved in taxes in a 529 plan.

I also see in the realm of possibilities wanting to help one child, who got a scholarships or chose a less expensive college, buy their first home or otherwise help him or her get started in life. This seems equitable to me if I help their sibling with a medical or graduate school. Again I just don’t like the strings involved. To each his own.

I will add - these are just my own personal issues with these plans. I know they could work out well for many people and their situations. I have recommended them to clients.

All I can say is what a wonderful world that is being created for us. We wouldn’t want anyone to have an incentive to do something productive like work and pay their own way. I have actually had semi-realistic thoughts of taking a few years off and enjoying a “mini-retirement” here in a couple of years, just in time for my oldest to attend an elite school for free, then go back to work. (I’d never do it, but it is tempting.) Rant aside though, I am sure you are correct. In your friends’ example, I guess they can be happy that they sacrificed as a family to make a gift to the school’s endowment.

187

It is very short-sighted thinking to assume that you are better off with no income and higher financial aid vs. income and no or less financial aid. I have been in the workforce since the summer I graduated from college. I have friends, neighbors, sisters/cousins, etc. who took off a decade or more, and irrespective of the impact on financial aid, they are struggling at age 55/58/60 with the long term impact of that decision.

Put simply, a lawyer doesn’t leave a six figure income, take 15 years off, and go back to a six figure income until retirement. My friends and neighbors are looking at part time work (teaching yoga, “personal shopper” at a department store, etc.) which offer zero retirement benefits, no 401K match, no paid disability insurance, etc. If there has been a divorce or the death/disability of the primary wage earner… you’re talking true financial distress.

Waiting until all the kids are out of the house and college is completely paid for to go back to work (even if you got a nice aid package) seems to me to be cutting off your nose to spite your face. The time-value of those years of retirement contribution can never be regained. To think that at age 60 you are going to command a professional level salary and be able to cram 30 years worth of retirement savings into 5 years defies the laws of mathematics.

Kiss the aid goodbye. Your taxes will go up. Your aid will go down. But you won’t be making 40K next year- you’ll be making more. And within a few years you may be making substantially more, and your contributions to your retirement account will essentially be a match for what you lost in financial aid. And they will accrue capital gains (growing tax free).

What happens to the friends who would rather get financial aid then have the wife making 40K per year if the husband is disabled? Every year she is out of the work force further erodes the time she has to get her earnings back to where they were when she became a SAHP.

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There are universities that ignore your home equity for FA purposes.

See this article: http://www.thecollegesolution.com/will-your-home-equity-hurt-financial-aid-chances/

•Bard College
•Bucknell University
•California Institute of Technology
•DePauw University
•Hamilton College
•Harvard University
•Princeton University
•Santa Clara University
•University of Virginia
•Washington University, St. Louis
•Whitman College

189

This.
SAHP is a noble idea, but what happens after a divorce/death/disability should be considered before doing so. I told my daughters to not leave the workforce (maybe work part time rathen than SAHM), because of these.

190

^^^ I actually agree with the conclusions of blossom above.

I just have strong emotional reactions “from each according to his ability, to each according to his need” - in all of its various versions and justifications.

191

Life insurance? Disability insurance? Deeply committed relationship? I am glad I haven’t lived my life in fear.

192

Reality stinks mom2aphysicsgeek. I have a young neighbor whose husband has ALS. His life insurance is useless right now since he is alive (for which they are quite grateful). His disability insurance is quite modest (although he has it, and not every job offers it). His out of pocket medical costs are a fortune. His children need to eat. His nursing care (covered by nobody BTW- health care insurance won’t cover someone to feed him or dress him) is entirely out of pocket right now. His wife could declare bankruptcy, put him in a state run nursing home for the indigent-- I guess that’s the option you’d recommend to her rather than maintain her job and status in the workforce???

This is a deeply committed relationship like nobody has ever seen. Wife has a full time job, young kids, husband who is completely disabled, and her entire existence is devoted to keeping him as a presence in their children’s lives.

But practicality rears its ugly head. Having a paycheck (which right now, provides HIS health insurance, not to mention that of her children) isn’t a dirty word especially given the alternative-have them move to a homeless shelter???

Nice not to live in fear. Lucky you.

193

I have clients this time of the year who complain that they have to pay more taxes because they earned more money. Baffles me how they would prefer to make less and pay less taxes. Looks like some use the same logic for financial aid.

194

If the tax rate were 100%, would you think their protest was more justified? I don’t think that is what you had in mind when you posted, but note that in the example 3puppies used above regarding using a spouse’s additional income to pay for college costs, a 100% tax rate was the equivalent.

I think for many of us there is a certain tax rate, a rate that is well below 100%, where we would chose to approach the world of work differently if the after tax reward wasn’t there. You might consider making adjustments to your work/life balance if your tax rate increased from whatever it is now to 60%. I can’t imagine how you wouldn’t if your tax rate was 90%. Everyone would have a different magic number, but the point is still valid.

Working for four years for free, with no financial benefit other than keeping one’s skills current, maintaining a network, clients, for future “what if this happened”, that is a tough pill to swallow. That it causes many to make adjustments is totally understandable to me.

In reality, what it causes many of us to do instead is change prizes. The prize is now full ride to state U with guaranteed admission to medical school, not admission to an elite institution. I have no statistics close at hand to support, but I would expect that kids whose parents have a household income of $150k to $400k are becoming an endangered species at many of these schools. I think this is unfortunate, because I think these kids have a lot to contribute to the life of those campuses. In the interest of truly diverse student body if nothing else. Just my opinion. It is ok if you feel differently.

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Lou- 150-200K? I agree with you. 300-400K? not being able to pay for college (assuming that someone didn’t fall into a bucket of money when their kid turned 18 but has slowly been increasing their earning power year by year)- this I have trouble believing.

I’m not telling other people how to spend their money. But I do have friends with the granite countertops and two big vacations per year and every kid gets a brand new car at age 17 and all the bells and whistles… and then comes college night Junior year and they go stark raving mad at the prospect of trimming their consumption to pay tuition.

Now of course it’s less painful if you’ve been socking away your annual bonus into a college fund all these years.

But if someone is complaining about giving up Aruba at Christmas and Aspen over February break plus “the main” vacation to Europe over the summer now that Susie needs to go to college- can we have a collective eye roll?

It is still possible to make ends meet on 400K. And if not, my guess is there’s a big old hunk of real estate that can be borrowed against.

196

I understand your point Louky but I also do feel differently.
Part of me wanted to use that 100% tax rate argument when I was a new mom, not making a very large salary and having to pay VERY high child care costs. Luckily I didn’t or I would not be in the position I am today.

I have heard the following arguments from clients:
Why should I work when I can continue on welfare and get Medicaid, section 8 housing and other entitlements?
Why should I get married when I can file head of household and get more money back on my tax return?
Why should I get health insurance when I can just get charity care?
Why should I get a bank account when I know it will be garnished?
Why should I move out of my parents house when they pay for everything and also do my laundry?

Well my answer is …you do these things for your future and for your long term financial and personal goals.

I fundamentally believe that I should work to pay for the life that I want. Its great if you qualify financial aid, or Medicaid or eitc or subsidized housing or any number of entitlements but I would much prefer to be in the position to afford whatever I choose. I understand that this is not always doable or possible but it is something that I strive for and a key tenant that I hope to have handed down to my children. Family obligation or illness may dictate a different path but hopefully doesn’t derail a person for 15 years. I have sons but it would be even much more important for a daughter given what I have seen happen through many a divorce. Full disclosure, I teach financial literacy and run a program that provides free financial services and antipoverty strategies in low income and immigrant communities.

So no, I wouldn’t be in a situation where a spouse goes back to work to pay for college - and then would only earn 35 - 40K per year. IMO 40K is too low salary for someone who college educated, a professional, probably in their 40’s or 50’s and needs to make money.

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@blossom i am truly sorry for your friend’s situation. It sounds very hard. But, nothing in life is guaranteed. Nothing. You can work hard your whole life and have a tragedy that causes deep distress. Staying at home with our children has been a privilege and not one I would trade for anything. Could tragedy strike? Absolutely. But, no, I still wouldn’t take away the precious time I have had with my children.

One could argue just about anything for reasons not to do something bc of possible negative outcomes. But that is making a decision based on fear of something might happen. (Even having children, which we obviously all have since this is the parent’s forum, is full of questions. We had a daughter who is deceased and a disabled adult son. Life happens. You make the best of the circumstances that are there today.)

Fwiw, disability is available from private insurers when employers do not offer it.

198

One of the things that is often assumed in the “is it worth it to work vs. stay home with kids” discussion is that the woman is making this decision, and that somehow her parenting is contingent on having, or not having, paid employment - in a way that few would expect of a father.

When this is coupled with the fact that women in the US still make only something like 80 cents on the dollar compared to men, live longer on average, and are more likely to be left in poverty after divorce/disaster, it leads to a lot of women making false calculations.

Why should, for example, childcare be counted against just the mother’s salary? It’s obviously a family expense, like any other tuition. (Completely apart from the evidence that high-quality preschool/childcare leads to better educational outcomes than being with an adult at home all day.)

I believe that it is important for every adult to be self-sufficient and creating his/her own credit history, employment history, social security benefit history, and so forth.

Both DH and I have worked throughout having kids, and it has led us to be better parents and better partners, and our children to be more resilient and to have more strong relationships with additional adults in their lives. That is in addition to all the benefits above to both of our continuous career histories. Disclosure: I have had some years of 75% FTE, which was great for time-management, and DH had years in grad school with flexibility wrt time.

Of course it is important to strive for balance - one of the things that a great college education, wisely paid for, can get for young adults is more choice in career paths with work-life balance. Sometimes one parent’s career has to take precedence, sometimes the other’s. We feel strongly in my family that both a “peer marriage” and “attachment parenting” are crucial to how our family operates.

All of this is also from a position of middle-class privilege (I’m a teacher; DH is a scientist) - there are lots of single-parent families, poorer families, immigrant families etc. who are not making these “choices” per se. They often rely on sub-standard childcare and barely get along with all adults working as much as they can. It’s just one of the ways that poverty cycles through successive generations.

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I was diagnosed with cancer at age 41. Good thing I got a sizable life insurance policy ten years prior – it would have covered both kids’ college (even with inflation). Some may call it living in fear. I have found it a comfort (and am thankful every day) that we have weathered my medical issues without trashing our finances. DH and I considered financial planning to be prudent policy, especially with two kids. DH also has a goodly insurance policy which will protect me (in addition to retirement savings) in case something happens to him first. My ongoing medical bills are 6 figures annually and the insurance will enable me to maintain good coverage.

I went back to work when my kids were 2 & 3, in part to maintain economic viability. For the first couple of years, day care was equal to what I grossed. While I stayed in my chosen career field in a professional position, I chose to go off the career track. At various points I was FT, sometimes PT, and also took off several years when daily chemo, young kids, and traveling workaholic spouse were all I could handle.

I did go back to work PT (against medical advice) when S1 headed to college. Everything I made went to tuition (making less than flyaround’s hypothetical), but for every penny I made, it was one we didn’t have to borrow. We were close enough to full pay that any FA package would be loan-heavy, so as long as I worked, we would not have to borrow. After a serious heart attack at the end of S2’s soph year of college, I left the workforce permanently.

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Perhaps I’m misunderstanding your post, @LouKyDad. If I make $40k/year and roll all of it over to college costs, I’m purchasing a product. How is that like a 100% tax rate where the government takes my money and I have no say over how it’s spent?