Just to clarify: I was talking about borrowing from/against an IRA. This can be a poor move financially, as discussed above.
@MiamiDAP is apparently withdrawing from an IRA, paying the taxes, etc. Not sure how wise that is, but if that is the source of your monies, then it has to be!
@Spayurpets: I am sorry your state does not offer 529, so that is not an option. The fees on our 529 are very light, and, like I said, it started aggressively 17 years ago, and is now conservative. It worked well for us, but everyone’s situation is unique. We were pleased with the returns over the long run.
If you will be over 59.5 when you need to withdraw retirement funds for college expenses, then maybe MiamiDAP’s plan is reasonable. (I say, maybe, because I am not all that knowledgeable about financial issues and I have no idea.) If you will NOT be at the age where you are allowed to withdraw retirement funds without penalty, then I am very sure that this is a horrible, awful, no-good idea.
We started early and saved in a state 529 plan. I like this approach because there is an immediate one-time 7.5% return (state tax savings on up to $10k/year). Our plan uses low-cost index funds with a reasonably wide range of choices. I also like this approach because the investment returns, which are substantial in our case, are never taxed if used for education. Of course, the performance of a college fund, or any fund, that is invested in stocks depends on the stock market. Overall, it’s worked well in the period over which we were (and still are) investing.
Another thing I did was to get Upromise credit cards for DH and me. I like to charge almost everything, including small amounts for parking meters. I don’t use credit cards for local small businesses or doctors, but I do for just about everything else. There is a 1% return on all charges that goes directly into the 529s. And, even better, if you do online shopping through the upromise website, there is an additional rebate. I have been doing almost all my shopping online for years. Most of the companies I use are included in upromise. Typically, 5% of the purchase is rebated to Upromise, and another 5% from charging with the credit card. It’s not a huge amount of money, but it does add up.
Reading over @miamiDAP’s post again more carefully, it does sound like s/he cashed out the IRA to pay for college. That is not an advisable thing to do. It usually involves paying the capital gains taxes plus 10% penalty.
I was talking about taking out a loan against your 401k which a lot of employers like mine allow you to do. It’s still not the greatest idea, but I think it’s still better than cashing out your 401k early. The interest is usually pretty low, you don’t have to got through any credit check, and the interest is paid to yourself back into your account. But usually there’s a maximum amount to borrow e.g., $50k and it does mean that the borrowed money is no longer invested so you are missing out on the investment gains during that borrowing period. Also the loan is amortized over a very short period, so the payback amount (which is usually taken directly out of your paycheck) is pretty high. As I also previously mentioned, if you leave your job, you have to pay it back almost immediately, and if you don’t it will be treated like an early withdrawal subject to tax and the 10% penalty.
Timing is everything. I remember where I was standing on that infamous day in October, 1987 (Black Monday for those of you too young to care or remember) when colleagues of mine who thought they were set for retirement discovered that they’d need to work another 10 years to make up for the dramatic market pullback. I have neighbors whose paychecks AND retirement came to a halt when Lehman failed (through no fault of their own- I’m talking secretaries and help desk managers here, not the big guns).
Leverage is a tool like any other. It works great most of the time, and it stinks when it fails. Borrowing against a retirement account which is worth 300K today seems like a solid idea… except if a market pullback means that the account is only worth 180K when you are set to retire. Then you are on a treadmill trying to catch up when you are likely past your peak earning years.
Again- all of these ideas are great. But folks who are looking behind the sofa cushions for another 80K or so need to be careful about borrowing against an asset which is there to protect you from a devastating loss. If I were 62 years old, I’d rather my kid borrowed (within a reasonable amount, and only if the future income stream seemed secure) vs. me risking my 401K.
So caveat emptor. A 20 year old has a much longer runway for market ups and downs than someone close to retirement.
If you have a 401k loan and leave that employer, you have 60 days to pay it back OR it becomes a distribution. You can take a distribution for education expenses without the penalty. You do still have to pay the tax owed as you didn’t pay taxes on that money when you originally earned it. The only horrible thing about it is that money is no longer there for retirement.
I know a few Lehman employees who were ‘wiped out’ in 2007 but notified in 2014 that they would be getting a ‘not too shabby’ pension. They were pretty happy with that recovered money.
Answering the OP’s question - “I was wonder what the average family did or will have saved for a child by the time he started college. I’ll have about $55k by then and was wondering how good or bad shape I’m in relatively speaking. Anyone willing to share?”
We have saved a lot. Far more than I ever would have thought I would need to save 22 years ago when we first started planning for this. And far more than I ever thought I would be able to save. Our goal was to be able to fully fund the private college undergraduate educations of our 3 children. It was an incredibly ambitious goal. Perhaps it was a silly, unreasonable goal. But my wife and I are savers and planners by nature, so we set the bar high.
Our circumstances have evolved so much over the past 22 years, that there is no way to compare where we stood against this goal at any point in time. We did our best to ensure we were saving something each month in the college fund. Some years it was not a great deal. We have always maxed out our 401(k) contributions as our first priority. For the past 19 years we have been a single income family. We are very fortunate that our career path decisions have turned out well. Our circumstances are not average, though. We are fortunate.
We have been in our home for over 16 years. Not long after we moved in, property values appreciated greatly. We refinanced at a far lower interest rate and pulled some money out to further fund our college accounts. Our mortgage payments were lower (due to the lower 30 year mortgage rate), our college funds were flush and our cash flow improved. Our property values have not gone down. They have flattened a bit, but we still have plenty of equity in our home. This was pure, dumb luck. We just happened to buy at the right time. I have friends in our neighborhood who bought near the height of the market (again, pure dumb luck) and have not seen an increase in the value of their property. Who could have known that the value of my home would more than double over the span of 16 years? I certainly didn’t plan for that. I simply wanted a nice old home in a great neighborhood, with good schools that we could live in until we retire.
If you will have $55K saved by the time your child is ready for college, I say Bravo and Well Done! That is a nice bucket of change. The fact that you are thinking about this and planning for this puts you far ahead of most people. Keep saving. Keep researching and you will be better prepared than most when you begin navigating the college game.
All of our circumstances are so different that I am not certain a comparison of goals and accomplishments tells us anything useful - other than to confirm that our circumstances are different.
The irony of my philosophy regarding college education is not lost on me. I believe one can succeed no matter what college one goes to. It is what the person does with the education that matters. Heck, I believe one can be wildly successful without going to college. I believe one can go just about anywhere in life after attending any public university (or after attending 2 years of community college and finishing at a 4 year public college). Yet, I am willing to fund private college education for my children - if that is the school that is best for them. It may not be the smartest decision, but it is one my wife and I can live with. If our circumstances change, I would have no problem guiding my children to in-state public universities. We are fortunate to have this choice. It is not an option most people have and we recognize our good fortune.
We specifically decided not to save for college. Reasons were many-fold.
When the kids were little, we had some debt that we needed to take care of.
My wife was a stay-at-home mom for about 15 years, and during that time after the debt was gone any extra went into our retirement accounts.
The plan was to be able to pay for college out of our income when the time came. We knew that COULD mean Community College first or a whole host of other options (living at home was not an option though as we value living on campus or at least at school, not at home), but the kids have turned out to be excellent students, so we haven’t considered the Community College route.
That’s what we have been able to do. First kid, daughter, will start at Vassar College in the fall, and while we couldn’t have foreseen that school being an option, with the need-based aid we will receive (and we make decent money actually, so that’s not JUST an option for poor people), we will be able to send her there. We anticipate similar opportunities for our second (and last) child when it is his turn in 3.5 more years; standardized test scores and grades so far predict lots of options, but you never know with kids; he could turn into a B student the rest of high school for all we know.
I have no issue with people wanting to save for college. For people with very large incomes ($300,000+ – my brother and his wife fall into that category), while they COULD pay full price even for a very expensive college, the saving they have done over time for their two children will lessen the pain. Good idea for them to have done that.
" But it was not needed as she attended on full tuition Merit. I like this stratedy better than saving money. Others may prefer saving money." - It’s a neat “strategy” when it works. But only a small percentage of students will qualify for full tuition merit… And during prime saving years of early childhood it’s hard to predict which one will
It will be interesting to see what private universities’ annual costs would be like, 20-30 years from now, when current high school students will be parents themselves.
Maybe privates like Brandeis or Duke will cost up to $90-100,000 a year.
"it’s still riskier to use your 401k funds because if you lose your job, you have to repay the loan immediately. "
We are NOT taking loans against 401k, we simply withdraw, just like you withdraw from any account, except, when you withdraw from 401k, you have to pay taxes, since 401k is pre-tax. You do nor to re-pay a loan, a loan does not exist.
-“But only a small percentage of students will qualify for full tuition merit”
Nope. The fact is that vast majority of those who qualify opt for some IVY / Elite where they have a very slim chance of getting Merit. Those who apply strategy to attend the place that gives you the most in Merit (I call it “show real love”), will find several places that will offer huge Merits. And, these places actually show love not only in monetary awards. The opportunities for the top kids at these places that originally showed them love, are literally endless, they grab all of them and at the end end come out with unbelivable applications, not only in stats but in everything else.
@miamiDAP, I had misunderstood what you said about 401k; I thought it was a loan but understand now that it was cash out. I think its ill advised to cash out a retirement account to pay for your child’s education, but to each his own.
Yes,a 401k withdrawal is just more current year income. If you have a job and make $100k, take a $50k withdrawal, you’ll have $150k in income for that year.
We had saved about $100K for our son. Then he went to a school costing $62.5K annually with a $15K scholarship. So… instead of 4 years, we have barely two. And he got accepted into a 5 year Masters program, so three years unaccounted for. Thankfully, he is our only. We’d be in deep doodoo if we had more than one. If we had just two, my retirement fund would have to be hit. Three? Retirement would be postponed. :-/ I don’t know how the average family does it without their kid going into major debt.
BTW, I don’t believe in letting my kid pay for his education. My parents could easily afford sending me, but made me pay for my own college to build character. That was back in the day when it was affordable and I still had to join the Army for a couple of years to get matching funds and save money for school. Nothing else I could get would allow me to save as much. I’ll tell you I resented my parents… big time! I felt they were just being cheap and it did nothing for my character. It took me well over a decade to forgive them! …but after writing this, it’s apparent to me I still have some resentment. :-/
As a friend of mine likes to say - she wants her daughter to have “some skin in the game” in terms taking responsibility for some of the college costs. I tend to agree. We have saved enough through 529 for all three of our kids not to have to worry about paying for college - and I am happy to be able to do this for them. But I want to try and figure out the best way that they can contribute. I by no means want them burdened with loans, but I also think it’s important that they don’t take it for granted.
“Skin in the game” doesn’t have to be having them pay their own way or even take out loans. Our kids cover books, spending money, and any internship expenses if they take an unpaid internship (which can be important in some majors).
thanks! @intparent - did your kids get jobs while at college or did they work over the summer? I had two part-time jobs when I went to college, but it seems so much more difficult for kids to juggle everything nowadays.
Not to derail the thread, @wrenwu, but to answer your question, I required my kids to work for money prior to freshman year of college. (Both had also saved some monetary gifts through the years from grandparents and graduation gifts as well). D1 got a nice paid teaching internship the summer before college, and she did it for two more summers after that (lived at home, so saved most of her earnings). She also worked for money in the writing center at college. She was able to cover the cost for an unpaid internship in DC one summer, too.
D2 night stocked at Walmart summer before college. Definitely gave her some incentive to head off to college in the fall and stay on track for her degree! She did summer research on campus after freshman year and still made money after paying for her housing on campus and some food (I covered the amount that my grocery bill would have gone up if she had been home). She is looking for a paid internship this summer. She has not worked during the school year, her school is too hard and stressful for her to do that… but fortunately she went in with a decent cushion, doesn’t spend a lot (is actually studying instead of spending!), and is majoring in CS or Physics (so summer internships or research will be paid).