@Sportsman88 There are certain govt and union jobs where employees get a pension (defined benefit) and are contractually required to pay X amt per paycheck.
The rest of us are more familiar with IRA/401k and it is discretionary, but still the “same” kind of contribution in theory.
I estimate about 35%…Almost all of it is coming from current income. This is possible because we paid off our house and cars and have no other debt.
@Sportsman88 In my case, my contribution to my 403b is automatically taken out of my paycheck, to be matched by the employer’s contribution (actually double matched: my 5%, employer’s 10%) . I never saw that money except in my 403b account. I had no option on this. and I had no defined benefit plan. After the kids finished college, I put more IRA’s, 457b’s, etc.
On your other point about net income, yes from a tax standpoint it is standard to refer to net income as net of taxes (including payroll taxes – FICA). But from the point of view of a parent looking at financing of college for the kids, they have other – non tax – obligations that are hardly discretionary, such paying the rent or mortgage, insurance, and in my case contributing to my 403b.
When we applied for mortgage twenty years ago the rule was that the mortgage payments plus property taxes should not be more than 30% of net income. I think this 30% rule would be ideal for college payments as well.
@HRSMom I thought it was a required contribution with defined benefit but not being in that type job, I wasn’t sure if that was how some worked.
@mackinaw Completely agree about discretionary income is where college is funded but still think if we’re going to have a standard for the thread, net income is a better standard. Cost of living varies, but even within a city, some choose to live in a smaller house and others larger. If you stick to net income, the other decisions are left as personal choices.
I do consider my 403b contribution as discretionary. Time will tell if this was good so I am not recommending this plan but we have invested in 403b/Roth’s for two decades steadlily increasing contributions until the point that we were investing around 20%. We did not set aside savings specifically for college. Part of my thinking has been college options vary but no one is going to provide for our retirement but us. Secondly, since I now have a decent nest egg built over two decades, if I choose to stop contributing 20% while kids are in college, I have a substantial amount available for college while the balance in my retirement accounts can still grow. Not enough to pay full freight private but enough to have options. That is not the entirety of our discretionary income because we avoid debt and live frugally but it is an option and only to be used if necessary. Some might disagree and that’s fine but stopping contributions is quite different from borrowing on retirement account (bad) or using loans for undergrad.
@mackinaw I don’t get the match, although I did with a past employer. If 5% got me a 10% match, I would not drop below the 5% contribution level.
Everyone should put as much as they can in their retirement accounts first! We have to retire. That part is not really at our discretion, as most of us will just wear out:)
Interesting idea…but I’m not sure it can be as clear as that.
Seems like a good rule of thumb for those who don’t already have a mortgage. But for those that do, maybe not so great. Also, would that be a rule of thumb for how much you pay out of your current net income or how much you pay overall (getting loans or using savings — should that be part of the 30% or is that different?)
When we answer the OP I assume we are counting all monies spent. For example if costs are 30k and someone is paying 10k from savings, 10k from current income 10k from loans and let’s say (for some easy math) their net income is 100k, I’m assuming the answer is 30% since all of that is what you’ll be paying for college–maybe in the past or in the future, but definitely paying.
"My question to you then is, what of people who are not maximizing their earning potential/income:
Families who have a stay at home parent, one income, and therefore receive need based aid whereas if both parents worked, they would not; and what if a parent has a high powered law degree but chooses to work as a public defender instead of being a partner at XYZ firm and now qualifies for need based aid. Are they being ‘subsidized?’
My point is that families who save in advance for college, or just for general financial security are expected to put those years worth of payments into the college payment whereas families who didn’t are not expected to pay nearly as much. I don’t think they can delve too deeply into personal circumstances, but when you have families making the same income but one is living in a far more expensive house with far more valuable cars, I don’t see why you would expect the family in the house worth half as much with old cars to be paying more for the same education as the family who clearly does have the earning power but is putting it elsewhere. Also I don’t see why a family with twins is only expected to spend 4 years paying tuition whereas a family with 2 kids 4 years apart is expected to spend 8 years paying tuition. There are also circumstances where families have less earning power than in prior years or had some kind of windfall such as an inheritance from parents who died. The money is there but those savings they have cannot be replenished in a way that significantly higher income family who is getting subsidized could build up before retirement, if they chose to. I’m just saying that the expectations could be more fair.
You have a valid point on twins but the family being penalized for savings isn’t as clear cut. $50,000 in income will reduce aid far more than $200,000 in savings.
The contribution to my 403b was required. The amount was determined by the state retirement board who administers the retirement, I had no choice about this deduction. Mandatory. But really I’m not griping…it was worth it.
@mathyone, and as I said, it’s your choice.
Different colleges have different fin aid formulas and give out different amounts of fin aid. You may disagree with them, but no one is forcing you to apply to or attend schools who’s fin aid formulas you think are unfair.
For that matter, if you believe that spending savings gets you ahead, why don’t you do that as well? Nobody’s forcing you to forego vacations.
Whether you invest in your own retirement plan or invest separately into a college fund isn’t entirely a matter of choice. Just like @thumper1, I was mandated to contribute to my 403b. No option. It came with the job. As I’ve mentioned, my employer added 10% on top to the 403b. What this has meant is that I had a roughly 15% annual savings rate, for almost my entire working career. I’ve pointed out on other threads that such a savings rate, if maintained over an entire career (and not depleted by loans or withdrawals) is likely to be all that one needs to maintain one’s standard of living in retirement.
With such a high probability that we’d be set for retirement (after including Social Security into the mix), we set out to make sure that our kids had all options open to them for college. The grandparents (my parents) contributed significantly by providing savings bonds that were worth about 1.5 years of the total costs of college for each of my two children. So we had to come up with 2.5 years of those costs. Because it seemed unlikely that we would qualify for need-based financial aid, our strategy was to a) economize, and b) save.
The 529-type plans were only coming into existence when our kids were in h.s., really too late for us to take advantage of them. Though we had only one income, it was pretty good (professional – academic salary). We economized by staying in our starter house (no McMansion ambitions, and no boats or other major toys), owning 1 car at a time (typically each for 6 years or more), staying married, keeping the kids in public schools, and demanding that the kids finish college in 4 years.
By the time the first child was in college, we had saved the equivalent of about 1 year of the cost of attendance ($30-35K) in a private college for each child. This plus the grandparent’s gifts brought us up to 2.5 years of funds needed. The remaining balance came out of current income during the 7 years the two kids were attending (1 year overlap), plus making that “last car” last a really long time.
The older child received just a nominal $1K National Merit Scholarship! This allowed UofChicago to count him among their NMS enrollees but that was chump change.
We are not rich. But we planned ahead. We were fortunate to have the gift from my parents. I do not feel that we were cheated or short-changed in any way by having to pay full-freight for college for the kids. A lot of students needed the financial aid money more than we did.
In an awful lot of cases, the middle income family that saved their money for college will get exactly the same as the middle income family who spent all their money. On just a need basis, the families probably won’t get anything except federal loans.The family that saved may not have to take the loans. A public school with a COA of $30k might not give a family with an EFC of $15k anything for need, so that family that saved nothing will either have loans or hope for merit.
Even at a meets need school the school can expect the family to contribute a fair amount out of current income, so the spendthrift family might still have to come up with $20k or $30k out of current income. Not all schools are Stanford or Princeton giving 100% to families making under $100k
Our income fluctuated wildly while our kids were in HS and college. I went from a part-time job that only earned about $20K to a full-time one I created earning about $40K (and now back down to a part-time job that barely pays or the gas or refreshments I donate to my non-profit) and H’s income went up about $20-40K as well. This was crucial for us because both our kids went to expensive private U. S received > 1/2 tuition merit award and D received nothing. Fortunately, we had saved some and SisIL helped us a bit, so we were able to make do without need-based FAid. S was in college 2006-2010 and D was in college 2007-2013!
The spend thrift family that has been piling money into savings whether IRA, 401k/403b/ or 529/ESA will be better positioned to cash flow college even if the savings didn’t exist or if they are protected in a retirement account.
I’d say 5-10% of annual pre-tax income would be a reasonable amount to spend out-of pocket, from current income, on current college costs. For a median income (~$55K) family that has saved nothing, borrows nothing, and gets no FA, that should cover tuition at a local community college. Toss in the maximum federal student loans, plus student work-study, and you should have enough to pay net costs at the University of Alabama if you qualify for its maximum out-of-state guaranteed merit scholarship. Possibly even with zero loans, for that median income family, 5%-10% from current income may be enough cover a very selective private college (such as Pomona) that claims to cover 100% of demonstrated need.
Suppose you’re in the upper middle income donut hole, making ~$150K. In that case, your Expected Family Contribution at a most-expensive private school like Pomona (one that claims to cover full need) might be about 25%-30% of current pre-tax income (~$40K EFC). That might be do-able if you’re not carrying a mortgage (if for example you were able to start … and stick with … a 15y mortgage before your first kid was born.)
Or … you could have started a savings/investment fund for each kid in the years they were born.
Annual tuition in 2016 is about $45K/year at a typical private college. Let’s assume 3% inflation per year and an average 4% return on your investment portfolio. Starting now, you’d need to add about $800/mo for 18 years to save enough for 4 years of tuition at the private college (using those assumptions). For a family making $150K, this would represent about 6.5% of pre-tax income.
You can experiment using your own assumptions using calculators like this one:
http://www.bankrate.com/calculators/savings/saving-for-college-calculator.aspx
If I were paying the tuition only out of my income it would be right around 30%, but it’s come out of savings and current income. I did not stop my 401K deposits, but did lower them slightly to meet the company match. I also decided to work 5 more years than i originally planned. My H retired the year #1 went off to college so does not contribute with “salary” income and has delayed his social security. It’s been a tough decade, but we’re almost through it. We saved over 20% in various buckets from the time we were married until my H retired and #1 went off to college. I’m not confident yet about our retirement, but I feel OK even after having spent a quarter of a million or so in college costs.
Our EFC is almost exactly 10% of our income. However, because my sons have outside scholarships that can go towards that EFC, we pay/will pay far less than 10% of our income.
Our EFC is well over 50% of our stable after-tax income, but the high value is due to our 2nd unstable income. Right now the 2nd income is high, but next year it could be 0. Alas, sometimes the 2nd income is negative (business) and we have to plan for that. So, figuring out what is a reasonable % of the stable income to devote to college feels like a moving target. We do have good savings, but again, how much to devote to college versus to keep to deal with income variation (esp negative) feels like gazing into a crystal ball.