Is there a best way to prepare for the expense of college?

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JV
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Is there a best way to prepare for the expense of college?

Post by JV »

My oldest child can attend college (if he so chooses) in 7 years, and my second child can follow shortly behind. I've been researching how to prepare for this, and there is (as usual) a variety of opinions. Some say to plug money into 529s and save in taxable as best you can due to the 6-7% inflation rate of college tuition. Some say your best shot at qualifying for financial aid is to purely fund retirement accounts (since they aren't counted as assets for aid) and leave 529s and taxable saving as close to zero as possible. Some even recommend buying something large with any taxable savings prior to college (like a car if one was needed) to "rid" yourself of that asset. All that said, if you make too much income, you may not qualify for anything, regardless of how much savings you have.

I figured I'd raise the question here to those who may have already gone through this experience. Is there one "best" way to prepare for college? Should taxable/529s be kept low, or at least under the threshold of what the financial aid calculators allow you to shelter? Is there an income level where it all becomes a moot point? Is there anything you'd recommend to at least best position yourself to be ready for the financial hit? I figure, at minimum, I'll have no debt by then, plus my tax-deferred will be maxed. Other than that, what is the best course of action?
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Re: Is there a best way to prepare for the expense of colleg

Post by Jack FFR1846 »

One of the first things to understand is that "aid" sometimes means unsubsidized loans at greater than 7% interest.

You are ahead of the curve by understanding that assets are counted against you. Remember that both assets and income are much more greatly counted against the student, so any assets in the stundent's name should be moved to parents accounts if you feel you have any chance of need based financial aid.

Merit aid is not counted against need directly, so that's something that's always open (and the only thing I expect to get for my son, starting college this fall). Outside scholarships that are not need based can also help if you have no need based aid from the college or govt.

Be very, VERY careful of college finance planners (many give seminars) advising that you buy universal life, whole life, insurance annuities as a way to hide the money from the college. Yes, it will hide the money, but while it's hidden, it's likely being drained by fees and commissions and getting that money out is very difficult in most cases.

You mentioned buying a car. Doing home improvements is another popular place to sink assets. What college your kids choose will make a difference here. You can look up FAFSA-only colleges and CSS colleges. It's not only public colleges that are FAFSA-only, so know what you're looking at. If the college is a CSS college, you'll have to submit the CSS form and the college can go further and find your assets. So that Ferrari that was a hedge against seeing assets will suddenly come to light and be "available" to pay for college.

Maxing any retirement accounts is the key, I believe. You may well find that with a good income and reasonable assets, you're not getting much or any aid. Remember the amount of money that FAFSA allows before saying that your income is excess and available to pay for college is right above the federal poverty line.

I don't think there's any magic way to do this. Well.....you could stop working for all of the years your kids are in college and have all your assets in retirement accounts but how much sense does that make.
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livesoft
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Re: Is there a best way to prepare for the expense of colleg

Post by livesoft »

Best way to prepare? Have a good job and have your spouse have a good job. That's really all there is to it.

If both of you have been putting large amounts (the maximums?) into your tax-advantaged accounts since you started working, then when it comes time for your children to go to college, you just stop contributing to those accounts if needed and divert the money towards education expenses.

There are several benefits to this method:
1. You end up with nice big retirement accounts.
2. You are forced to live below your means since a lot of your money is going into retirement accounts.
3. The retirement accounts are sequestered from the FAFSA, but the FAFSA expects a family to stop retirement contributions when student is in college anyways.
4. You really save on taxes, too.
5. Retirement accounts can be used for college expenses in a pinch. One can get a loan from their 401(k), too.
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JV
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Re: Is there a best way to prepare for the expense of colleg

Post by JV »

Thanks to you both. Very helpful. When it comes to assets outside of tax-deferred, would it make sense to intentionally limit their amount (in essence, "shielding them") or am I focusing on them too closely?
markcoop
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Re: Is there a best way to prepare for the expense of colleg

Post by markcoop »

I always felt that you need to make one assumption that clarifies the picture. For me that assumption was I will not qualify for needs based aid and any loan I may get won't be a great loan. Once I made that assumption, I no longer was concerned about hiding/spending/shifting money and it allowed me to focus on where to invest the money in the most advantageous way. I did the following:

1) Maxed out my 401K
2) Maxed out ROTH IRAs
3) Maxed out Coverdell IRAs for all kids
4) Contributed to a 529 up to the max to get a state tax deduction (NYS).
5) Opened small UGMA to keep options open on some money.
6) Some I-bonds that I don't expect to use for college but is an option if my job situation changes (lower income would mean tax-free withdrawal for college).

I imagine it is possible when I have 2 kids going to college at the same that I will qualify for a loan with a decent rate (who knows what those rates will be in the future). But I'm not counting on it and feel secure I did everything in my power to max out tax advantaged college savings.

Of course, if I had made the opposite assumption, that I would qualify for some aid, I may have proceeded much differently.
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Re: Is there a best way to prepare for the expense of colleg

Post by Grt2bOutdoors »

JV wrote:Thanks to you both. Very helpful. When it comes to assets outside of tax-deferred, would it make sense to intentionally limit their amount (in essence, "shielding them") or am I focusing on them too closely?
How can you intentionally limit their amount legally? Well, you can spend all of your taxable assets, but what good will that do you if the only option extended to your child is a 7% unsubsidized loan? Really, the best way to prepare for any expense is to SAVE. In my case, my tax deferred space is limited, but that does not mean I'm going to take my hard-earned money and blow it on a $300 dinner every weekend, or a new car, or jetting off to Paris (well maybe once in my life :wink: , but not now) or try and hide it in a high cost variable annuity or life insurance policy - that's like saying I'm going to keep the biggest mortgage I can because I can deduct the interest on my tax return (okay, so you save 25 or 35 cents, but you pay someone else 65 cents - make sense?) Maybe a low-cost Vanguard annuity, but even then it's questionable, because upon withdrawal it's all taxed at the highest rates - it's income, not capital gains taxes. If you want to shield your taxable assets - pay off your mortgage, if you have one. If your child applies to private college, they will look at all your assets including the car in your driveway, value of the home, value of life insurance, value of the cheap Timex watch sitting on your wrist. The bottom line is private colleges in my mind are "blood suckers". Someone I'm friends with paid his house off two years before his kid applied to schools, because his kid is a virtual brain she got a full scholarship for 4 years to a prestigious private university just below Ivy league name status - so the parents rushed to pay off the home, maybe it helped or maybe it was because the child is first in her class and scored extremely high in all those exams.
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Mike Scott
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Re: Is there a best way to prepare for the expense of colleg

Post by Mike Scott »

The kids should have some investment in this. They should save some of their own money as well as work on good grades and test scores in order to qualify for as many academic scholarships as possible.
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JV
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Re: Is there a best way to prepare for the expense of colleg

Post by JV »

I hear you, Grt2bOutdoors, and thank you. I probably worded my question incorrectly, but your response was helpful. I'm as frugal as they come, so no $300 diners for me! I've been doing so much research lately that I am getting paralysis by analysis and lost in the fog of data. In the end, I just want to prepare properly and do what's best for my family, while maintaining our standard of living and enjoying the hell out of life! To that end, it makes sense to max out tax-deferred, minimize debt (I am working on paying off my mortgage by 2016, possibly 2015), and saving beyond that. I still struggle with beginning taxable investing, and wondered if that would have as negative an effect as I thought on qualification for reduced tuition. Thanks!
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Re: Is there a best way to prepare for the expense of colleg

Post by sunnyday »

You could use a financial aid calculator like http://www.finaid.org/calculators/quickefc.phtml to get a rough estimate on your EFC.

Income increases ones EFC significantly, I think over 20%. Assets (taxable, 529s, etc) increase it by I think 5.6%.

Grt2bOutdoors wrote:
JV wrote:Thanks to you both. Very helpful. When it comes to assets outside of tax-deferred, would it make sense to intentionally limit their amount (in essence, "shielding them") or am I focusing on them too closely?
How can you intentionally limit their amount legally? Well, you can spend all of your taxable assets, but what good will that do you if the only option extended to your child is a 7% unsubsidized loan?
More financial aid doesn't always mean more loans. Take Princeton for example -- the entire undergraduate class has $0 in student loans. Also, if you're an undergrad and have financial aid in the form of loans, won't it be a direct subsidized (not unsubsidized) loan?

Plus if the loan is in your child's name, they can use their education, to get a job and to pay for their college :)


Personally, I think Bogleheads sweat this too much. But we're an extremely financially conservative group, so that's typical.
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Re: Is there a best way to prepare for the expense of colleg

Post by Grt2bOutdoors »

My understanding is there is a collar on the amount of direct subsidized loan values offered. After that, you are offered unsubsidized loans which are more costly.

Princeton is an outlier on offering grants as opposed to loans. The barrier in gaining admission to Princeton is very high, your child could be exceptionally bright and still be denied entrance into Princeton. Frankly, I believe in saving your money for grad school if that is the direction the child is intending to go.
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Texas hold em71
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Re: Is there a best way to prepare for the expense of colleg

Post by Texas hold em71 »

Make no mistake, there are students at Princeton with loans. What Princeton says is this:

"Since 2001, grants have replaced student loans in the Princeton financial aid package for all aid recipients. No Princeton student is required to borrow to meet their determined financial need."

And this:

"Since loans are not required in the Princeton financial aid package, any student or parent who borrows does so at their own initiative."

They then go into a multiple page description of all the loans you can apply for.

I put my family's information into their aid calculator and it said this:

"Based on the answers you provided, your family is not likely to qualify for need-based financial assistance.

Even though your estimated resources appear sufficient to pay a year’s expenses at Princeton, there are financing options available to help manage college payments. More information can be found at Financing Options for Students and Parents.

Students may also work on campus to cover books and personal expenses. It is possible to earn between $2000 and $3000 over the course of the academic year."

So Princeton meets the Cost Less EFC with grants not loans, but that does not mean that the entire undergraduate class has $0 in loans. It means parents are expected to cash flow tuition or sell taxable investments to do so if they can and can is by their definition and not ours.
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Re: Is there a best way to prepare for the expense of colleg

Post by 500Kaiser »

This is likely more practical than financially optimal. We are tming paying off our mortgage when the first kid hits so we can divert the cashflow. In years where we have multiple kids in school, plan on tapping the 529 and Ibonds. I am not expecting much financial aid, and really want to avoid the loan route. Also setting the expectation that they pay a third. That can be through academic scholarships, flipping burgers, or whatever. But they should have some skin in this game.
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market timer
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Re: Is there a best way to prepare for the expense of colleg

Post by market timer »

The answer depends on your income and assets. If you are at the border of qualifying for need-based aid, some strategies, like paying off your mortgage or taking a sabbatical year, can yield substantial financial aid windfalls. We started late and hope to retire by the time our son enrolls in college. That's one strategy that would work under the current system of means testing.
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Re: Is there a best way to prepare for the expense of colleg

Post by dhodson »

Very few people can just take off work in order to qualify and then resume their job at their leisure.

If you have good income then the best thing to do is max your 529 bc you are not likely to get aid that's worth getting and you might as well get the tax deduction (which has low limits unfortunately in most states) and get the tax free growth.

After you maximize your tax protected accounts, id only get fancy IF I thought I was likely to have substantially reduced income when my children were in college. Out of all the strategies, I prefer paying down the mortgage. As mentioned by someone above, be very careful about those who promote insurance products to either pay or shield assets for college.
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Re: Is there a best way to prepare for the expense of colleg

Post by Jack FFR1846 »

Please also don't place all private colleges into the "blood sucking - look at everything" category. My son is attending a private college in the fall and it is a FAFSA-only college. He has already received merit scholarships for his entire 4 years that covers 25% of attendance (all costs). My tax refund just hit my checking account so I'll be doing the FAFSA this weekend but expect nothing from it.

Maximize all retirement savings, starting now.
When you approach your first going into college, first look at your income. Frankly, if you make $500k a year, you're getting nothing. If you make $100k a year, it's going to depend on other factors and you might get something. Income weighs more heavily than assets. The student's income weighs more heavily than the parents. If the student works his butt off the year before college, expecting that most of the money is going to pay for college, he'll be fine, since the college will expect that half his earnings (after $6130) will pay for college.
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Re: Is there a best way to prepare for the expense of colleg

Post by Grt2bOutdoors »

Jack FFR1846 wrote:Please also don't place all private colleges into the "blood sucking - look at everything" category. My son is attending a private college in the fall and it is a FAFSA-only college. He has already received merit scholarships for his entire 4 years that covers 25% of attendance (all costs). My tax refund just hit my checking account so I'll be doing the FAFSA this weekend but expect nothing from it.

Maximize all retirement savings, starting now.
When you approach your first going into college, first look at your income. Frankly, if you make $500k a year, you're getting nothing. If you make $100k a year, it's going to depend on other factors and you might get something. Income weighs more heavily than assets. The student's income weighs more heavily than the parents. If the student works his butt off the year before college, expecting that most of the money is going to pay for college, he'll be fine, since the college will expect that half his earnings (after $6130) will pay for college.
If you make half the amount you quoted you'll get nothing either. The main issue I have with income having a higher weighing is income is not an asset unless you have an occupation that guarantees an annuity like stream of it going forward - those in the public sector and certain lucrative private sector jobs that require licensure may have that benefit, many in the private sector have no such guarantees. Furthermore, assets may or may not be taxed as heavily (capital gains/muni interest/deferred access plans like 457's), income is taxed at the highest rates and depending on where one resides $250K may offer a king's living out in Arkansas, but the picture is vastly different in NYC where you come home with 49 cents on the dollar and the taxing authority receives 51 cents. To offset these particular FAFSA and private college "grab its" - many folks I know are sending their kids to state colleges and universities and saving their money and/or loan taking ability for graduate school where the ROI is likely to justify the expenditures.

On an aside, I personally know 3 collegiate employees and frankly their attitude regarding tuition, room and board, ridiculous fee assessments is appalling. They think it's an endless pot of money to be vacumed up into their wallets. How many working people do you know receive 9%+ matches in their 403b plans? How many receive 11 weeks vacation? etc. etc. Tone-deaf is how I read it (or sticking one's head in the sand).
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Re: Is there a best way to prepare for the expense of colleg

Post by livesoft »

market timer wrote:We started late and hope to retire by the time our son enrolls in college. That's one strategy that would work under the current system of means testing.
That will work if one has only tax-advantated accounts. If the parents have a joint taxable account, then the educational institution will assume it belongs to them. They will think that you can go back to work. And rightly so, if they have any financial aid money, they should give it to folks who have no assets instead.
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Re: Is there a best way to prepare for the expense of colleg

Post by market timer »

livesoft wrote:
market timer wrote:We started late and hope to retire by the time our son enrolls in college. That's one strategy that would work under the current system of means testing.
That will work if one has only tax-advantated accounts. If the parents have a joint taxable account, then the educational institution will assume it belongs to them. They will think that you can go back to work. And rightly so, if they have any financial aid money, they should give it to folks who have no assets instead.
This site says parents are expected to contribute 2.6-5.6% of assets: http://www.savingforcollege.com/financi ... avings.php#.

So, suppose we have $800K in an IRA, $1mn house (maybe with a decade of prepaid property taxes?), and $200K in taxable investments, then we'd probably owe less than $10K/year at a typical school. At an Ivy League school with better aid, our son would almost certainly receive grants to cover tuition and living expenses.
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Re: Is there a best way to prepare for the expense of colleg

Post by Grt2bOutdoors »

livesoft wrote:
market timer wrote:We started late and hope to retire by the time our son enrolls in college. That's one strategy that would work under the current system of means testing.
That will work if one has only tax-advantated accounts. If the parents have a joint taxable account, then the educational institution will assume it belongs to them. They will think that you can go back to work. And rightly so, if they have any financial aid money, they should give it to folks who have no assets instead.
Like the folks portrayed in the WSJ on Monday, obtaining financial aid to pay personal expenses, paying their mother rent and putting food in the refrigerator for their 5 kids. :oops: One of the fellows has no degree in sight, makes $10/hr as a security guard in a mall, has 5 kids and nearly $52,000 in non-dischargeable debt. I'm going to buy a big iron strongbox fill it with gold and bury it. Now I have no assets, give me the aid.
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Re: Is there a best way to prepare for the expense of colleg

Post by Grt2bOutdoors »

market timer wrote:
livesoft wrote:
market timer wrote:We started late and hope to retire by the time our son enrolls in college. That's one strategy that would work under the current system of means testing.
That will work if one has only tax-advantated accounts. If the parents have a joint taxable account, then the educational institution will assume it belongs to them. They will think that you can go back to work. And rightly so, if they have any financial aid money, they should give it to folks who have no assets instead.
This site says parents are expected to contribute 2.6-5.6% of assets: http://www.savingforcollege.com/financi ... avings.php#.

So, suppose we have $800K in an IRA, $1mn house (maybe with a decade of prepaid property taxes?), and $200K in taxable investments, then we'd probably owe less than $10K/year at a typical school. At an Ivy League school with better aid, our son would almost certainly receive grants to cover tuition and living expenses.
Think again, try finaid.org, fill out the mock FAFSA - you will pay more than 10K.
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Re: Is there a best way to prepare for the expense of colleg

Post by sunnyday »

Texas hold em71 wrote:Make no mistake, there are students at Princeton with loans. What Princeton says is this:

"Since 2001, grants have replaced student loans in the Princeton financial aid package for all aid recipients. No Princeton student is required to borrow to meet their determined financial need."

And this:

"Since loans are not required in the Princeton financial aid package, any student or parent who borrows does so at their own initiative."

They then go into a multiple page description of all the loans you can apply for.

I put my family's information into their aid calculator and it said this:

"Based on the answers you provided, your family is not likely to qualify for need-based financial assistance.

Even though your estimated resources appear sufficient to pay a year’s expenses at Princeton, there are financing options available to help manage college payments. More information can be found at Financing Options for Students and Parents.

Students may also work on campus to cover books and personal expenses. It is possible to earn between $2000 and $3000 over the course of the academic year."

So Princeton meets the Cost Less EFC with grants not loans, but that does not mean that the entire undergraduate class has $0 in loans. It means parents are expected to cash flow tuition or sell taxable investments to do so if they can and can is by their definition and not ours.
Good point. I misspoke in my previous thread, but was referring to federal subsidized (Stafford and Perkins?) loans.

Someone stated that more financial aid = more loans, but I brought up Princeton to show that that isn't always the case. In the case of Princeton, more financial aid = more grants. I think other schools do this too, but most of them are top tier.
Last edited by sunnyday on Wed Mar 05, 2014 8:30 am, edited 1 time in total.
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Re: Is there a best way to prepare for the expense of colleg

Post by sunnyday »

market timer wrote:
livesoft wrote:
market timer wrote:We started late and hope to retire by the time our son enrolls in college. That's one strategy that would work under the current system of means testing.
That will work if one has only tax-advantated accounts. If the parents have a joint taxable account, then the educational institution will assume it belongs to them. They will think that you can go back to work. And rightly so, if they have any financial aid money, they should give it to folks who have no assets instead.
This site says parents are expected to contribute 2.6-5.6% of assets: http://www.savingforcollege.com/financi ... avings.php#.

So, suppose we have $800K in an IRA, $1mn house (maybe with a decade of prepaid property taxes?), and $200K in taxable investments, then we'd probably owe less than $10K/year at a typical school. At an Ivy League school with better aid, our son would almost certainly receive grants to cover tuition and living expenses.
But what's your annual income? That reduces financial aid more than total assets.
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Re: Is there a best way to prepare for the expense of colleg

Post by dhodson »

Princeton is the exception. if you are guessing what you will get in grants based on Princeton then likely you will be disappointed.
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Re: Is there a best way to prepare for the expense of colleg

Post by market timer »

sunnyday wrote:
market timer wrote:
livesoft wrote:
market timer wrote:We started late and hope to retire by the time our son enrolls in college. That's one strategy that would work under the current system of means testing.
That will work if one has only tax-advantated accounts. If the parents have a joint taxable account, then the educational institution will assume it belongs to them. They will think that you can go back to work. And rightly so, if they have any financial aid money, they should give it to folks who have no assets instead.
This site says parents are expected to contribute 2.6-5.6% of assets: http://www.savingforcollege.com/financi ... avings.php#.

So, suppose we have $800K in an IRA, $1mn house (maybe with a decade of prepaid property taxes?), and $200K in taxable investments, then we'd probably owe less than $10K/year at a typical school. At an Ivy League school with better aid, our son would almost certainly receive grants to cover tuition and living expenses.
But what's your annual income? That reduces financial aid more than total assets.
Suppose $10K/year in this example (5% interest on $200K).
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Re: Is there a best way to prepare for the expense of colleg

Post by livesoft »

I will guess that in that specific situation, your EFC will be $99,999.
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Re: Is there a best way to prepare for the expense of colleg

Post by market timer »

livesoft wrote:I will guess that in that specific situation, your EFC will be $99,999.
FAFSA must have changed since I last filled it out. Previously, equity in primary residence and retirement accounts were not included in EFC calculation.

Edit: Appears that is still the case, actually: http://www.cune.edu/a-to-z/offices/unde ... questions/

If this is still the case when my son is applying, I'd probably just annuitize most of my taxable investments.
Excluded assets—not reported on the FAFSA:

Possessions such as a car, a stereo, clothes, or furniture are not re­ported as an asset.
A family's principal place of residence is not reported, even if it is part of a business.
Family-owned and controlled small businesses – see the next question for detailed information on how a business (including a farm) qualifies as this.
Retirement plans and whole-life insurance. The value of retirement plans (401[k] plans, pension funds, annuities, non-education IRAs, Keogh plans, etc.) is not counted as an asset, but distributions (taxed and untaxed) do count as income. Similarly, the cash value or equity of a life insurance policy (often called a whole-life policy) isn’t reported as an asset, but an insurance settlement does count as income. The full amount of the distribution is reported, whether it was a lump-sum or annual distribution, and it will count as taxable or untaxed income, as appropriate. An exception to reporting pension distributions is when they are rolled over into another retirement plan in the same tax year.
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Re: Is there a best way to prepare for the expense of colleg

Post by JupiterJones »

One great way to prepare for the expense of college is to lower your part of the expense in the first place.

Such as:
  • Picking an inexpensive state school
  • Having the student attend the first year or two at community college
  • Having the student work
  • Having the student go to school part-time
  • Having the student take a gap year and work full-time (or more)
  • The armed forces
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Re: Is there a best way to prepare for the expense of colleg

Post by ThatGuy »

With as many veterans on this board as there are, evidenced by all of the USAA talk, and as focused on penny pinching, I don't understand why the GI Bill is not offered more often as a way to pay for college.

Yes you're giving 4 years up, during which you get to make a paycheck, and you could knock out the first two years at a community college. Particularly if your state has something similar to the California TAG program. Do note that if you get out early with certain discharges (medical) you retain your GI Bill with less than 4 years. Where else do you get a financial return as good as the GI Bill?

The enlistee pays $100 a month for 12 months = $1200. As of 2012 the benefit to attend college fulltime after separation is $1,564 per month for 36 months. You can extend this by making sure that you have at least 1 day left of payable benfits going into your last term, because they will still pay the entire term.

On top of this, if you pay an extra $600, total cost $1,800, your monthly benefit jumps by $150 per month. I mean really, where else can you get something like this? Some states, I believe Texas is one, guarantee that there are no school costs (at a state school) for veterans receiving the GI Bill.

An added benefit is that a veteran is automatically considered an independent for FAFSA considerations, and the GI Bill is not taxable, so they most likely will qualify for need-based aid.
Work is the curse of the drinking class - Oscar Wilde
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happymob
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Re: Is there a best way to prepare for the expense of colleg

Post by happymob »

Not exactly the direction you were going in, but...

Prepare your kids to graduate in 4 years. Most college graduates take longer. And while there is nothing inherently wrong in that, even an extra semester is expensive, both in direct cost and opportunity cost of delaying employment. So, how does one prepare their kids for this?

Take a college preparatory curriculum in high school. Take as much math and science as you can. Lack of math prep will put you behind in STEM fields. Outside of STEM fields, general education math classes are the most repeated classes. Take foreign languages. Take AP courses, though be aware that not all colleges will give you credit for them. Take dual enrollment courses with the local community college, but be aware not all colleges will transfer them in. Even if you don't receive credit, the preparation for college will be useful.

Once in college, talk to an advisor, whether you need to or not. Take what they say with a grain of salt (the quality of advising is a mixed bag. Read the student handbook to understand exactly what you need to graduate and understand the chain of pre-requisites and when classes are offered to get there. A small mistake in not enrolling in a particular course at the right time can set you back 1 or 2 semesters, even if you are taking 15 hours a semester and passing everything. Take ownership of this, yet get a second opinion so you don't mess this up.

Take this advice with a grain of salt. It comes from a current college professor (at a regional public university) who dropped out of college the first time and received their bachelors degree 12 years after they graduated from college.
jackholloway
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Re: Is there a best way to prepare for the expense of colleg

Post by jackholloway »

market timer wrote:
livesoft wrote:
market timer wrote:We started late and hope to retire by the time our son enrolls in college. That's one strategy that would work under the current system of means testing.
That will work if one has only tax-advantated accounts. If the parents have a joint taxable account, then the educational institution will assume it belongs to them. They will think that you can go back to work. And rightly so, if they have any financial aid money, they should give it to folks who have no assets instead.
This site says parents are expected to contribute 2.6-5.6% of assets: http://www.savingforcollege.com/financi ... avings.php#.

So, suppose we have $800K in an IRA, $1mn house (maybe with a decade of prepaid property taxes?), and $200K in taxable investments, then we'd probably owe less than $10K/year at a typical school. At an Ivy League school with better aid, our son would almost certainly receive grants to cover tuition and living expenses.
Quoting the other points from the article: each year, they figure you can contribute:

20% of a student's assets (money, investments, business interests, and real estate)
50% of a student's income (after certain allowances)
2.6%- 5.6% of a parent's assets (money, investments, certain business interests, and real estate, based on a sliding income scale and after certain allowances)
22%-47% of a parent's income (based on a sliding income scale and after certain allowances)

So, if your only income is 10k from investments, plus you have 200 k taxable, each year, they may expect you to contribute about 13k from taxable, plus another 2-3k from income. Expect to have spent down your taxable investments by 25% by the time you are done, plus you may have to live on half to three quarters of your income.

Financial aid officers do have some discretion on school-based aid, I figure if you have nigh on a mega dollar in retirement, and a similar amount in a paid off house, they are not likely to go out of their way to help. They will work to hit the suggested targets, but not try to go beyond the estimates.
jackholloway
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Re: Is there a best way to prepare for the expense of colleg

Post by jackholloway »

happymob wrote:Not exactly the direction you were going in, but...

Take as much math and science as you can. Lack of math prep will put you behind in STEM fields. Outside of STEM fields, general education math classes are the most repeated classes. Take foreign languages. Take AP courses, though be aware that not all colleges will give you credit for them. Take dual enrollment courses with the local community college, but be aware not all colleges will transfer them in. Even if you don't receive credit, the preparation for college will be useful.
+1. If you take the STEM courses and do not go into STEM, they will not hurt, and they may help. Having to do the number crunching in intro physics will make algebra and calculus familiar, and chem lab is great prep for the biotech lab work I used to do. Even the error analysis and statistics I learned in lab has been useful in software engineering when looking at time estimates, and figuring out whether the variation in delivery times is signal or noise.

If, on the other hand, you skip the STEM courses, you will not be able to make them up, as even intro courses assume a fair amount of prep.

I also echo owning your graduation schedule. Schools have little motivation to graduate you on time, and some not to. I do not believe most of them are maliciously planning you to get out in five, but some advisors have said (privately) that it is going to happen anyway, so why set the student up with unrealistic expectations. To which I say "if they can, through some effort and study, plan a course schedule that will get them out in time, then they should shoot for that target. Not planning will insure a poorer outcome."
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BigOil
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Re: Is there a best way to prepare for the expense of colleg

Post by BigOil »

dhodson wrote:Princeton is the exception. if you are guessing what you will get in grants based on Princeton then likely you will be disappointed.
Vanderbilt has a similar policy IRRC...a *little* easier to get in too...
There are other Colleges doing this, fewer Universities. I suppose they all have loans too, but they have reasonable family contribution formulas and taking a loan is a lifestyle choice not a requirement. They expect people to take "small pains" in form of forgone wealth/stuff to pay. Doh. Fair.

It is an attractive reason to apply to the schools if your kid is in the "admit" range of scores...

If you have an odd situation (i.e. mostly out of your control and does not fit the forms) talk to Aid Office with documentation and logic etc. They can give discounts, especially if they want you kid. Private schools have flexibility. They are not robots. But they need reasons for their Boss too, and owning an expensive mortgaged vacation home rater than paying for Susie's skewl ain't one! Get loan buddy or sell the Vacay...sorry.

I think preparing is being smart re: fund retirement and pay mortgage off etc rather than have after tax assets. Keep it simple. Use 529 if you do the other things 1st. Dave Ramsey has this one item 100% right.
Don't game the system to get others to pay your obligations to your children. But do shop and get a smart price. AVOID INSURANCE PRODUCTS!!!

If you gotta have a Rolex, expect to pay.

Bottom line - SAVE (Doh!) Retirement and house 1st then 529's. If you can.
Buy smart. I cannot drive a Rolls Royce, but some schools are Rollses. For STEM and non-Wall Street I have not seen evidence school matters in the long run IF your kid can get good to great grades and get a "starting point" job to begin managing a career in tech, sales, admin, or whatever you field is.

I'm not sure anyone should strain an unprepared budget, and lack of financial discipline, to keep a kid in an unexpected "Harvard"-type admit. Poor choice IMHO. Go where the same scores get you free tuition, you cannot afford it. Period. If you don't have the resources or are diverse, then they will get significant aid...then I might help/advise small loan backup if they can get a job when they get out with a reasonably employable major on the 4 year plan only. I know some unprepared families will not agree.

People buy College with logic as bad as they buy cars, and just as stupid/ignorant as people that cannot calculate interest, or manage most emotions, and go to "buy-here-pay-here-lots"... I winced when I heard choices some friends make for their children.

To OP don't panic or worry. Just save as smart as can for you retirement, and maybe some left over for College if you can. Plan to spend a lot of time working on aid packages and guiding you kids choices as far ahead as possible.

Example not my kid but somewhat similar- Kid want's to be an Engineer or STEM 32 ACT plus 3.5 HS = FREE TUITION at some SEC & other schools. ABET Engineering is the SAME for all undergrads in traditional majors. Some smaller excellent schools, say WPI are like 60K on campus...dunno maybe you get 50% need and merit aid leaving a 120K gap. You need to make choice. To me it's simple...you can afford it or not like anything else (no loans) and what is alternative. If you have the money great, might buy the Rolls or not. No money, maybe a much better family choice is War Eagle! Plus you get $5 football tickets! LOL Both get jobs paying $60Kish with good grades. Just like all of life more money is more (smarter) choices.
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