NOT saving for college

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bobbun
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Re: NOT saving for college

Post by bobbun »

I'm curious why no one suggests this option:

1. Maximize tax defered.
2. Invest additional in taxable.
3. Once the children are independent and in college, gift them appreciated shares as needed to pay for college.

The child pays the taxes at his rate, which is likely far lower, and you get to reduce your future tax liability by unloading your most appreciated shares to pay for college.
scubadiver
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Re: NOT saving for college

Post by scubadiver »

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livesoft
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Re: NOT saving for college

Post by livesoft »

bobbun wrote:I'm curious why no one suggests this option:

1. Maximize tax defered.
2. Invest additional in taxable.
3. Once the children are independent and in college, gift them appreciated shares as needed to pay for college.

The child pays the taxes at his rate, which is likely far lower, and you get to reduce your future tax liability by unloading your most appreciated shares to pay for college.
The child only gets to pay taxes on the first $1900 in investment income at her rate. Above $1900, she pays at the parents' rate. See Form 8615. My college senior knows all about Form 8615 after doing her own tax return last month.

I guess I suppose you might mean really "independent" in the tax sense, but that is gonna be really tough to do.
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bobbun
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Re: NOT saving for college

Post by bobbun »

livesoft wrote:I guess I suppose you might mean really "independent" in the tax sense, but that is gonna be really tough to do.
Yes, I do. I'm not a parent. I might help my sister's kids when they're ready to go to college, though. They will be independent of me. Since it's not a sure thing, I'm probably better off just planning on using the savings for retirement, and seeing what happens. Even if it gets taxed at my sister's rate, that's definitely lower than mine, and probably not increasing significantly in the future.

There might be better options in the situation I'm thinking of, but I doubt a 529 is one of them. Admittedly, this is very different from the original poster's scenario.
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danwhite77
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Re: NOT saving for college

Post by danwhite77 »

letsgobobby wrote:So I don't believe for a second that today's upper middle class parents can't afford to save for college and retirement. I do believe its impossible to save for retirement and college while also eating six meals out per week, driving late model cars, taking vacations to sunny places in the winter, and upgrading to a larger home .....
Be very careful in what you assume. I am a relatively high wage earner (several 100k), but I have four children and the projected college cost is virtually impossible to pay even with a solid salary. So what's it like for other people that make less? I'm sure it's even more difficult for them.

I paid cash for my house which is *just* big enough to house a family of six. My family has one car (a minivan we bought for cash), despite living in the 'burbs. My wife and I just ate out at a restaurant this month (twice!) for the first time in a year. Our vacation expense is less than two thousand dollars a year.

Do not underestimate the insane tuition inflation that has occurred over the last 20, 30 years and continues to run rampant. Tuition inflation rises faster than any index - you cannot invest a dollar anywhere today that will offset a dollar in tuition when your children enter college. If you don't believe me, investigate for yourself using Vanguard's college calculator here: http://www.archimedes.com/vanguard/csp.phtml

With four kids, in the worst case scenario, I need to save roughly $2 million dollars for college. Even assuming the most favorable economic outcome for my employment over the next twenty years, I frankly regard that threshold as impossible to achieve if I'm also going to fund retirement for my spouse and myself.
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TomatoTomahto
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Re: NOT saving for college

Post by TomatoTomahto »

livesoft wrote:I guess I suppose you might mean really "independent" in the tax sense, but that is gonna be really tough to do.
It is so profoundly difficult to do that sometimes you hear heartbreaking stories of kids who truly are independent (I would call them abandoned), but can't prove it. So, their "family" finances preclude financial aid, but their supposed family won't pony up.
I get the FI part but not the RE part of FIRE.
bobbun
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Re: NOT saving for college

Post by bobbun »

TomatoTomahto wrote:
livesoft wrote:I guess I suppose you might mean really "independent" in the tax sense, but that is gonna be really tough to do.
It is so profoundly difficult to do that sometimes you hear heartbreaking stories of kids who truly are independent (I would call them abandoned), but can't prove it. So, their "family" finances preclude financial aid, but their supposed family won't pony up.
Financial aid rules and tax rules aren't the same thing, of course. I did the independence for financial aid purposes my junior year (late 1980's), and it wasn't as bad as all that, though admittedly the rules have likely changed over the years. It involved a trip to the financial aid office, an affidavit from me, and a letter from another relative speaking to my inability to depend on financial assistance from home. I was already "needy" from a financial aid perspective even with family income included, so that's different from the situation you're describing. And as stated, it's not the same as tax independence.
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kenyan
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Re: NOT saving for college

Post by kenyan »

We apparently commit the cardinal sin, though I will admit it is somewhat for emotional reasons. We live on 1.5 incomes, and the .5 is actually closer to .25 (and is entirely consumed by day care and retirement contribution costs for the second earner). I reorganized our finances recently to deal with increased living expenses after purchasing a house, and now max our two employer plans - 403(b) and SIMPLE IRA - rather than the 403(b) and Roth IRAs. We are in the child tax phaseout, and pay a high state tax, so moving our contributions from Roth to pretax was probably a good idea anyhow. Frequently transferring contributions out of the SIMPLE will be a bit of a pain, but it's worth it to get away from the terrible employer choices.

We are now contributing $100/mo to each child's 529, and $125/mo to each earner's Roth. Yes, it would probably make more economic sense to ditch the 529 contributions and put them toward Roths, but we like feeling as though we are making progress on all of our financial goals, of which paying for the majority of college costs is one of. We also plan to pay a little bit extra toward our new mortgage for the same reason. After those contributions are being made, I plan to build up the Roths again as income (hopefully) increases.

Maybe it doesn't make the most sense, but I think there is value in keeping the wife happy - she doesn't care about the details, but likes knowing that we are moving down the right path with our financial goals.
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bru
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Re: NOT saving for college

Post by bru »

Because of a myriad of reasons we have not started a college fund for our now 5 year old. However we have significant assets, both liquid and retirement, that should cover some if not all of his college costs should he choose to attend. I should mention we will be able to access the retirement accounts penalty free when our child is of college age.

The Forbes article mentions how retirement assets are not counted toward financial aid eligibility. Knowing this it seems I should use my taxable assets to fund my retirements accounts, in our case Roth and Traditional IRAs and one 401(k). So rather than putting "new" money into my retirement accounts I should "shift" money from non retirement to retirement so when the time comes my non retirement accounts will have less and hopefully it will help us qualify for some financial aid. Make sense?
wilked
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Re: NOT saving for college

Post by wilked »

Agree with others, fund retirement savings to max, then go after the mortgage, try and cash-flow college when it comes
dhodson
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Re: NOT saving for college

Post by dhodson »

bru wrote:Because of a myriad of reasons we have not started a college fund for our now 5 year old. However we have significant assets, both liquid and retirement, that should cover some if not all of his college costs should he choose to attend. I should mention we will be able to access the retirement accounts penalty free when our child is of college age.

The Forbes article mentions how retirement assets are not counted toward financial aid eligibility. Knowing this it seems I should use my taxable assets to fund my retirements accounts, in our case Roth and Traditional IRAs and one 401(k). So rather than putting "new" money into my retirement accounts I should "shift" money from non retirement to retirement so when the time comes my non retirement accounts will have less and hopefully it will help us qualify for some financial aid. Make sense?
not really.
you want to max those retirement accounts. You cant shift more once you have maxed those yearly contributions. If you are using "old" money then new money wont be going into those accounts and will now just "replace" the money "shifted" from taxable.
moneyman11
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Re: NOT saving for college

Post by moneyman11 »

If there's one thing there is never any shortage of in these "paying for college" threads it is self-righteousness.
scubadiver
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Re: NOT saving for college

Post by scubadiver »

bru wrote:The Forbes article mentions how retirement assets are not counted toward financial aid eligibility. Knowing this it seems I should use my taxable assets to fund my retirements accounts, in our case Roth and Traditional IRAs and one 401(k). So rather than putting "new" money into my retirement accounts I should "shift" money from non retirement to retirement so when the time comes my non retirement accounts will have less and hopefully it will help us qualify for some financial aid. Make sense?
I would continue funding the retirement accounts with new money and instead transition the funds in the taxable accounts to a 529 up to the point to where I was able to fully fund 4 years at in-state school for each child.
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bru
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Re: NOT saving for college

Post by bru »

dhodson wrote:not really.
you want to max those retirement accounts. You cant shift more once you have maxed those yearly contributions. If you are using "old" money then new money wont be going into those accounts and will now just "replace" the money "shifted" from taxable.
You imply there is a surplus of investable money. What if there is no "new" money to put into the retirement accounts? The choice would be not funding the accounts or shifting. Shifting seems to make sense in this scenario.
scubadiver wrote:I would continue funding the retirement accounts with new money and instead transition the funds in the taxable accounts to a 529 up to the point to where I was able to fully fund 4 years at in-state school for each child.
See my reply above. We could probably scrape together some "new" money to fund retirement accounts but in reality it comes down to shifting or not making any contributions at all.
MGBGTV8
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Re: NOT saving for college

Post by MGBGTV8 »

A couple of observations-

1- the difference between the couples who have children in their early 20's vs. those whose children are born to parents in their late 30's. I fall into the late 30's camp. You will have different capabilities to support your children in the early stages of your working life than in the middle, and later on. Can't speak too much on priorities, but the capabilities are different.

2- Save early, both for retirement and for college. The big difference is that for college savings, you only have 18-22 years to save. For retirement, there are typically 20 more years to save. That matters.

Adding #1 & #2: For us, we have two kids, and our retirement saving has been progressing steadily. My wife took a year off from teaching, and I scaled back my retirement and college savings contributions temporarily by about a third. When I looked at the impact of a year or two of less contribution into my 403(b), it's hardly perceptible 20 years down the road. We get a state tax credit for our 529 contributions, so saving in that method is still "tax-preferred" and an instant one-time 7% return. Having that money available for college after compounding will be better than if invested later, whatever the cost of college turns out to be. Certainly college savings shouldn't overwhelm your retirement savings plan, but if college saving is a priority to you, it may a higher priority than it seems to be getting in discussions that deem it subservient to retirement savings.

Bottom line- We all seem to agree on the value of saving, and harnessing the power of compounding. How we prioritize the various mechanisms for accomplishing it is still an area without "one size fits all answers."
scubadiver
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Re: NOT saving for college

Post by scubadiver »

bru wrote:See my reply above. We could probably scrape together some "new" money to fund retirement accounts but in reality it comes down to shifting or not making any contributions at all.
If there is realistically speaking no new money, then yes, your proposal makes sense. I'm assuming of course that you still have earned income which I believe is a requirement for funding IRAs and obviously so with 401k / 403b / etc.
lwfitzge
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Re: NOT saving for college

Post by lwfitzge »

not mutually exclusive decisions, at least should not have to be for an average boglehead w an average networth of $1M according to our polls and the power of compounding. These decisions reflect more our value system and about should I fund rather than an ability to fund. So yes, my values tell me that "I should help" w education given my socioeconomic status in life and given the fact that I chose to be a parent. I've invested and saved heavily for my retirement and provided enough funding for 4 yr state school. I felt that was a fair and happy medium between my interests and those of my kids. Others can and will disagree...it's all good.
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bru
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Re: NOT saving for college

Post by bru »

scubadiver wrote:If there is realistically speaking no new money, then yes, your proposal makes sense. I'm assuming of course that you still have earned income which I believe is a requirement for funding IRAs and obviously so with 401k / 403b / etc.
A minimal amount of earned income. Just enough to qualify.

I had another thought. Shifting the money to a 529. We would get the state tax deduction but since we pay so little in tax already it isn't a big factor. But if we do this then for sure we wouldn't be adding to retirement accounts. But we would have a dedicated college fund though the amount wouldn't nearly cover the entire education cost.

So to summarize my dilemna, I think I can (and should) "shift" money from non retirement accounts. But to where? Retirement or 529? I've got about a decade to do this.
dhodson
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Re: NOT saving for college

Post by dhodson »

bru wrote:
dhodson wrote:not really.
you want to max those retirement accounts. You cant shift more once you have maxed those yearly contributions. If you are using "old" money then new money wont be going into those accounts and will now just "replace" the money "shifted" from taxable.
You imply there is a surplus of investable money. What if there is no "new" money to put into the retirement accounts? The choice would be not funding the accounts or shifting. Shifting seems to make sense in this scenario.
scubadiver wrote:I would continue funding the retirement accounts with new money and instead transition the funds in the taxable accounts to a 529 up to the point to where I was able to fully fund 4 years at in-state school for each child.
See my reply above. We could probably scrape together some "new" money to fund retirement accounts but in reality it comes down to shifting or not making any contributions at all.
Well you cant put money into retirement accounts if there is no income or no new money.
MnD
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Re: NOT saving for college

Post by MnD »

petej wrote:I'd like to hear people's takes. I've got a 2 and 0 year-old, and my wife and I were considering cutting back on our own retirement contributions (she's taking time off until they're 5, so a total of 7 years out of the workforce) and emphasizing their 529s.
Two kids two years apart. We saved just enough for the two overlap years for 1 child in ESA's and 529's assuming total cost of attendance flagship State U costs. We kept saving for retirement at the level in our plan and didn't really design some sort of coordinated hierarchy. Most years we didn't "max out" our retirement savings, but we are now, and are solidly on-track for an early retirement when we want to retire and with the income we desired. Maxing out retirement and full-on college savings when the kids were younger and my wife was working less would have violated our "living in the present" rule. :mrgreen:

Kids will graduate with no debt and a significant net worth as they are able to bank a lot of what they are earning from jobs since we are paying for school.
My only change in retrospect is that we didn't get or quickly refi to a 15 year mortgage when we bought our house around the time the kids were born. Having no mortgage for the high school and college years would have been great.

College costs are under our budget and plan - oldest is a top student and got a 25% merit scholarship at the most selective State U. Youngest isn't a top student so his smaller state school is 25% less than the flagship. EFC is ~$80K so financial aid wasn't a possibility. Private school merit aid offers for "top student" were underwhelming - I think they looked at CSS_profile and said - nope, no need or merit aid for this crowd. Partial merit aid offers did seem to be appropriate at the public ivy caliber state schools she applied to given her scores, grades and achievements.

Beware of the "students can just get loans" fallacy. Students can only get $5500 their freshman year and $31,000 aggregate for undergraduate in federal student loans in their name. $5500 is less than 1/4 cost of 1 year attendance at most flagship State U's. A lot of parents will take out ParentPlus federal loans or co-sign private loans and "pretend" that the kid is responsible for repayment. You are gambling your financial future on an 18 year old's future willingness and ability to pay on debts you are legally responsible for if you go that route.

Good luck!
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Dianne
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Re: NOT saving for college

Post by Dianne »

bru wrote:
scubadiver wrote:If there is realistically speaking no new money, then yes, your proposal makes sense. I'm assuming of course that you still have earned income which I believe is a requirement for funding IRAs and obviously so with 401k / 403b / etc.
A minimal amount of earned income. Just enough to qualify.

I had another thought. Shifting the money to a 529. We would get the state tax deduction but since we pay so little in tax already it isn't a big factor. But if we do this then for sure we wouldn't be adding to retirement accounts. But we would have a dedicated college fund though the amount wouldn't nearly cover the entire education cost.

So to summarize my dilemna, I think I can (and should) "shift" money from non retirement accounts. But to where? Retirement or 529? I've got about a decade to do this.
Run your scenarios through some Net Price Calculators on a few college websites, and see how the student's financial aid is affected. For example, here is Rice University's Net Price Calculator: http://financialaid.rice.edu/main.aspx?id=68. At most schools, the retirement accounts are excluded from consideration, but a 529 Plan is a parent asset. If you go through the calculator multiple times, with different 529 Plan balances each time, you will see how shifting money to a 529 Plan will affect the eventual amount of the grant your child would receive, given your income and other information. If your income is low enough, you might find that the benefits of a 529 Plan are outweighed by the financial aid cost.
letsgobobby
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Re: NOT saving for college

Post by letsgobobby »

danwhite77 wrote:
letsgobobby wrote:So I don't believe for a second that today's upper middle class parents can't afford to save for college and retirement. I do believe its impossible to save for retirement and college while also eating six meals out per week, driving late model cars, taking vacations to sunny places in the winter, and upgrading to a larger home .....
Be very careful in what you assume. I am a relatively high wage earner (several 100k), but I have four children and the projected college cost is virtually impossible to pay even with a solid salary. So what's it like for other people that make less? I'm sure it's even more difficult for them.

I paid cash for my house which is *just* big enough to house a family of six. My family has one car (a minivan we bought for cash), despite living in the 'burbs. My wife and I just ate out at a restaurant this month (twice!) for the first time in a year. Our vacation expense is less than two thousand dollars a year.

Do not underestimate the insane tuition inflation that has occurred over the last 20, 30 years and continues to run rampant. Tuition inflation rises faster than any index - you cannot invest a dollar anywhere today that will offset a dollar in tuition when your children enter college. If you don't believe me, investigate for yourself using Vanguard's college calculator here: http://www.archimedes.com/vanguard/csp.phtml

With four kids, in the worst case scenario, I need to save roughly $2 million dollars for college. Even assuming the most favorable economic outcome for my employment over the next twenty years, I frankly regard that threshold as impossible to achieve if I'm also going to fund retirement for my spouse and myself.
Obviously everyone's situation is different. Of course you didn't talk about any other challenges you (and other parents) can face, such as burdensome student loans, parental care, etc. All those things impact our ability to pay for college.

However in general my opinion is that this is a 'do I want to' question rather than a "can I afford to" question for upper middle class families. It's not for me to question you at all, and you've only shared a few glimpses into your personal life, but someone who makes 'several $100k' per year and refers to themselves as a 'relatively' high wage earner and having a 'solid' salary may have a distorted perspective on things. Such a salary places you in the top 1% of all taxpaying units in the United States, and with your very low cost of living (no eating out, modest cars, no vacations, etc), it is hard to see how someone in your position couldn't reasonably expect to meet both college savings and retirement goals. You don't have to pay for 4 years at a private liberal arts school for each kid - certainly state schools would be less than half the amount you're talking about. And with 3-4 kids in college at once, and with zero or low countable assets, even your income may permit some financial aid.

I'm also in the "several $100k" camp (I like that term, it's extremely broad) and feel it is not only possible but incumbent upon me to provide a college education for my children. It may or may not be a $500k education each, although it would be my goal to be able to afford it. I'm a compulsive planner in some ways; family size was largely determined by financial ability to sustain our own desired lifestyle as well as provide in the manner I see suitable for my children, and that included college education. It's why we waited til our mid-30s to have kids, why we have two kids rather than, say, three, and why we funded our son's 529 before he was born (funded in my wife's name, switched beneficiary once we had his SSN).

Just FYI, there are ways to offset the risk of tuition inflation, primarily by using prepaid tuition plans. Some have major drawbacks but some are quite reasonable (or have been). Our kids have 5 years each of prepaid state tuition and it cost "only" $35,000 or so each at birth. That seemed like a great deal considering the benefit of guaranteed future costs/limited upside risk. Currently the MA state prepaid tuition plan is attractive, but only if your kids go to a MA school and Harvard and MIT aren't on the list. The Independent 529 plan is attractive but only if your student will attend one of the schools in question, which is a big risk. Some state plans let you transfer the prepaid units at full value even out of state. If you're eligible you might look into one. Also the tuition inflation rate seems to be leveling off, especially for private schools. My opinion is that an equity-rich portfolio has a good chance of matching or exceeding that rate over a 20 year period.

I strongly advocate maxing retirement plans first but not because retirement is a more important goal than college savings. Rather I advocate this because the financial benefits are greater under the current system, both for current income tax reduction and also for future financial aid consideration. In some states 529 tax deductions/credits are substantial but since they may count against your EFC calculation it still may be preferable to max out 'non countable' assets like retirement accounts and primary residence mortgage pay down.
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petej
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Re: NOT saving for college

Post by petej »

Original poster back. Great list of comments and suggestions here.

I'm going to give my strategy based on some of the most salient posts for my situation. I’m a non-profit worker (circa 90+K) with a spouse who is staying at home to care for the kids, so we maybe able to benefit from financial aid someday more than the average poster. We’ve got a 2.5 and a 2 month old. We’re 40.

I've already put about $7,000 in 529s for my 2 yr. old. I’ll take his up to $8,000 in contributions and to make things equal, will give the girl newborn the same amt. of contributions. All of these get a tax preference in that they get a state deduction of 6%, so a one-time instant 6% gain. So, in the end, they’ll both get a small but front-loaded 529 that in 16-18 years may make a small dent in their college costs. Both balances should be more than small enough to not impact their FAFSA. These will all be in their first 4 years of life, when meaningful “experience expenses” as Jeff Bogle writes, will not be as numerous.

Because we had kids late, we’ll be able to withdraw money from IRAs when our kids are 19 and 21. So, after that $8,000 each of 529 contributions, we’ll go with IRAs as a primary savings vehicle for college. In fact, because we’ll be so close to our withdrawal eligible years when they’re in college, we could even borrow against them (short-term) to draw-downs off the FAFSA as income.

Faults to this plan?
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bungalow10
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Re: NOT saving for college

Post by bungalow10 »

danwhite77 wrote: With four kids, in the worst case scenario, I need to save roughly $2 million dollars for college. Even assuming the most favorable economic outcome for my employment over the next twenty years, I frankly regard that threshold as impossible to achieve if I'm also going to fund retirement for my spouse and myself.
I'm not a worst-case-scenario type, and I don't know your school situation, but my number is much lower.

I have three kids (0, almost-4, almost-6) and we figure we need about $500,000 to pay tuition, room, board at the flagship state school. It's $80k for a four-year degree right now ($20k each year, all-inclusive). Roughly doubling that for inflation, time three kids, is $480,000. There are cheaper state schools that cost about $15k/year right now that would bring the total down to $360k.

If we save $3k/year/kid from 0-22 and make ZERO on it (stuff it in a mattress), we would have $196k, which should fund maybe (optimistically) half of the cheaper option or 1/3 of the more expensive option. We won't actually be stuffing a mattress, but rather putting it in a 529... with any luck we will have some return on our investment and will be able to fund a little more.
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happymob
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Re: NOT saving for college

Post by happymob »

I'm not sure if this has mentioned yet (as I haven't finished the thread), but you basically have two advantages with 529s:

1) The tax-deferred (well, tax-free if used for education) growth is used for education. Obviously, this is maximized by early contributions and compounding.

2) The state income tax deduction (where this applies, as some states have no income tax).

#1 is the great debate on whether to do a 529 plan or not. I tend to side with the maximize retirement first and pay for college out of cash-flow crowd.

But definitely keep #2 in mind for late 529 contributions. Not when they are 1 year old, but when they are 14 or 16 or 18 (or even 21 in their last year of college or beginning graduate school) years old. Know the rules of your state. Specifically, do you get a deduction at all? What are the caps on this benefit? And is there a minimum holding period?

Many people can still take advantage of the state tax deduction benefit at a very late stage - you just funnel (I like to use the verb "launder", but that's not quite accurate) some late cash flow into a 529 to capture your, say 5% income tax benefit a year or less before you actually use the money. You might as well get the #2 benefit, if you are legally able to, even if you didn't start investing for college at an early age. But you have to know the rules of your state.

For example, in my current state (Oklahoma), you do get a state tax deduction of up to 5.5% (depends on your bracket) for up to $10,000 of 529 contributions (per individual, so $20,000 for both parents), but perhaps not per child (this is unclear to me in simple Internet research). So 2 or more children bunched might be a problem. There is no apparent minimum time involved. So if we end up paying "cash" for 1 or both of my children, we will absolutely dump $20,000 into the Oklahoma 529 and immediately disburse the money for educational expenses and therefore save 5.5% on that money on our state taxes. A >$1,000 benefit even though we didn't save any of that money specifically for school.

And, yes, we will look at the educational tax credits as well, as those may be worth more than the 5.5% (or whatever it is in the future) in any case, and cut back a little on 529 disbursements to fully capture those federal tax credits.

I guess the overall point is that with the dual benefits of 529 plans, people often overestimate the second, even though there is really no time limit on it. Understandably, reducing your state taxes now sounds great. With the first, you have to compare that benefit against other benefits, like contributing to a 401(k), Roth, etc, which provide similar, but not equal benefits.
david9117
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Re: NOT saving for college

Post by david9117 »

Just wanted to highlight that in case one gets it wrong you can always withdraw from 529 for retirement with 10% penalty on the gains.

Also the impact is less than 10% because over the say 10+ yrs of 529 you are getting tax deferred growth. Saw a paper highlighted on this blog site some time ago, about that after 36 years or so one breaks even using 529 (www2.stetson.edu/fsr/abstracts/vol_12_num4_p309.pdf) compared to taxable investment assuming 8% return with 25% tax and 15% on gains. Not asking people to wait 36 yrs by just wanted to highlight that the 10% penalty will be lower in case one gets the 401K and 529 amounts wrong.
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Re: NOT saving for college

Post by mikegerard »

petej wrote:
Because we had kids late, we’ll be able to withdraw money from IRAs when our kids are 19 and 21. So, after that $8,000 each of 529 contributions, we’ll go with IRAs as a primary savings vehicle for college. In fact, because we’ll be so close to our withdrawal eligible years when they’re in college, we could even borrow against them (short-term) to draw-downs off the FAFSA as income.

Faults to this plan?

Be careful on the IRA withdraws if you're getting financial aid as they would be considered income....maybe better to borrow against them as you pointed out.

The IRAs and 403bs give you more flexibility than the 529 so fill those first. And your age works to your favor... You will have a lower EFC on FAFSA and you can pull from your retirement accounts if needed. Most people dont have that option.
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danwhite77
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Re: NOT saving for college

Post by danwhite77 »

letsgobobby wrote:...it is hard to see how someone in your position couldn't reasonably expect to meet both college savings and retirement goals.
...

Just FYI, there are ways to offset the risk of tuition inflation, primarily by using prepaid tuition plans....
Thanks for your comments. I did leave out a lot of personal details in my post, including the fact that we don't have cable TV and my wife cuts my hair, but I guess you get the idea. :happy The reason that I don't expect to be able to meet the worst-case scenario goals is because I do not expect my earnings to be this high for more than five more years, maximum. I did put in my post a line about assuming "the best case economic scenario" (or words to that effect), but that scenario likely means that I experience a medium- to large-scale decrease in earnings power in about five years. Hopefully I'm wrong, but in the meantime I'll hope for the best and prepare for the worst. The problem is that the worst case scenario defies preparation. That said, I refuse to allow avaricious academics and administrators dictate the size of my family.

Regarding your second point, I considered but deliberately did not mention prepaid tuition programs. My state has one, but my state is also the worst or second-to-worst state in terms of fiscal stability and the prepaid tuition program is not guaranteed by the full faith and credit (such as it is) of the state. At this point, the program in my state is a poorly disguised Ponzi scheme and I don't have any confidence that the money paid into that program will be there when my kids are ready for college.

If you live in Massachusetts, you hit the jackpot. With a prepaid program and reasonably priced (and academically excellent) schools, I am envious!
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ofcmetz
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Re: NOT saving for college

Post by ofcmetz »

bungalow10 wrote:
I have three kids (0, almost-4, almost-6) and we figure we need about $500,000 to pay tuition, room, board at the flagship state school. It's $80k for a four-year degree right now ($20k each year, all-inclusive). Roughly doubling that for inflation, time three kids, is $480,000. There are cheaper state schools that cost about $15k/year right now that would bring the total down to $360k.

I see these ^ numbers and and the poster who said he would need 2 million and I am blown away. Our state flag ship university (LSU) right now is $2,900 a semester for in state residents. This is actually right around what I am paying for private school for the two kids right now. For those in the more normal range of income, I suggest you make plans for a more reasonable priced education. Then if your child excels and qualifies for scholarships or financial aid at a more expensive out of state school you can modify your plans.
Never underestimate the power of the force of low cost index funds.
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interplanetjanet
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Re: NOT saving for college

Post by interplanetjanet »

MGBGTV8 wrote:1- the difference between the couples who have children in their early 20's vs. those whose children are born to parents in their late 30's. I fall into the late 30's camp. You will have different capabilities to support your children in the early stages of your working life than in the middle, and later on. Can't speak too much on priorities, but the capabilities are different.
Pondering this, I think I appreciate some of the issues of older parents a bit more. Having children later gives you an increased ability to save, but you may have less of an ability to cash-flow college if you plan on retiring early. When I had mine we were just scraping by - not making a bad living, but in a high cost of living area saving was difficult. The incredible rise of tuition fees caught me by surprise, as it did many others, and I feel grateful that my earning power went up along with it.

I do have to say that I am impressed by those of you who had children later. I had some medical issues which made having my own later in life very unlikely and wasn't willing to take the chance - but being in my late 30s now I wonder how I would deal with newborns at this age. Looking back, I think that sometimes it was only youthful optimism and stamina that kept me going as a young parent.

I joke sometimes that I traded my 20's for my 40's, though...if they all leave home on time it should be a fun decade. :)
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bru
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Re: NOT saving for college

Post by bru »

interplanetjanet wrote:Pondering this, I think I appreciate some of the issues of older parents a bit more. Having children later gives you an increased ability to save, but you may have less of an ability to cash-flow college if you plan on retiring early. When I had mine we were just scraping by - not making a bad living, but in a high cost of living area saving was difficult. The incredible rise of tuition fees caught me by surprise, as it did many others, and I feel grateful that my earning power went up along with it.

I do have to say that I am impressed by those of you who had children later. I had some medical issues which made having my own later in life very unlikely and wasn't willing to take the chance - but being in my late 30s now I wonder how I would deal with newborns at this age. Looking back, I think that sometimes it was only youthful optimism and stamina that kept me going as a young parent.

I joke sometimes that I traded my 20's for my 40's, though...if they all leave home on time it should be a fun decade. :)
I am an older parent. I like to say a "late in life parent". Not sure you'd be impressed with me but I do my best. Never really thought I'd be dealing with a Kindergartener in my 50's but life throws you curves. I was single for so long I was able to save a ton for retirement. Now, circumstances have curtailed our income so paying for college presents challenges. The limited advice I received said to use our IRAs to (perhaps) pay for college but the fact that the income will be taxed makes it concerning.

Got to run, off to pick up my son from school. I'm waiting for the day someone calls me "Grandpa".
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Re: NOT saving for college

Post by bungalow10 »

ofcmetz wrote:
bungalow10 wrote:
I have three kids (0, almost-4, almost-6) and we figure we need about $500,000 to pay tuition, room, board at the flagship state school. It's $80k for a four-year degree right now ($20k each year, all-inclusive). Roughly doubling that for inflation, time three kids, is $480,000. There are cheaper state schools that cost about $15k/year right now that would bring the total down to $360k.

I see these ^ numbers and and the poster who said he would need 2 million and I am blown away. Our state flag ship university (LSU) right now is $2,900 a semester for in state residents. This is actually right around what I am paying for private school for the two kids right now. For those in the more normal range of income, I suggest you make plans for a more reasonable priced education. Then if your child excels and qualifies for scholarships or financial aid at a more expensive out of state school you can modify your plans.
Those numbers I posted shouldn't really blow you away. I checked the LSU website and it looks like a year (fall + spring, no summer) of attendance, room, board, books, and fees is right about $16k (I did not include personal expenses), which is a little more than my less expensive option.
An elephant for a dime is only a good deal if you need an elephant and have a dime.
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TomatoTomahto
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Re: NOT saving for college

Post by TomatoTomahto »

interplanetjanet wrote:I do have to say that I am impressed by those of you who had children later.
Nothing impressive about it; just takes being optimistic without reason :D
I had my first child at 30 and my last (4th) at 47. You can find my photo in the dictionary next to "sack of hammers, dumber than."

All kidding aside, there are pluses and minuses to having children earlier or later. Being happy with what you have is the answer.
I get the FI part but not the RE part of FIRE.
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TomatoTomahto
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Re: NOT saving for college

Post by TomatoTomahto »

bru wrote:Got to run, off to pick up my son from school. I'm waiting for the day someone calls me "Grandpa".
Last year, I went to a teacher conference with a new teacher who did not know me. I was 61 yo at the time. The teacher came up to shake my hand, said: "and you must be Mr. Tomahto, Tomatina's" and paused just long enough for me to sneak in "Father." He was relieved that he paused long enough for my statement to overcome what his eyeballs were telling him.
I get the FI part but not the RE part of FIRE.
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ofcmetz
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Re: NOT saving for college

Post by ofcmetz »

bungalow10 wrote:
Those numbers I posted shouldn't really blow you away. I checked the LSU website and it looks like a year (fall + spring, no summer) of attendance, room, board, books, and fees is right about $16k (I did not include personal expenses), which is a little more than my less expensive option.
A part time job and if the child stays at home or rooms with a couple of friends in a campus apartment would go a long way towards reducing cost. You are right, your number isn't that far off I guess if you include housing, food, books, and transportation.
Never underestimate the power of the force of low cost index funds.
bungalow10
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Re: NOT saving for college

Post by bungalow10 »

ofcmetz wrote:
bungalow10 wrote:
Those numbers I posted shouldn't really blow you away. I checked the LSU website and it looks like a year (fall + spring, no summer) of attendance, room, board, books, and fees is right about $16k (I did not include personal expenses), which is a little more than my less expensive option.
A part time job and if the child stays at home or rooms with a couple of friends in a campus apartment would go a long way towards reducing cost. You are right, your number isn't that far off I guess if you include housing, food, books, and transportation.
My kids won't have the option of staying home unless they want a pretty long commute. Part-time jobs right now barely make a dent either (although my kids will probably be expected to have them anyway- and things might change by the time they get there).
An elephant for a dime is only a good deal if you need an elephant and have a dime.
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danwhite77
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Re: NOT saving for college

Post by danwhite77 »

bungalow10 wrote:
ofcmetz wrote:
bungalow10 wrote:
I have three kids (0, almost-4, almost-6) and we figure we need about $500,000 to pay tuition, room, board at the flagship state school. It's $80k for a four-year degree right now ($20k each year, all-inclusive). Roughly doubling that for inflation, time three kids, is $480,000. There are cheaper state schools that cost about $15k/year right now that would bring the total down to $360k.

I see these ^ numbers and and the poster who said he would need 2 million and I am blown away. Our state flag ship university (LSU) right now is $2,900 a semester for in state residents. This is actually right around what I am paying for private school for the two kids right now. For those in the more normal range of income, I suggest you make plans for a more reasonable priced education. Then if your child excels and qualifies for scholarships or financial aid at a more expensive out of state school you can modify your plans.
Those numbers I posted shouldn't really blow you away. I checked the LSU website and it looks like a year (fall + spring, no summer) of attendance, room, board, books, and fees is right about $16k (I did not include personal expenses), which is a little more than my less expensive option.
As the two million guy, I happen to live in a state where the flagship university has tuition, room & board of $30,212 for this year. My kids are between ages 8 and 2 right now. The total four year projected cost according to Vanguard (default assumptions) for the oldest is ~$237K and for the youngest it's ~$336K. Add in the other two kids and you start to see my problem, and remember we're not talking about a private school. I have no idea where my children will go to college, or if they'll even go at all. But if a relatively plain-vanilla scenario results in tuition expense like this, you have to question where the United States is headed as a society.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.
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bru
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Re: NOT saving for college

Post by bru »

TomatoTomahto wrote:
bru wrote:Got to run, off to pick up my son from school. I'm waiting for the day someone calls me "Grandpa".
Last year, I went to a teacher conference with a new teacher who did not know me. I was 61 yo at the time. The teacher came up to shake my hand, said: "and you must be Mr. Tomahto, Tomatina's" and paused just long enough for me to sneak in "Father." He was relieved that he paused long enough for my statement to overcome what his eyeballs were telling him.
I stole the "Grandpa" line from David Letterman. Lots of celebs, past and present (Letterman, Bruce Willis, Alec Baldwin, Picasso etc.) have kids when they're older, but they can afford it. Or maybe it's ego.

I'm trying to figure out how I can use it to my advantage. An amusement park type of place here advertises "grandparents free". What are they going to do, ask for ID? People say I look young, but as each day goes by my looks are catching up to my age.
DualIncomeNoDebt
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Re: NOT saving for college

Post by DualIncomeNoDebt »

letsgobobby wrote:My wife's parents contributed a significant portion of their four kids' college costs, despite being refuges from the Vietnam war, despite being a laborer at a machine shop eventually laid off to be a stay at home dad, and a milk carton assembly line worker before getting hired on for the USPS. And they saved for retirement, too, though they're far from rich, of course. But they rarely (never?) took vacations when younger, never went out to eat, still live in the original 1200 sf home they bought 25 years ago (and managed to raise the four kids in), and until this year drove a 1995 Nissan entra. That's entra, because the "S" fell off a long time ago.
Not judging the parents described in particular. But as a general comment, and recognizing many families are facing this today in the United States: this sounds like a horrible life and existence. Subsisting hand-to-mouth, paycheck-to-paycheck, in a crammed shack with too many kids, not enough resources, and nary a break. This is a life to be emulated? Not in my book. Sounds like a living hell.
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Re: NOT saving for college

Post by Slapshot »

FWIW this is what we did. I agree that it involves priorities, but the OP maybe shares some of ours. My wife and I bought our home and budgeted based on my salary as a public school teacher. Living below/within our means was a priority. My wife stayed home with the kids until they were both in school (and as an editorial comment, when one considers today's child care expenses and the overall costs of having a job, I don't know why more don't do this). Later she went back to work part time, but we still budgeted on just my salary. When it came time for college, she went to full time, and her salary went to paying for college.

One son went to Colorado at the out-of-state rate, which was pretty steep. The financial aid guy told us that we qualified for full aid, which to him meant that we could get loans for the entire amount. I basically told him where to stick his "financial aid" stating that his "aid" was really an 8% added cost. We paid as we went. He qualified for the in-state rate his last semester since he lived out there summers while in school, and he graduated with no debt whatsoever for him or us. His brother went to the local community college for 2 years, transferred to UMass and paid the in-state rate, and he graduated with no debt for him or us. The key was living on my salary which then allowed us to use my wife's income to pay for college.

I know that costs are much greater today than when we were paying 15 years ago, but the principle is the same. Live below your means and pay as you go if you can. The best thing you can do for both yourself and your kids is to have no college debt, particularly given today's employment environment.

On another note, one of my friends has a daughter who's a college junior, triplets who are college freshmen, and a daughter who is a high school senior and college freshman-to-be next year. How would you like to be footing that nut?
This time, like all times, is the best of times if we but know what to do with it.
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danwhite77
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Re: NOT saving for college

Post by danwhite77 »

Slapshot wrote:I know that costs are much greater today than when we were paying 15 years ago, but the principle is the same. Live below your means and pay as you go if you can. The best thing you can do for both yourself and your kids is to have no college debt, particularly given today's employment environment.
This is absolutely true. Equally true is that tuition inflation has made this virtually impossible, regardless of a family's frugality and sensibility. At some point, the math simply doesn't work. Just put the term "tuition inflation" into google images. It's staggering and unsustainable.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.
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HomerJ
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Re: NOT saving for college

Post by HomerJ »

DualIncomeNoDebt wrote:
letsgobobby wrote:My wife's parents contributed a significant portion of their four kids' college costs, despite being refuges from the Vietnam war, despite being a laborer at a machine shop eventually laid off to be a stay at home dad, and a milk carton assembly line worker before getting hired on for the USPS. And they saved for retirement, too, though they're far from rich, of course. But they rarely (never?) took vacations when younger, never went out to eat, still live in the original 1200 sf home they bought 25 years ago (and managed to raise the four kids in), and until this year drove a 1995 Nissan entra. That's entra, because the "S" fell off a long time ago.
Not judging the parents described in particular. But as a general comment, and recognizing many families are facing this today in the United States: this sounds like a horrible life and existence. Subsisting hand-to-mouth, paycheck-to-paycheck, in a crammed shack with too many kids, not enough resources, and nary a break. This is a life to be emulated? Not in my book. Sounds like a living hell.
A living hell? Try asking the people who stayed behind in Vietnam if the people described above were in a living hell... I"m thinking most of them would describe that life as heaven on earth.
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HomerJ
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Re: NOT saving for college

Post by HomerJ »

danwhite77 wrote:At some point, the math simply doesn't work. Just put the term "tuition inflation" into google images. It's staggering and unsustainable.
Which means it will stop at some point. Tuition inflation will not continue upwards at the same pace. Like you said, the math doesn't work. I don't think you really have to worry about spending $2 million on college.
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interplanetjanet
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Re: NOT saving for college

Post by interplanetjanet »

HomerJ wrote:Which means it will stop at some point. Tuition inflation will not continue upwards at the same pace. Like you said, the math doesn't work. I don't think you really have to worry about spending $2 million on college.
While I agree in principle, "Markets can remain irrational longer than you can remain solvent" comes to mind. It's not clear where the tipping point will be, and what will happen. Interesting times.
lrak
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Re: NOT saving for college

Post by lrak »

bungalow10 wrote:
danwhite77 wrote: With four kids, in the worst case scenario, I need to save roughly $2 million dollars for college. Even assuming the most favorable economic outcome for my employment over the next twenty years, I frankly regard that threshold as impossible to achieve if I'm also going to fund retirement for my spouse and myself.
I'm not a worst-case-scenario type, and I don't know your school situation, but my number is much lower.

I have three kids (0, almost-4, almost-6) and we figure we need about $500,000 to pay tuition, room, board at the flagship state school. It's $80k for a four-year degree right now ($20k each year, all-inclusive). Roughly doubling that for inflation, time three kids, is $480,000. There are cheaper state schools that cost about $15k/year right now that would bring the total down to $360k.
Tuition inflation over the last 50+ years has averaged over 7% annually. That means you can plan on an average cost of 2x for the 6 year old and about 3x for the 0 year old. If the millionaires with multi-hundred thousand annual income have to scrimp to send their kids to State U, where are the 'regular' people going to be able to afford? Oh yes, the students with lower and middle income parents can get aid so they can graduate with the same mortgage sized loans as millionaire parents are able to subdize their kids down to...
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Re: NOT saving for college

Post by Grt2bOutdoors »

lrak wrote:
bungalow10 wrote:
danwhite77 wrote: With four kids, in the worst case scenario, I need to save roughly $2 million dollars for college. Even assuming the most favorable economic outcome for my employment over the next twenty years, I frankly regard that threshold as impossible to achieve if I'm also going to fund retirement for my spouse and myself.
I'm not a worst-case-scenario type, and I don't know your school situation, but my number is much lower.

I have three kids (0, almost-4, almost-6) and we figure we need about $500,000 to pay tuition, room, board at the flagship state school. It's $80k for a four-year degree right now ($20k each year, all-inclusive). Roughly doubling that for inflation, time three kids, is $480,000. There are cheaper state schools that cost about $15k/year right now that would bring the total down to $360k.
Tuition inflation over the last 50+ years has averaged over 7% annually. That means you can plan on an average cost of 2x for the 6 year old and about 3x for the 0 year old. If the millionaires with multi-hundred thousand annual income have to scrimp to send their kids to State U, where are the 'regular' people going to be able to afford? Oh yes, the students with lower and middle income parents can get aid so they can graduate with the same mortgage sized loans as millionaire parents are able to subdize their kids down to...
Not sure if you meant this to be sarcastic. And.......trees grow to the sky forever, until they don't and come crashing down.
Like real estate, it only goes up........they forgot what goes up must come down.
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Hub
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Re: NOT saving for college

Post by Hub »

I feel confident enough that shutting off retirement savings during my child's college years will be enough to cover it. We aren't yet maxing tax advantaged space, but I'm still maxing an ESA with a mere $2000 each year starting at age 0. It makes me feel good to have something in the market this far in advance (I have no taxable), plus I like that I can spend it on high school expenses or even elementary private school if I want to.
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Re: NOT saving for college

Post by letsgobobby »

DualIncomeNoDebt wrote:
letsgobobby wrote:My wife's parents contributed a significant portion of their four kids' college costs, despite being refuges from the Vietnam war, despite being a laborer at a machine shop eventually laid off to be a stay at home dad, and a milk carton assembly line worker before getting hired on for the USPS. And they saved for retirement, too, though they're far from rich, of course. But they rarely (never?) took vacations when younger, never went out to eat, still live in the original 1200 sf home they bought 25 years ago (and managed to raise the four kids in), and until this year drove a 1995 Nissan entra. That's entra, because the "S" fell off a long time ago.
Not judging the parents described in particular. But as a general comment, and recognizing many families are facing this today in the United States: this sounds like a horrible life and existence. Subsisting hand-to-mouth, paycheck-to-paycheck, in a crammed shack with too many kids, not enough resources, and nary a break. This is a life to be emulated? Not in my book. Sounds like a living hell.
They would disagree vociferously. They simply don't have strong material needs. They attend about 20 church weddings per year in their very cohesive immigrant church community. They have a huge family (my wife has 25 first cousins on her mom's side alone, most of whom live within 50 miles of home), spend every holiday together as a large group (we have fit up to fifty family members in that 1200 sf house for Christmas - it was expanded to 1800 sf with an enclosed patio), and have seen their four children grow up to be teachers, pharmacists, and epidemiologists. They have four grandchildren whom they love to visit with. We've taken them to Rome for Easter, a highlight for them. They've been able to travel back to Vietnam a few times and bring money back to relatives who stayed behind. Now my mother in law has reached pension eligibility age, but she has decided to 'keep working, I like to walk' (she walks 5-8 miles per day as a letter carrier). They talk often about how happy they are, how blessed they feel, how life has been so good to them.

In many ways they are much happier than much richer folks.

Just a completely different life perspective, which was kind of my point - saving for college and retirement are about priorities - in other words, about desire, not ability.
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BHCadet
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Re: NOT saving for college

Post by BHCadet »

It all depends on the income and wealth.
After certain level, maybe with 250k annual salary and three millions and up in savings, the money doesn't have to be divided into buckets anymore.
Sometime, college can be paid for with cash on hand.
fareastwarriors
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Re: NOT saving for college

Post by fareastwarriors »

I want my future kids to take care of it themselves like their future dad did. Am I too harsh? :oops:
Fine maybe I will contribute a little toward their education... :moneybag
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