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'Saving for college' discussion tangent

3,530 Views | 27 Replies | Last: 7 yr ago by Ag92NGranbury
62strat
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AG
Was having this discussion with my wife after we saw a commercial on the topic of saving for college. We notice the normal discussion on this topic always involves saving now and throughout childhood; investing, 529, etc. and no one ever seems to have the idea of 'why not just pay as you go'? Is it common to pay as you go?

To be more specific, I'm talking about the roughly 10-20% of households that are similar income to us (income in the $100k<x<$200k), which means kids are very likely to go to college. The top 5ish% ($200k+) can likely easily pay as you go without issue. The 15-20% below us, while their kids are still very likely to go college, the household income probably can not support paying college tuition in real time. Anything lower than that, and saving over the life of child is a must if they wish to support the child in college.

I digress to bring in my point;
A constant reminder of where our money goes is the weekly check to daycare. We have two kids 15 months apart. Wife is a HS counselor and after her paying full family medical premiums and daycare, she still brings home money. Not a whole lot, but it's in the green, so it was a no-brainer for her to keep her job so her retirement year stays in her 50s, since daycare is temporary. Plus counseling positions are far and fewer between, and she got landed one in our sd very close to home.. (TMI for this post, just trying to justify my next statement)

We currently pay $630 a week. That's ~$32k a year, which is roughly the cost of current day college tuition for a single child isn't it? (I haven't looked in a while)

We are in that top 10-20% range of income earners, so with that daycare bill, we currently live on a very tight budget that requires frugality. it takes lots of discipline, but we can do it and we know it's temporary. So how will just paying for college when the child is enrolled going to be any harder that what we're doing now? It seems I never see this angle, it's always save save now... but I say we just wait and pay for it then if college is in the cards for the children.

If anything, when college comes around (we'll be 52 when first child is 18, 58/59ish when second child is finished), we should be nearing, if not already in, our top paying years, so it shouldn't be as tight as it is now with an expense like that. So why not just pay the bill as we go? Our savings now (in 20s,30s, and 40s) should be for our retirement, since time is on our side for growth. In our mid 50s-60, there isn't as much time for retirement to grow, so it makes sense to pull back from retirement contributions then and deal with college (if necessary). Obviously, our daycare bill is weekly, whereas college is in large chunks 2-3 times a year.. but we can simply auto save weekly into a savings account. Does this make sense from a 'maximizing investments' standpoint?

Of course we'll have two kids in college for 3-4 years, so that number doubles and so it may be very challenging if possible at all, but for the middle-upper class with siblings 3-4 years apart, why do I not see this in the discussion? Your average top 15%-ish class family should not have an issue paying as you go, just like we are paying the $30k+ right now for daycare.

Are all college expenses deductible or is it only tuition? Currently, I can only deduct $5k of daycare.

Curious on the thoughts of others. This post is me just kind of thinking out loud.

Maybe families in this class already currently pay as you go
Bird Poo
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AG
I have a bunch of kids, and this is exactly how we're managing it. My wife has her masters in education but quit working after our 2nd kid. We had 5 kids but now the youngest is in kindergarten. She's starting to substitute soon, and perhaps will move back to full-time teaching if she finds something that's good and close to home.

We'll continue to live and play on my income, but every dime she makes will be saved for college.
terradactylexpress
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62strat said:

. This post is me just kind of thinking out loud.



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bam02
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AG
This is kind of my line of thinking too. Daycare tuition is also what made me think this way. I'm contributing to a 529 for both my kids but it's not much and there's no way it's going to cover what the projections are saying college will cost in 10-15 years.

I am hoping the bubble pops in the meantime and tuition comes back down to earth. If not I honestly don't know if I will be supporting my kids going the traditional college route. I think there is a point at which it just doesn't have a reliable ROI.
Endo Ag
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AG
The catch is what you do between daycare and college. If your saving, then great. You will simply redirect savings when the kids go to college. If you are blowing it, then money will feel very tight while the kids are in school, assuming you can even cinch your belt that tight. If you hit your retirement savings goals first, then kids saving, then hookers and blow last, you will take advantage of more tax advantaged saving vehicles while simultaneously keeping the h&b budget constrained.

I personally am maximizing the tax advantaged saving available to me, as well as adding additional savings to meet my goals. I'm over contributing to 529 plans for my kids. If they use it, fine... Less I have to pay out of pocket. If not, that remaining money will grow for thirty years and my grandkids will be covered. If I decide I need or want the money later, that is manageable too. The money can be reclaimed, though penalties would be owed.
libertyag
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AG
62strat said:


Of course we'll have two kids in college for 3-4 years, so that number doubles and so it may be very challenging if possible at all, but for the middle-upper class with siblings 3-4 years apart, why do I not see this in the discussion? Your average top 15%-ish class family should not have an issue paying as you go, just like we are paying the $30k+ right now for daycare.

Are all college expenses deductible or is it only tuition? Currently, I can only deduct $5k of daycare.

Curious on the thoughts of others. This post is me just kind of thinking out loud.

Maybe families in this class already currently pay as you go
There are so many things that can go wrong with this pay as you go plan. Death, disability, divorce, loss of job, serious illness, etc. My wife wanted to stay home with our three children and she did until the youngest went to first grade, then she resumed her teaching career. I cannot fathom paying out $30k for daycare.

We saved for the college costs for our three children but still were able to pay as we went for them, not totally, but almost. Their college savings were then used as significant down payments on homes for two of the three, the other one is in the market to buy his first house now.

Personally, I could not take the risk that all was going to go according to plan and rely totally on paying out of cash flow once they get into college. Time is your friend when saving for college.
tamutaylor12
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At the risk of a thread derailment, you might want to check on the wife's ability to retire in her 50s without paying a penalty. 5%-10% a year for every year younger than 60 if my memory serves.
ORAggieFan
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Many good points mentioned. Also, the doubling up is tough. We pay our nanny about $25k/year, yet still save in a 529. I'd like to think when we are done with the nanny I'll save a bunch more.

A 529 allows for investments tax free if used for college so why not take advantage?
libertyag
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AG
62strat said:


Are all college expenses deductible or is it only tuition? Currently, I can only deduct $5k of daycare.


I forgot to comment on this. College expenses (some of them) can be used for a variety of things, tax credits, tuition and fees deduction, preventing distributions from 529 plans or education savings accounts from being taxable. Different expenses apply to some of those items. But I think you will find, by that time, your level of income will prevent you from availing yourselves of the tax credits or tuition and fees deduction.

62strat
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AG
tamutaylor12 said:

At the risk of a thread derailment, you might want to check on the wife's ability to retire in her 50s without paying a penalty. 5%-10% a year for every year younger than 60 if my memory serves.
There is no 'penalty' per se. Just reduced benefits. You can retire whenever you want if you're happy with the benefit, assuming you worked long enough to get one.

Benefits range from 8.4% (5 years of service at age 60), up to 100% for 40 years of service at any retirement age.

https://www.copera.org/sites/default/files/documents/table7.pdf

She wants to retire at 59. yes she'd get more if she worked a few more years.. but hey, she'll get 60% of her paycheck until she dies, and we're both good with that. I plan for that to pay the bills and my retirement is our travel/fun money.

62strat
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AG
libertyag said:

62strat said:


Of course we'll have two kids in college for 3-4 years, so that number doubles and so it may be very challenging if possible at all, but for the middle-upper class with siblings 3-4 years apart, why do I not see this in the discussion? Your average top 15%-ish class family should not have an issue paying as you go, just like we are paying the $30k+ right now for daycare.

Are all college expenses deductible or is it only tuition? Currently, I can only deduct $5k of daycare.

Curious on the thoughts of others. This post is me just kind of thinking out loud.

Maybe families in this class already currently pay as you go
There are so many things that can go wrong with this pay as you go plan. Death, disability, divorce, loss of job, serious illness, etc. My wife wanted to stay home with our three children and she did until the youngest went to first grade, then she resumed her teaching career. I cannot fathom paying out $30k for daycare.
These are definitely risks that maybe I've lessened a little bit. My life insurance policy goes until youngest is 21, so majority of college would be paid for by then if I croak the day after policy expires. If I die sooner, they have plenty of money above and beyond college costs, which is well protected in a family trust.
That's about the only risk I can confidently say is not an issue.

I can't hardly fathom paying that daycare bill either. But, she is a HS counselor, not a teacher. It is a much different environment than teachers. Counselors have a much higher retention rate, and obviously, a mere fraction of positions available. There are only about 5 high schools within her desired commute distance, so that's only 15 or so positions (schools here are not quite as big TX).

The $30k is not constant, it's just that much at this very instant in time ($630 a week). We'll only actually pay that much one time; next year. I anticipate paying about $100k-$120k in daycare by the time it's said and done with (6 years). At $55k salary, 60% (her planned retirement benefit), she gets $33k a year. 40% (the benefit for 5 less years of service) of 55K is $22k. Difference of $11k. (Obviously no inflation involved here). That's a 9-11 year break even. With retirement at 59, she's likely better off staying in PERA and we pay for daycare. That doesn't account for missed years trying to find a job back in the system if she does leave.

Please excuse my very rough numbers!


libertyag said:

Their college savings were then used as significant down payments on homes for two of the three, the other one is in the market to buy his first house now.

You can't use 529 monies to buy a house can you? You're talking about after tax monies invested in the market? If that's your reasoning, then yeh, I can pull out/cash out investments any time to free up to pay for tuition, at the time they are in college. That method requires no specific change in strategy now to save for college.. just continue saving/investing like I currently am. This was more about saving specifically for college, which often times involves a 529 for tax free growth, not just saving in general.
libertyag
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AG
62strat said:

libertyag said:

62strat said:


Of course we'll have two kids in college for 3-4 years, so that number doubles and so it may be very challenging if possible at all, but for the middle-upper class with siblings 3-4 years apart, why do I not see this in the discussion? Your average top 15%-ish class family should not have an issue paying as you go, just like we are paying the $30k+ right now for daycare.

Are all college expenses deductible or is it only tuition? Currently, I can only deduct $5k of daycare.

Curious on the thoughts of others. This post is me just kind of thinking out loud.

Maybe families in this class already currently pay as you go
There are so many things that can go wrong with this pay as you go plan. Death, disability, divorce, loss of job, serious illness, etc. My wife wanted to stay home with our three children and she did until the youngest went to first grade, then she resumed her teaching career. I cannot fathom paying out $30k for daycare.
These are definitely risks that maybe I've lessened a little bit. My life insurance policy goes until youngest is 21, so majority of college would be paid for by then if I croak the day after policy expires. If I die sooner, they have plenty of money above and beyond college costs, which is well protected in a family trust.
That's about the only risk I can confidently say is not an issue.

I can't hardly fathom paying that daycare bill either. But, she is a HS counselor, not a teacher. It is a much different environment than teachers. Counselors have a much higher retention rate, and obviously, a mere fraction of positions available. There are only about 5 high schools within her desired commute distance, so that's only 15 or so positions (schools here are not quite as big TX).

The $30k is not constant, it's just that much at this very instant in time ($630 a week). We'll only actually pay that much one time; next year. I anticipate paying about $100k-$120k in daycare by the time it's said and done with (6 years). At $55k salary, 60% (her planned retirement benefit), she gets $33k a year. 40% (the benefit for 5 less years of service) of 55K is $22k. Difference of $11k. (Obviously no inflation involved here). That's a 9-11 year break even. With retirement at 59, she's likely better off staying in PERA and we pay for daycare. That doesn't account for missed years trying to find a job back in the system if she does leave.

Please excuse my very rough numbers!


libertyag said:

Their college savings were then used as significant down payments on homes for two of the three, the other one is in the market to buy his first house now.

You can't use 529 monies to buy a house can you? You're talking about after tax monies invested in the market? If that's your reasoning, then yeh, I can pull out/cash out investments any time to free up to pay for tuition, at the time they are in college. That method requires no specific change in strategy now to save for college.. just continue saving/investing like I currently am. This was more about saving specifically for college, which often times involves a 529 for tax free growth, not just saving in general.

I'm an "old" lol. 529 plans were not even available yet for the first several years my children were around. Some of the money set aside for them was in gifts to minors accounts, and some in Coverdell Education Savings Accounts. But you can use 529 monies for anything you like, though using it to buy a house would make the distribution subject to tax and penalties. The two of mine who used the remaining funds as a down payment on houses did so out of the funds that had been in UGTMA accounts. Had it been in 529 plans, then we would have changed the beneficiary to one of my grandchildren. We have/will do that with most of the monies in the CESA's.
edwardsk2003
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AG
terradactylexpress said:

62strat said:

. This post is me just kind of thinking out loud.



No ****




One of the funnier things I've read on TexAgs....lol
Leeman
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Be careful about putting too much into a 529 account. You can move money between children and use the money for more education. HOWEVER, the penalty for cashing out excess money is worse than just investing it on your own and paying taxes.
Matsui
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AG
What about buying muni bonds that come due when your kids turn college aged? Is that a decent option compared to 529 plans?
Bocephus
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AG
I expect college to be $50,000 per year for state universities by the time my daughter is college age in 10 years. I may be underestimating it. Very hard for me to justify that kind of expense. I have two 529's set aside but I don't see any way I will be able to pay $200,000 over 4 years. Part of me hopes that she wants to be a welder or stone mason.
Endo Ag
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AG
Leeman said:

Be careful about putting too much into a 529 account. You can move money between children and use the money for more education. HOWEVER, the penalty for cashing out excess money is worse than just investing it on your own and paying taxes.


If you are in a position however to over fund a 529, you are likely in a position to let a remainder ride 30 years for grandchildren, and only pay the penalties if late life plans turn to crap.
Leeman
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Endo Ag said:

Leeman said:

Be careful about putting too much into a 529 account. You can move money between children and use the money for more education. HOWEVER, the penalty for cashing out excess money is worse than just investing it on your own and paying taxes.


If you are in a position however to over fund a 529, you are likely in a position to let a remainder ride 30 years for grandchildren, and only pay the penalties if late life plans turn to crap.
I'd prefer to have the money to spend on other things without paying the penalty. If you start investing early in a 529, it is not too difficult to get into a position where you can over-fund it.
edwardsk2003
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Bocephus said:

I expect college to be $50,000 per year for state universities by the time my daughter is college age in 10 years. I may be underestimating it. Very hard for me to justify that kind of expense. I have two 529's set aside but I don't see any way I will be able to pay $200,000 over 4 years. Part of me hopes that she wants to be a welder or stone mason.

2014: $22.4
https://web.archive.org/web/20140720162129/http://admissions.tamu.edu/freshman/cost


2015: $24k
https://web.archive.org/web/20150729173730/http://admissions.tamu.edu/freshman/cost


2016: $27.2k
https://web.archive.org/web/20160618050546/http://admissions.tamu.edu/freshman/cost


I used the numbers above... to extrapolate a trend line... then I put numbers for 2020, 2025, 2030 on the chart to put points on the trend line.


Projected annual cost of A&M:
histag10
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AG
my parents paid as we went.

But I will say, if you are paying that much in day care now, when your kids hit the age of 5, you could divert that money to an account for their college, in the event that something happens, and your income isnt able to support them in real time. Of course that assumes that your children will go to public school, and not private school, where the daycare bill is diverted to tuition.

Thats our plan anyways.
AggieArchitect04
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AG
Bocephus said:

I expect college to be $50,000 per year for state universities by the time my daughter is college age in 10 years. I may be underestimating it. Very hard for me to justify that kind of expense. I have two 529's set aside but I don't see any way I will be able to pay $200,000 over 4 years. Part of me hopes that she wants to be a welder or stone mason.
Though said in jest, this is part of the problem. We have no trade skills. Kids graduating high school have no other choice but to enroll in college or enlist in the military, because those are generally the only things they can do that aren't "embarassing" and that is the expectation we've put on our children and they are simply acting it out.
Stive
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It's actually really close to the number it would have been had you not put it in the 529 (assuming it was in a taxable brokerage account). The 10% penalty on non-college withdrawals is basically offsetting the tax deferred accumulation.

(disclaimer.....there are multiple variables.....tax rates, products used, timing, etc.)
Matsui
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agreed

I wish I would have learned a trade to go along with my Aggie degree. HVAC/plumbing/electical/welding something
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edwardsk2003
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From April
http://interactives.dallasnews.com/2016/tuition-costs/


TEXAS A&M





austin




Carnwellag2
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histag10 said:

my parents paid as we went.

But I will say, if you are paying that much in day care now, when your kids hit the age of 5, you could divert that money to an account for their college, in the event that something happens, and your income isnt able to support them in real time. Of course that assumes that your children will go to public school, and not private school, where the daycare bill is diverted to tuition.

Thats our plan anyways.
You could put that 32k in day care fees into a 529 for the kinder, 1st, 2nd, and 3rd grade years and then let it grow and you would be set for their college years in 12 years.
O'Doyle Rules
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By the time your snowflake is in college, the academia bubble will have popped and have drastic changes to the landscape. Pay as you go.
Ag92NGranbury
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economics is my past time... the education bubble will pop... i'm just hoping it pops before 4 years from now when my oldest goes.


i go by this rule for investments:

Pay in order
401k - max
ira me - 5500
ira wife - 5500
529's (4 kids)

good luck!
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