saving more for college

[LivingAlmostLarge]

Okay so we are in a good financial position finally. I was looking at our numbers and we have enough in our retirement accounts to pay off our mortgage, not that we would, but it's a nice milestone. We have six figures this year in our taxable account and we have a 9 month cash EF with ING. Our debts are two car loans of $3k and $8k because the rates 1.49% and our mortgage. Yeah we talked of paying it off but my DH said to let it ride. I carry a very hefty life insurance on my DH as well and maximum disability insurance.

Now we are 33 and 35 with two kid(3 and 9 months) and thinking one more. We are saving $2k/year in coverdell for each, but I feel we are approaching the point where we may be able to save more.

I'm pretty conservative and nervous about retirement so I haven't really set more aside because I worry we won't have enough for retirement. So instead we've focused on saving in our taxable account and 401k/IRA, and paying cash for living and saving for our cars.

But honestly I think we are at the point of maybe saving a bit more for college. How much should we save? Should we divert some money towards that? Or is it more financially wise to keep adding to our taxable account and use that in the future for their colleges? What if we lose our jobs? What if we buy a different home?

I run so many scenarios it sort of stresses me out. But then I hear all these people talking about college saving $10-20k/year or more or generous grandparent gifts. Or people talking about how we have to pay 100% for college at a private school and I stress out thinking maybe I can't have my third kid because how will we ever afford college?

I've always thought that we'll help what we can. I just don't know what 15 years from now our financial picture will be. Hopefully good. Then we can afford to help.

Thoughts?

[bjl584]

Standard advice is to take care of retirement first, then move on to saving for your kids' college. There are loans for college. Not for retirement.

From what you posted, it sounds like you are a bit uneasy about things. I'd probably keep saving for retirement for the time being. Maybe re visit this in a year or so, and if you are more comfortable with your overall situation you can think about starting up a 529.

[kork13]

I agree with Brian. Get to a point where you're comfortable about your trajectory for retirement, then work more on college savings.

Or if you don't like the all-or-nothing approach, you might consider increasing both your retirement AND college savings -- take whatever excess you have each moth, and split it between both goals. That would help achieve both objectives, just on a less aggressive timeline.

[MonkeyMama]

I personally wouldn't stress about it. It seems your question is less "what to save" and really more "where to save it." Keep saving it in your taxable accounts - you can always use that money for college or retirement. The decision does not have to be made right now. Save what you can. You have time on your side.

I believe you are actually in a tax bracket where you might get some useful tax breaks from a 529 plan, BUT on the flip side there aren't near as many contribution limitations on 529 plans. So, if you wait another year or two before you shift money over, should really be no big deal. Give it a little time to be sure, before you make such a big commitment. It is always very simple to add more money to a 529 plan, later, but it is a difficult thing to undo.

Due to our own big picture, I am not concerned about college (have not even started saving for it), but we are getting to a similar spot where all our other ducks are in a row and so it is the next obvious step. Since we don't get any useful tax benefits, and don't expect to spend a lot on college, we are just plowing extra money into our taxable investments. I figure it's pretty much a college/unemployment/retirement/pay-off-mortgage fund. But it's an easy decision for us because we have exhausted our useful tax shelters. Other than that, you just have to weigh the pros and cons and tax benefits of your options.

[disneysteve]

My daughter was almost 7 when we started her 529. Before that, we were busy paying off my student loans (and we still weren't finished at that point). Sure I would have liked to have started sooner but the money just wasn't there. Now 10 years later, we have over 50K in that 529 account. That certainly won't cover 4 years of college. We'll be happy if it covers one year and maybe part of a second year. The rest will come from some combination of cash flow, her income, loans (hers and ours perhaps), maybe some money from grandmom, and who knows what else. It will be what it will be.

Save what you can. As your children get closer to college age, start the conversations about factoring cost into the college choice decision. Let the kids know how much money is going to come from Mom and Dad and that the rest will need to come from them. Make it clear that you can't give them a free ride so they know that going in. No law says that you have to pay it all. My parents didn't and I know that we certainly can't and our daughter knows that.

[sblatner]

We have a son who just committed to Berkeley in the fall. We did not start saving for college until two years ago. We paid off all debts and our house and then started saving. Never used a 529 or any other college plan as we didn't want to have our uses limited (and we have friends who were really screwed in 2008 when the market tanked and their funds lost a lot of value). We have saved a lot since we paid everything else off and I feel comfortable with where we are at.

Just because money is not in a "college savings plan" type fund doesn't mean you can't use it for college. We have our money in taxable accounts. We have the first 1.5 years saved and will continue to save monthly to pay the rest.

[disneysteve]

Never used a 529 or any other college plan as we didn't want to have our uses limited (and we have friends who were really screwed in 2008 when the market tanked and their funds lost a lot of value).

Just to be clear here, the fact that their funds lost a lot of value has nothing to do with the fact that the money was in a 529 account. When the market crashed, virtually every equity fund lost a lot of value. Had the money been in a taxable account, the same thing would have happened, as I'm sure many of us can attest to.

Protecting the money from market swings would require investing it more conservatively with less equity exposure no matter what type of account you are using.

[moneybags]

529's are a bit tricky. I was afraid of overfunding them. Now that DD has just finished her first year of college, I realize I should have funded them a lot more. It's hard to plan for the unknown 18 years out. Will my kid go to college? What type of college? How much should I pay for with my 529 so that I don't miss out on education tax credits? How does my 529 fund affect FAFSA? How can I be sure I don't have unused 529 funds?

In hindsight, I would have liked to have 4 years of state tuition/room/board in her account. Of course, in our state, that could be between $20-$35,000 per year, so again, a guessing game. Our state offers a tax credit of 5% for funds deposited into a specific 529 plan. While DD (&DS when he gets there) is in college, I plan on depositing & withdrawing funds in the same year to get a 5% return on my money.

[LivingAlmostLarge]

How do I predict my retirement trajectory? It seems unreal that we would ever save enough.

MM how would the 529 be a tax break for us? We have no 529 open for the girls and we have maxed out our retirement savings vehicles. We also do the $2k into a coverdell for the girls a year now, but past that we haven't any specific plans.

Should we talk to a tax professional? We do our own taxes and live pretty simply. No second homes or big time investments.

[disneysteve]

MM how would the 529 be a tax break for us?

In some states, you get a tax deduction for contributions to the 529. Go to savingforcollege.com to research all of the options.

Personally, my state (NJ) does not give any tax break for contributions so we actually don't use the NJ plan. Our account is with the NY plan which is more highly rated.

[feh]

529's are a bit tricky. I was afraid of overfunding them. Now that DD has just finished her first year of college, I realize I should have funded them a lot more. It's hard to plan for the unknown 18 years out. Will my kid go to college? What type of college? How much should I pay for with my 529 so that I don't miss out on education tax credits? How does my 529 fund affect FAFSA? How can I be sure I don't have unused 529 funds?

We chose a specific dollar amount we wanted to provide our son - roughly the equivalent of the total cost of attending a state college for 3 years. We've reached that goal, even though he won't need it for another 5 years.

If he chooses a less expensive school, the money may last 5 years. If he chooses a private school, it may last less than two. That choice will be up to him, but we won't be footing the difference. I don't believe in being a blank check for his schooling; he needs to have some skin in the game.

[LivingAlmostLarge]

I'd like to have at least 2 years saved or 100% but not tell them. That way my DD think there is skin in the game.

[boefixepa]

I know this a little off topic, but why do parents feel obligated to pay for their children's education?

I didn't grow up with that mindset and now when I see it, I wonder why?

I'm not saying it's not a great thing, but it is not a "requirement."

I went to a private college and I took care of it all myself. I knew that there was no way my parents where going to help, all they did was drive me up and drop me off. I worked 20+ hours a week to pay room and board, worked two jobs over summer and took out loans for the last two years to cover the last part. Then I negotiated for my first job to pay off the loans. It worked great for me.

Every situation is different, but I saw a lot of kids wasting their parents hard earned and hard saved money while I was working hard. They didn't appreciate it, nor value it. I am more then willing to help my children, to a limit, but I will not just "give" them tens of thousands of dollars. If they value the education, they better be willing to work for it and show me they are getting something for the money.

So, no 529 plans. They are generally limited to a state school, and have restrictions on what it can be used on. There will a general 'kids' fund (probably a taxable account of some kind) for things we will help them with. It will be in our name and we will decide how and when it is spent.

Just my point of view. It's great to help your children, but I am more interested in teaching them how to accomplish what they want without having to depend on me to foot the bill.

[feh]

I know this a little off topic, but why do parents feel obligated to pay for their children's education?

I didn't grow up with that mindset and now when I see it, I wonder why?

I'm not saying it's not a great thing, but it is not a "requirement."

I went to a private college and I took care of it all myself. I knew that there was no way my parents where going to help, all they did was drive me up and drop me off. I worked 20+ hours a week to pay room and board, worked two jobs over summer and took out loans for the last two years to cover the last part. Then I negotiated for my first job to pay off the loans. It worked great for me.

Every situation is different, but I saw a lot of kids wasting their parents hard earned and hard saved money while I was working hard. They didn't appreciate it, nor value it. I am more then willing to help my children, to a limit, but I will not just "give" them tens of thousands of dollars. If they value the education, they better be willing to work for it and show me they are getting something for the money.

So, no 529 plans. They are generally limited to a state school, and have restrictions on what it can be used on. There will a general 'kids' fund (probably a taxable account of some kind) for things we will help them with. It will be in our name and we will decide how and when it is spent.

Just my point of view. It's great to help your children, but I am more interested in teaching them how to accomplish what they want without having to depend on me to foot the bill.

I received a little bit of help from my folks, but paid most of my way myself via income and loans.

That being said, I can think of a couple reasons why it's important to help out, if financially able:

1. college is much more expensive now than it used to be (I graduated in '88)
2. post-secondary education is more important than ever for landing a decent paying job

[JoeP]

I don't look at our 529s as anything besides a convenient way to squirrel away money with minor advantages. We don't expect them to pay for more than maybe 50% for each child, and will likely make up the difference with some of the methods described earlier. One good point will be that our mortgage will be paid off by the time child #1 starts college, so we will have some extra cash on hand to help there.