Strategy for paying for baby's college

[Nika]

Instead of a traditional 529 palan, I was thinking this:

1. Of course, ESA, because it only has 2k a year maximum. Should be about 70-80K by the time he is 18. (He just turned 1).

2. Re-finance our mortgage to 15 year fixed, that will bring our monthly payment up to $2200, or $3500+ with maintenance (ouch!!!)

BUT, the apartment will be paid off by the time he is 16.

Than we can save the entire amount of the mortgage payment for 2 years prior to his college, and cashflow him to the same $2200 a month for 4 years while he is in college (maybe more if by that time we are making more and can afford it).

Good plan?

[riverwed070707]

I'm going to go with no. Things change. Your situation could change -- you could have more expenses, you could move, you could make more or less. Saving now isn't the same as planning to spend that money 17 years from now. It's unpredictable and unreliable. Also what if you have another kid? Will they just have to split that?

While I'm not an advocate for paying for kids' college, if you want to do it, you need to have a plan for saving now.

And am I just deprived or do college kids really not need $2200/mo?? That's what I bring home now to support a family of 3...and my husband is in college! That seems incredibly excessive.

[Slug]

How do you believe your suggestions offer a better alternative than a 529 plan. Put another way, what's wrong with a 529 plan?

[Nika]

I'm going to go with no. Things change. Your situation could change -- you could have more expenses, you could move, you could make more or less. Saving now isn't the same as planning to spend that money 17 years from now. It's unpredictable and unreliable. .

I am looking at is as saving into the equity and reducing the interest we are paying in the meantime. If I had phrased it "I want to pay off mortgage early" would reply still be "not a good idea, things change"? That way I will free up cash flow. If I make less, having no mortgage is still pretty good when you look at an overall family picture.

Also what if you have another kid? Will they just have to split that?.

Well, of course! In whatever way we would be saving, if we have more kids whatever resources we have would be divided between them. There is just a limited number of resources, and they would have to be split. If they are going to 2 kids instead of one, that one kid get half of what he could have. That's how it works when you have more kids.

While I'm not an advocate for paying for kids' college, if you want to do it, you need to have a plan for saving now.

How is that not a plan?

And am I just deprived or do college kids really not need $2200/mo?? That's what I bring home now to support a family of 3...and my husband is in college! That seems incredibly excessive.

Well, the school I graduated from about 6 years ago now costs 19K per semester (38K per year, that's $3,167 per month) for TUITION ONLY - without books, lab fees, housing, or living expenses. That's now, without accounting for inflation and tuition cost over the next 17 years.

[riverwed070707]

Paying off your mortgage early is great. My point simply was that if paying for your kid's college is important to you, I would find another vehicle to do so. If you are putting $2k/year in a college account and 7 years down the road something happens that prohibits you from contributing that amount any longer, you still have $14k saved and can always resume those contributions later when you're in a better position.

If you contribute nothing until your child is 16 and your situation changes between then and now (what if one of you can't work? major medical expenses come up? forced to relocate, etc) then you may not be able to find the means to contribute like you wanted and you could regret it. Of course everything could pan out perfectly but if it doesn't there is no fall back.

How is that not a plan? Maybe that was poorly worded. What I meant was you should start saving now.

How is the rest of your financial picture? Do you have the equity to refi? What percentage of your income will the new payment be? That's a hefty montly payment. Are you contributing 15% to retirement? I suppose these also might impact peoples answer to your question.

[MonkeyMama]

Actually, I think it is a very fine plan - and more along my own way of thinking.

529 plans are tax shelters for the wealthy. They aren't necessarily terribly useful to the rest of us. (Though in your case, maybe not so bad, you have 17 years to save and living in NYC, you probably have high income/high tax situation. So a 529 could serve you okay).

I personally plan to have the mortgage paid off before my kids start college. I don't contribute to a 529 plan because it is expensive, inflexible, and doesn't give me any real tax benefit (in my personal tax situation).

Of course, the biggest piece for me is I don't expect college to cost that much, and so I don't want to tie up all my savings in a 529 plan I might never even need. !!

Personally, if I really expected college to cost a ton, I would save for it ahead of time. Things change - lord knows if you can even work in 18 years. I think relying on future income to fund college is a dangerous plan. In your shoes I would save a little more for college. Either that, or make the choice that you simply can't afford that much for college, now. Maybe things will change later.

My own personal differences? Wouldn't pay that much for a home - wouldn't want to tie up that much money in a mortgage payment - and not really planning to pay that much for college, either. So, I am not sure if I totally agree with the plan, or my similar plan is really that similar. I get the line of thinking, but my approach is very different in the end, I guess. Paying off the mortgage is worthy, but probably not at $3500/month. Ouch.

[disneysteve]

And am I just deprived or do college kids really not need $2200/mo??

Have you looked at college prices lately? Here in NJ, the state schools run over $20,000/year not counting books and supplies and living expenses. So that's over $2,000/month for 9-10 months of the year. And that's at a state school with in-state tuition.

Are there cheaper schools? Sure, but $2,200/month ($22,000 for an academic year) isn't unreasonable at all today.

[riverwed070707]

Have you looked at college prices lately? Here in NJ, the state schools run over $20,000/year not counting books and supplies and living expenses. So that's over $2,000/month for 9-10 months of the year. And that's at a state school with in-state tuition.

Are there cheaper schools? Sure, but $2,200/month ($22,000 for an academic year) isn't unreasonable at all today.

Sure I have. My husband is currently in school and I just graduated 4 years ago. Maybe my view is skewed since we live in a LCOL area but next year DH will be attending one of the best medical schools in the country to finish his undergrad for $10k a year. Currently, we pay about $5k for communinty college. 5 years ago I paid around $7k/year for a state university.

ETA: then again, you probably couldn't live on my salary in NJ either so I suppose it's just a matter of perspective. I guess my shock was more from the fact that they were going to save $52k prior to DC starting school and then continue to cash flow $2200/mo to the kid... the way I read that meant tuition would be paid and they woudl get another $2200 in living expenses/books/etc on top of that. I just feel strongly that kids shoudl have to work for it a little bit.

[bjl584]

Instead of a traditional 529 palan, I was thinking this:

1. Of course, ESA, because it only has 2k a year maximum. Should be about 70-80K by the time he is 18. (He just turned 1).

2. Re-finance our mortgage to 15 year fixed, that will bring our monthly payment up to $2200, or $3500+ with maintenance (ouch!!!)

BUT, the apartment will be paid off by the time he is 16.

Than we can save the entire amount of the mortgage payment for 2 years prior to his college, and cashflow him to the same $2200 a month for 4 years while he is in college (maybe more if by that time we are making more and can afford it).

Good plan?

I'm going to say that any strategy that gets you to your goal of paying for your son's college is a good plan. What you have laid out looks like it will do just that.

Is there a different or better way? Maybe.

Do things change? Definitely. Maybe he will decide on the military which would pay for his school. Maybe he will be good at sports and get a scholarship. Maybe he won't even choose to go to college. Maybe he will decide to go to school part time and pay for some of his own school.

A lot of people have no plan at all, so you are ahead of the game already. My parents didn't have a plan. There was no money set aside for me when I went off to college.

So, I think your plan is fine.

[MonkeyMama]

Sure I have. My husband is currently in school and I just graduated 4 years ago. Maybe my view is skewed since we live in a LCOL area but next year DH will be attending one of the best medical schools in the country to finish his undergrad for $10k a year. Currently, we pay about $5k for communinty college. 5 years ago I paid around $7k/year for a state university.

ETA: then again, you probably couldn't live on my salary in NJ either so I suppose it's just a matter of perspective.

Actually, college expenses are similar where I live - high cost area. The thing is there are tons of GREAT public options. It helps to offset the high cost of living. My education cost pennies, and wages are on the high side for that investment. win-win.

& I can tell on national type message boards that most people think I am delusional. But it is what it is. College costs can vary pretty widely.

[snshijuptr]

I think one of the main considerations for where to put your money (either into a 529 or your mortgage) is your APR vs APY. Do you expect to earn more money in the market than you current pay in interest rate on your house? If so, invest in a 529. If not, pay down your mortgage. I would ignore tax implications for this unless you are currently in a high tax bracket.

You don't have to refinance to pay off your mortgage quicker. You might want to leave yourself the flexibility and start paying now as if you had a 15 year mortgage.

Remember that for a 529 plan, you can always transfer the money to someone else if the designated child does not go to college. It can go to your other children, neices or nephews, grandchildren, you or your spouse, and many more. I'm not sure how passing an ESA works.

[Nika]

My own personal differences? Wouldn't pay that much for a home - wouldn't want to tie up that much money in a mortgage payment

How much would you pay? It is not like we have a mansion with 2 bathrooms or something.

This is for a 1.5 bedroom apartment in Bronx (in good area and good building). I have a 2 hour daily commute and my husband and baby have 3 hour daily commute (he works from home occasionally though). If we are to buy some place cheaper, we woudl have to go farther, with longer commute? Is that a much better option when you have a 12 month old?

If you contribute nothing until your child is 16 and your situation changes between then and now (what if one of you can't work? major medical expenses come up? forced to relocate, etc) then you may not be able to find the means to contribute like you wanted and you could regret it.

If we have huge medical expences how is it better to have money tied up in 529 plan? It gives less of an option. If we relocate (not sure what "forced to" means, in this country you are generally not forced to relocate) we would cell NYC apartment and have money from the sale (I doubt that we would move any place with higher cost of living than NYC). In most places you can buy a house with the yard and a garage for that amount of money.

We are not upside down on our apartment because we put almost 110K down 2 years ago (they don't let you do that 20/80 crap here. If you don't have 20% cash and 2 years of carrying expences a good co-op won't even interview you.

[riverwed070707]

If we have huge medical expences how is it better to have money tied up in 529 plan? It gives less of an option. If we relocate (not sure what "forced to" means, in this country you are generally not forced to relocate) we would cell NYC apartment and have money from the sale (I doubt that we would move any place with higher cost of living than NYC). In most places you can buy a house with the yard and a garage for that amount of money.

We are not upside down on our apartment because we put almost 110K down 2 years ago (they don't let you do that 20/80 crap here. If you don't have 20% cash and 2 years of carrying expences a good co-op won't even interview you.

Kind of feel like you're getting defensive here, but I was just trying to point out another consideration.

Why is it better to have money tied up in a 529 than to refi and have it in the house? Well for starters, you can stop contributions to the 529 at any time and redirct those funds where needed...you can't stop contributions on your higher mortgage payment.

[riverwed070707]

And, like I said, my answer may be different based on your overall financial picture. If increasing your house payment still only makes it say 20-25% of your overall income and you're fully funding retirement, then ya maybe it's not a bad plan if that works better for you. it's just not what I would do personally but part of that stems from knowing that in order to make those changes, we'd be tieing up more of our income than I'd be comfortable with because I like the flexibility to change my mind. Perfect example was my husband going back to school. If we had done a 15 year loan and had our moeny tied up in other commitements, what would we have done -- made him wait 15 years to go back? It's just one example and doesn't apply to everyone, but keeping our options open allowed him to go back full time without negatively impacting our budget.

[SeanH]

$38K/year for an undergraduate degree is just mind blowing to me. I'm attempting to go to medical school next year and none of the schools I'm interviewing at cost that much and they are all private.