Interesting conversation about college savings

[disneysteve]

I saw a friend last night who is a little younger than me and has 2 daughters ages 7 and 5. She is also a physician (a specialist, not family practice like me). Her husband also works a good job so between the two of them, I'm sure they make 2-3 times what we make.

I was telling her about our college visits last week and of course the topic of cost came up. She asked if we've been putting money aside for our daughter. I said we have but it won't be nearly enough to pay the full cost. She mentioned that they have 32K saved for their older kid and somewhat less for their younger kid. I said I thought that was great since she is only 7. We didn't start saving for college until our kid was about 10 because until then I was busy paying off student loans. Her response was, "Oh, I'll be paying those until I'm 70."

While I'm sure she was exaggerating, the point is that she and her husband put saving for college first before repaying her student loans. My wife and I did just the opposite. I was determined not to still be paying for my own education when my daughter was getting hers. My loans had a 25-year repayment schedule so had I followed that, I would have not been done until 2018. My daughter starts college in 2014. As it is, I finished repayment in 2005.

I guess which method makes more sense would depend on the interest rate of the debt and the growth rate of the investments. If she has a low interest rate and has enjoyed the prolonged bull market of recent years, it's possible that she'll come out ahead as opposed to if she had done it my way. So I'm not saying that either way is necessarily right or wrong. I was just struck by the very different approaches we each took. My thought was to get out of debt first and then pour money into savings for a shorter period. Hers was to pay the minimum on the debt and put the remainder of available funds in savings over a longer period.

I don't really have a question or even a point here. Just thought I'd share this and see what folks thought.

[bjl584]

I've always heard to get your own finances in order first, them start to save for your kid's education. You can finance college but you can't finance retirement.

[kork13]

I rather doubt that the rates on their SLs (most likely private, given the high cost of advanced professional degrees & the limits on federal loans) are lower than 5-6%, in which case getting consistently better investment returns (esp. after taxes, given their high income) seems unlikely.

DS, I would say that your gut is only too correct. I won't say it's irresponsible to finance kids' educations over paying off their SL debt.... but it's probably not the smartest option available to them.

[LivingAlmostLarge]

Bad idea, they can always finance college but they need to be paying off their debt. Why? Because in 10 years their incomes will probably go up. They may even be able to cashflow some college expenses. So getting rid of their debt and saving for retirement should be priority number one.

Even better they can take out 4 years of loans for their kids and pay it back if they need more time to get the cashflow worked out.

Is the Dr even saving for retirement? I am shocked by how many parents I meet who are saving nothing for retirement and just a little for college. I am appalled that they are "not in debt" but then they are paying for ridiculous things for their kids like tons of extracurriculars or private school but have nothing saved.

What is their plan? I mean is that the gift you want to give your kids? The feeling your parents need help because they sacrificed everything for you?

[savingmama]

Just thought I would throw in my experience. My dh is a MD that just finished all his training a year ago (he did 6 years of training after his 4 years of med school). His student loans are both under 5%. The majority is at 2.77% and the rest is at about 4.25% (none is private, all came through the government). We have chosen to pay the bare minimum on student loans right now while we work on aggressively saving for a down payment on a home. (Our student loans are at 30 year plan). Right now we are also maxing out our 401 (k) since there is a limit each year and we couldn’t catch up on deposits later. As far as 529 plans I have thought about wanting to start contributing once we have bought our house (our oldest is already 11). I see us still having my dh student loan debt through at least some of our kid’s going to college (we have four children). But unlike the other MD you spoke with, there is no way we would still have the debt by the time my husband is 70. Our plan is to be debt free way before retirement. Honestly, I am torn about what we would do in a few years when we are more settled- pay off the house early or pay down student debt. So I guess my point is it doesn’t surprise me that the MD is putting money towards 529 before accelerating student loan debt. When you specialize as a doctor it takes a really long time to get established, and there are so many things that get put off during all the training; you don’t always want to keep putting those things off so that you can pay your student loans off quickly.

[savingmama]

[QUOTE=LivingAlmostLarge;362691]Bad idea, they can always finance college but they need to be paying off their debt. Why? Because in 10 years their incomes will probably go up. They may even be able to cashflow some college expenses. So getting rid of their debt and saving for retirement should be priority number one.

Even better they can take out 4 years of loans for their kids and pay it back if they need more time to get the cashflow worked out.

QUOTE]

Now I am not totally read on 529s so please help me in my ignorance, but isn't there some benefit to putting money in a 529 plan (i.e. state income tax breaks), verses paying college expenses as they come. That is one reason I would think to start contributing earlier than later.
Also as far as financing college as it comes, that sounds like a bad idea for my personal situation. Why would I hurry to pay off my dh sl debt that has very low rates, so I can finance my child's college at a much higher rate (dh sl rates are 2.77% and 4.25%) (Isn't parent loan rates in the 8th%). I just wanted to point out why that might seem unreasonable for other MDs to accelerate their loans so they could then turn around and finance their child's student loans.

[disneysteve]

Now I am not totally read on 529s so please help me in my ignorance, but isn't there some benefit to putting money in a 529 plan (i.e. state income tax breaks), verses paying college expenses as they come.

It depends on the state. Some give a tax break. Some don't. Here in NJ, no tax break so no advantage.

[dawnwes]

I am with you, I would pay off our own loans first and worry about college for our kids later.

We have some saved, but not nearly enough for all 3 to attend a private, away from home school. If they choose that, they will need to pay a large portion of it. We have enough saved up to afford all 3 to live at home and attend the local 4 year college. That is what we will be offering (or its equivalent in $$ and they pay the difference.)

[TheKayla]

I'd pay off your own debt first, you'll save the most money by avoiding interest, not to mention psychologically you'll feel a lot better having those finally paid off. Then I'd say don't lose sight in saving for your child's college -- and remember the cost of college is estimated to continue to rise rapidly, so you'll need a lot more saved up than what you had for college. I'm not sure if this is true or not, but a friend of mine who has two daughters -- aged 2 & 3, said the estimated average cost of college (4-year university) by the time her girls got to college was going to be around $300,000 -- just to give you an idea!

[kv968]

It depends on the state. Some give a tax break. Some don't. Here in NJ, no tax break so no advantage.

If you invest in NJBEST qualified withdrawals aren't subject to state taxes.

[disneysteve]

If you invest in NJBEST qualified withdrawals aren't subject to state taxes.

I don't think any 529 withdrawals are taxed in NJ.

From the NJ Division of Taxation:
"For New Jersey income tax purposes, a qualified state tuition program is defined as one established under section 529 of the Internal Revenue Code. Presently, N.J.S.A. 54A:6-25 allows the earnings accumulating in a qualified state tuition program account to be excluded from New Jersey gross income."

Some states, however, give a tax deduction for contributions to 529 plans. NJ does not.

[kv968]

I don't think any 529 withdrawals are taxed in NJ.

From the NJ Division of Taxation:
"For New Jersey income tax purposes, a qualified state tuition program is defined as one established under section 529 of the Internal Revenue Code. Presently, N.J.S.A. 54A:6-25 allows the earnings accumulating in a qualified state tuition program account to be excluded from New Jersey gross income."

Some states, however, give a tax deduction for contributions to 529 plans. NJ does not.

Got it. I thought you were talking about no tax advantage with the withdrawals not the contributions.

[feh]

This is one of those decisions that likely depends on the specific details of the couple's finances. What's the interest rate of the loan? How's their cash flow? How stable are their jobs?

It depends on so many factors, it's impossible to say if their choice is a good one or not.

[Nika]

I can see their point of view.

I have a student loan locked at 2.1%. We are saving for our toddler son's college already, before paying off my loan. We have enough in investments to pay it off, but since the interest rate on the loan is below inflation, and returns on the investments are above, I can't bring myself to do that.

[Like2Plan]

It is an interesting perspective.

In a way you could almost equate it to the age old debate of whether you would be ahead if you prepaid your mortgage and paid it off early vs not paying it off early and investing the extra money instead. Most of the illustrations I've seen makes investing the difference instead of prepaying scenario come out ahead. But, paying off the mortgage can give some folks a sense of security that is hard to put a price on.

Same with the student loans. Your friend is probably doing the smart thing, but I wouldn't have the same sense of security I would get by retiring the student loans early in lieu of saving for the children's education fund.