College Funding - what did you budget for your kids?

[karluk]

Quote:

Originally Posted by FinanceDude Those tax deductions are minimal at best.

Not true. The American Opportunity credit is a straight forward $2,500 tax credit on the first $4,000 in eligible expenses per child for four years of school. Parents of college age children have the choice of writing a total of $10,000 in checks to the IRS over the four years or retaining said $10,000 in their own bank accounts. For me, with two children to provide educations for, the total is $20,000. If you classify $20,000 as "minimal at best", well all I can say is that you're a lot richer than I am to be volutarily handing over this much money to the Feds.

Quote:

Originally Posted by FinanceDude Of course, I could relate horror stories of what happens in some instances with large balances in irrevocable gifts such as UGMA accounts but I digress.

Of course, I could relate an equal number of stories where UGMA worked out perfectly as both a tax shelter and a source of non-529 funds to qualify for very generous tax credits, my own personal experience included. But I digress.

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Originally Posted by FinanceDude In addition, you do not mention that 529 plans are not counted as the child's assets like UGMA accounts are in figuring in financial aid eligibility.......

True, my post didn't go into that level of detail, but that doesn't mean I haven't done those calculations myself or am discouraging anyone else from making the same calculations. It turns out that, even with all my kids education funds sheltered in 529 plans, my expected family contribution is almost exactly twice my kids' college expenses. So there's no advantage in over-funding my 529 plans and a big tax hit for using them to the exclusion of other investments. I have a mixture of 529 money, UGMA money and other investments that will enable to me to both minimize taxes and qualify for the maximum tax credits that I'm eligible for.

[Sesq]

I built a spreadsheet based on what I thought I could afford when I started saving in 2008 (when my second child was born and my first was 3). I took figures from the net for median public and private tuition and rolled them forward assuming 5% education inflation. The way things worked out it looked like we thought we could afford about 160% of 4 years public or about 67% of 4 years private tuition. I plan to let them choose when they graduate. If there is money left over I would tell them they can get it rebated after some time to see if grad school was in the mix. If they went private, loans, work or scholarships would need to be in the mix.

My wife and I both had our undergrad degree's covered, so we want to do the same for our kids.

I recently shifted my funding strategy and upped my contributions to front load since 529 plans are deductible in my state, and my state tax rate is higher than my mortgage interest rate (where the money would otherwise go). If I am able to early retire, and FAFSA rules remain comparable, we likely will lose out on "need based" aid. I don't think I will be able to FIRE by the time the first one is in, and don't like having really different savings approaches for the kids in the event that something were to happen.

I still hope that technology disrupts the education industry in the next decade before my kids go, but can't count on that.

[seraphim]

BS (beloved son) had an average bill of $36k a year for five years. And that was just the basics: tuition, books,fees room and food. The cost averaged a 3% increase each year.

Just food for thought.

[Brdofpray]

During the years of 1999 to 2003, DS and DD were in college (for three of those years they overlapped). We budgeted $15K per year each, for their total expenses. Total for both 120K. We let them know what the budget was and they searched for colleges and universities that would work for their interests. We were fortunate in that both obtained academic and athletic scholarships during this process. The result, our total expense for both ended up just under 60K.

We did not have any college funding plans, we put the monthly college fees on a credit card. We paid it off each month, and collected the points. This was enough to fund our yearly travel to the national swim meets where both DD, and DS qualified.

DS went on to dental school, and is now part owner of his own practice. He managed this part of his education on his on. DD went on to nursing school. She is employed as an RN on the cardiac telemetry floor. She also handled this part of her education on her own.

Once they both graduated,we refocused our savings plan and retired in 2009. We feel good in that we gave both our kids a good start, and then let them finish the job.

I know our situation is unique, but college does not have to cost an arm and a leg. There are options.

[Katsmeow]

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Originally Posted by Mariez This may be a bit off topic but the potential decision is driving me crazy. Our middle son has his college selection down to two choices. He has been accepted into the business school of both colleges. Option 1. Indiana University. Total annual cost (out of state tuition, room & board, misc. books, etc. less scholarships) = $36,186. Option 2. Purdue University (out of state tuition, room & board, misc. books, etc. less scholarships) = $17,130. He wants to go to Indiana because its business school is ranked higher but is it worth an extra $20,000 per year? We (the parents) are paying for everything. We also have a 10th grader and a sophomore at another college. We have money saved up but I am hesitant to pay for the higher cost needlessly. My husband is 68 and still working and I am 10 years younger. Retirement is in the future and outside of our house purchase this will be the biggest spending decision we will make.

I would probably encourage him strongly to go to Purdue. I might even offer him some additional spending money if he agreed to go there. When my son argued at one point to live in the dorm at the university that we live within driving distance from, I pointed out that if he lived at home we would have more money available for extras for him and he found that persuasive.

How much did you tell him you would be willing to pay for school. If you have told him for years that you would be pay, say, $40k a year and your circumstances haven't changed and you now insist he go somewhere cheaper than I could understand him feeling you changed the rules. In our case, we never gave a specific number but talked about type of school (in state, public university). If a child of mine wanted to go somewhere that was not within what I had said then I would tell the child that we would pay for what would be the cost of what we offered and the child would have to come up with the rest. In our situation, I feel sure I would likely be telling my son that I would pay for Purdue since I know I would never have agreed to pay $36k a year. And,no, for a bachelor's degree the fact it might be a better business school (and I don't know if it is) would cut no ice with me at all.

[Aiming_4_55]

Thanks for all the responses and sharing. Work and MN snow (yes it's snowing now) has limited my free time on the forum.

Seems like $75k per kid is a reasonable amount (with potential appreciation over 10+ years in the market) in my mind. Taking a conservative number, let's hope each account has $100k by 2014. This would be for tuition, room, board, incidentals, etc. I will always have extra if truly needed.

I do except to teach them along the way about cost, budgeting, funding, majors, careers, etc. in the decision making process, but they might stop listening to me when they are teenagers.

I will not give them the funds straight away, depending on their maturity and ability, course loads, work, extra activities, etc will determine if tuition is paid with others funded by them via work, loans, grants, scholarship, etc. They will have skin in the game.

I left home for fulltime university with $100 (no K here) from someone other than my parents. They didn't have anything to offer but love. I worked full time through my undergraduate studies and graduated in 3 years without any loans.... ROTC, work, and scholoarships were my friends. ;-) but so were Miller Lite, Coors, Bud... whatever was the special.

[Aiming_4_55]

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Originally Posted by imoldernu Aiming_4_5 ..... Keller @ Edina worth a look.

My grad degree is from Keller - Chicago Downtown and Oakbrook, IL campus. The only Saturday program available back then. It's a reasonable education. I took advantage of my employer's tuition reimbursement program. I guess I gamed the system! ;-)

Thanks for the comment.

[Bestwifeever]

Quote:

Originally Posted by Mariez ....He has been accepted into the business school of both colleges. Option 1. Indiana University. Total annual cost (out of state tuition, room & board, misc. books, etc. less scholarships) = $36,186. Option 2. Purdue University (out of state tuition, room & board, misc. books, etc. less scholarships) = $17,130. He wants to go to Indiana because its business school is ranked higher but is it worth an extra $20,000 per year? ....

Maybe. Congrats to your son! Call the admissions/financial aid people at Indiana and tell them about Purdue and see if they will also grant in-state tuition to your son.

[FinanceDude]

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Originally Posted by lhamo I would tell him you will pay the fees for Purdue and if he really wants to go to Indiana he's going to have to find a way to cover the 20k/year difference. If you want to be nice you can tell him you'll match him on the student loan payments dollar for dollar once he finishes and starts paying back. He wants to go to business school -- he better get used to cost/benefit analysis... And does the ranking of the school really matter THAT much for a BA? I could possibly see the value in paying more for an MBA at a top-ranked school, due to the networking spilloffs such programs usually provide, but not necessarily at the undergraduate level.

Perhaps the undergrad business school is higher at Indiana, but Purdue's MBA program is top notch...........

[FinanceDude]

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Originally Posted by karluk Not true. The American Opportunity credit is a straight forward $2,500 tax credit on the first $4,000 in eligible expenses per child for four years of school. Parents of college age children have the choice of writing a total of $10,000 in checks to the IRS over the four years or retaining said $10,000 in their own bank accounts. For me, with two children to provide educations for, the total is $20,000. If you classify $20,000 as "minimal at best", well all I can say is that you're a lot richer than I am to be volutarily handing over this much money to the Feds.

Neither of my kids is in college yet, and the AOTC was renewed for the next 4 years, not sure if the tax credit will be there when he starts college.

We don't qualify under the income limits.

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Of course, I could relate an equal number of stories where UGMA worked out perfectly as both a tax shelter and a source of non-529 funds to qualify for very generous tax credits, my own personal experience included. But I digress.

Please relate some of these many stories. I have only been advising on education funding for 16 years so what do I know??

Quote:

It turns out that, even with all my kids education funds sheltered in 529 plans, my expected family contribution is almost exactly twice my kids' college expenses. So there's no advantage in over-funding my 529 plans and a big tax hit for using them to the exclusion of other investments. I have a mixture of 529 money, UGMA money and other investments that will enable to me to both minimize taxes and qualify for the maximum tax credits that I'm eligible for.

I am confused. You are saying you have ALL education funds in 529 plans, and yet you expouse the virtues of UGMA accounts? Also, could you explain to me how "overfunding" a 529 plan involves a big tax hit? You do know the taxation rules on 529 distributions for qualifying education expenses, right?

[Mariez]

Thanks to all for your input. I am in agreement with many of you that Purdue seems to be the smarter, most cost-effective choice. I have not heard from anyone that chose Indiana for the additional $20,000 cost. In retrospect I should have tried to get my son to state more clearly what his goals were for college. He said he wanted Big 10 so I had him apply to the four that were closest to us and that was it. We were going to pony up the extra cost of out-of-state tuition and then at the last minute Purdue came through with this offer. I called Indiana and they indicated that there was no scholarship money left to give him additional help. We have a visit scheduled to Purdue in a couple of weeks so hopefully that will persuade him to go there.

[FinanceDude]

Are you in a state that has reciprocity with Wisconsin? very good business school............

[Bestwifeever]

Quote:

Originally Posted by Mariez ... have a visit scheduled to Purdue in a couple of weeks so hopefully that will persuade him to go there.

A lot of kids from our local high school go to Purdue as their first choice and I've never heard of anyone not loving it and not graduating with good to excellent job prospects, even my friend's daughter who was an English major (I think their Midwest alum network is incredibly strong). Your son might fall in love with it.

[Mariez]

Thanks. I am hoping for a nice warm day in West Lafayette so the "frisby factor" kicks in--lots of kids outside throwing frisbies and having fun. It seems to be a major decision factor in selecting a school.

[Mariez]

Unfortunately, no reciprocity.

[jon-nyc]

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Originally Posted by Mariez Thanks to all for your input. I am in agreement with many of you that Purdue seems to be the smarter, most cost-effective choice. I have not heard from anyone that chose Indiana for the additional $20,000 cost. In retrospect I should have tried to get my son to state more clearly what his goals were for college. He said he wanted Big 10 so I had him apply to the four that were closest to us and that was it. We were going to pony up the extra cost of out-of-state tuition and then at the last minute Purdue came through with this offer. I called Indiana and they indicated that there was no scholarship money left to give him additional help. We have a visit scheduled to Purdue in a couple of weeks so hopefully that will persuade him to go there.

I would never pay more for IU, but then I'm a Purdue grad...

[ronocnikral]

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Originally Posted by lhamo I would tell him you will pay the fees for Purdue and if he really wants to go to Indiana he's going to have to find a way to cover the 20k/year difference. If you want to be nice you can tell him you'll match him on the student loan payments dollar for dollar once he finishes and starts paying back. He wants to go to business school -- he better get used to cost/benefit analysis... And does the ranking of the school really matter THAT much for a BA? I could possibly see the value in paying more for an MBA at a top-ranked school, due to the networking spilloffs such programs usually provide, but not necessarily at the undergraduate level.

Worked out for Mark Cuban, who picked IU based on its ranking (and cost!). Of course, I think he probably would be ok financially regardless of what he did, and that includes not going to college at all.

[karluk]

Quote:

Originally Posted by FinanceDude I am confused. You are saying you have ALL education funds in 529 plans, and yet you expouse the virtues of UGMA accounts? Also, could you explain to me how "overfunding" a 529 plan involves a big tax hit? You do know the taxation rules on 529 distributions for qualifying education expenses, right?

Quite frankly, I am struggling to suppress the impression that you're the one who's unfamiliar with the taxation rules on 529 distributions. I never said I had "all of my education funds in 529 plans", rather that I had them in a mixture of 529 plans, UGMA accounts and other accounts. The reason for this is specifically to avoid some of the negative consequences of the 529 withdrawal rules. The IRS doesn't allow tax free 529 distributions to be used to pay the $4,000 in expenses needed to qualify for the full American Opportunity credit. You either have to pay taxes on part of your 529 distributions or not claim the American Opportunity credit.

I would direct your attention to example 2 in the following IRS publication, in which Sara's parents incurred (perhaps unwittingly) additional taxable income by taking a 529 distribution to pay for the $4,000 in expenses used to claim the American Opportunity credit. If they had been able to withdraw that $4,000 from some other account instead, they would have reduced their tax liability.

So in order to accomplish the dual goal of minimizing taxes while maximizing educational tax credits, it's generally necessary to keep only a portion of one's educational funds in a 529 account. In my earlier post I was advocating UGMA accounts for the funds kept outside of the 529. That has worked well for my family, and is worthwhile for others to consider as well. If that doesn't work out in individual circumstances, there are certainly other choices as well. The key is to avoid dumping everything into the 529 on the theory that withdrawals will be tax free. The "100% into a 529" approach is probably going to lead to unpleasant suprises once withdrawals begin, especially for people like jon-nyc, who already had $250k in his son's 529 plan prior to his 4th birthday.

Publication 970 (2012), Tax Benefits for Education

[sengsational]

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Originally Posted by studbucket Regarding the cost, I've loved this infographic from NPR (supplemental to a podcast) showing that the true net cost college has not increased like everyone claims it does. Sticker price has raised, but what kids pay (on average) has actually decreased when factoring in inflation.

The problem with those averages is that not everyone will get the discounts. Those discounts come largely from financial aid. Since financial aid ignores retirement accounts, maybe people here who have "everything" in retirement accounts, could get the discount. But the financial aid formulas expect the parent to drop about 6% of your non-retirement assets annually. So if you have two kids, not at college at the same time, after they're done, the formulas have you with about half the assets you started with, not to mention a good chunk of your paycheck. The bottom line for the discounts is "if you have the money, you won't get the discount". And I presume that most people on this board "have the money".

And for all of the discussion about a couple thousand here and there with taxes, that's peanuts compared to the discounts (many thousands per semester) you can get with the "right" FAFSA inputs. One thing is for sure: UGMA is a super dumb idea if you're going to try for financial aid. You save $12 is taxes and then your financial aid discount is cut by $1,200, hehe.

[Mulligan]

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Originally Posted by sengsational The problem with those averages is that not everyone will get the discounts. Those discounts come largely from financial aid. Since financial aid ignores retirement accounts, maybe people here who have "everything" in retirement accounts, could get the discount. But the financial aid formulas expect the parent to drop about 6% of your non-retirement assets annually. So if you have two kids, not at college at the same time, after they're done, the formulas have you with about half the assets you started with, not to mention a good chunk of your paycheck. The bottom line for the discounts is "if you have the money, you won't get the discount". And I presume that most people on this board "have the money". And for all of the discussion about a couple thousand here and there with taxes, that's peanuts compared to the discounts (many thousands per semester) you can get with the "right" FAFSA inputs. One thing is for sure: UGMA is a super dumb idea if you're going to try for financial aid. You save $12 is taxes and then your financial aid discount is cut by $1,200, hehe.

I am with you on this. I have true apples to apples comparison, and college costs swamp the inflation rate in competition personally for me anyways. I paid $30 a credit hour in mid 80s. Now this year it is $290 a credit hour. I got the privilege of paying full rack rate then, and get an encore opportunity with DD this year. This is not including all the newly created "fees" over the years which almost entails everything up to a "breathing campus oxygen air fee".