Tag Archives: college costs

How Will Your Children Pay For College?

Little LRC walking to preschool last winter

Little LRC walking to preschool last winter


Paying for a child to go to college or at least helping to pay a substantial portion of the tuition is the goal of many parents. While I’ve mentioned that some of my co-workers seem to go to far in financially supporting their adult children rather than teaching them to be independent and financially literate, I understand wanting to help pay for college. They want to give their kids the best chance for a financially successful future and don’t want them to start out life with the burden of substantial student loan debt.

A recent survey has revealed that millennials are saving more for their children’s college education than parents from previous generations. The results of the survey makes sense because millennials are the generation that has had to bear the brunt of the student loan debt crisis. They have first hand knowledge of the burden of having student loans weighing them down and don’t want their kids to have to carry that burden.

Should you pay for college?

If you’ve got nothing saved for retirement or you’re living paycheck to paycheck, it’s probably best to focus on fixing that before saving for college. While your child can always borrow to pay for college costs, you won’t be able to borrow money to fund your retirement. There are also parents who don’t think it’s a good idea to pay for college because the child will have a sense of entitlement or take their schooling for granted. I think that paying for college is a shared responsibility. I have two little boys, a 3 year old and a 3 month old. I will do my best to help them pay for college but I’ll expect them to chip in as well.

How much should you save?

With private universities charging over $50,000 and even over $60,000 in tuition, it seems impossible to save enough to pay for college. And at the rate that tuition is increasing, it seems even more impossible. However, personally, I think the rate at which tuition is increasing is unsustainable. When college grads with heavy student debt burdens have difficulty finding high paying jobs and have a difficult time making their student loan payments, the college tuition bubble is bound to burst. In any event, both my wife and I went to state universities, and while tuition is increasing at public schools as well, they are still much more affordable. Many parents and students love the big name colleges because they think that is the only way to be successful, but often times, where you go to school will not determine what you will achieve. If my child turns out to be high-achieving and we can afford the price tag, I won’t deny him that opportunity, but going to a big name university no matter the cost just doesn’t make financial sense.

529 NYS saves

How do you save for college?

The 529 plan is probably the best vehicle to save for you child’s college education. Surprisingly, many people haven’t heard of the 529 plan. Only about two-thirds of Americans have heard of the 529 plan and only about 27% of families use it to save for college. Many people also have misconceptions as to how the 529 plan works. When you contribute money to a 529 plan, the money grows tax-deferred and when you withdraw the money to pay for qualified college expenses, you are exempt from federal taxes. Many states offer a tax deduction for contributions into your state’s plan. I live in New York and participate in its 529 plan because of the tax deduction and because it contains low-cost Vanguard funds.

Some have said they don’t want to save in a 529 plan because their child may not go to college. The 529 plan can be transferred to another child or to a grandchild or even to yourself. So there is some flexibility. However, if you really don’t like being tied down, you can always save in a taxable stock account.

Saving tips

Start early – I start saving for my first son’s college when I found out that my wife was pregnant. What can I say? I’m a planner. Since I didn’t have his social security number, I listed the beneficiary of the plan as me and then changed it to my son after he was born. Getting a head start opening a 529 plan will give allow your contributions to compound. Determining how aggressive you want to invest college savings will depend on your risk tolerance. If you are having trouble saving for your child’s college because you’re still paying off your own student loans, check out this valuable resource about student loan refinancing.

Have family friends contribute – When my friend’s daughter turned one, he threw a birthday party and asked for contributions to his daughter’s college savings plan instead of toys. His daughter has been showered with plenty of toys from family and friends already and they have a small apartment. A gift towards her future college education would be much more valuable. The 529 plan in New York makes it pretty easy for people to contribute online.

Have kids contribute – As I mentioned early, I think it’s important that children share in the responsibility in saving for their college education. When I was growing up, I would receive cash gifts during my birthday and holidays and would also receive an allowance. My parents would ask me occasionally if I’d like to save and invest that money for college. (The 529 plan did not exist at the time). As a good little saver even as a child, I would allot some of my savings for this purpose.

Do you plan on helping your child pay for college? How are you saving for it?

Hidden Costs of Living in a High Cost of Living Area

Cost Of Living Expenses Sky High Monitor Showing Increasing Costs
It’s pretty obvious that living in a high cost of living area is expensive. I live in New York City and when I hear about how much a house costs in many other cities, I am pretty envious. My friend, who lives in upstate New York, rents an entire house for $900 splitting the costs with a few roommates. A 500 square foot studio apartment in my neighborhood costs about $1300 and I don’t live in Manhattan or a hip part of Brooklyn. Housing costs are usually the biggest expense but things such as food, entertainment, childcare, and others costs are also higher. Here are two hidden costs of living in a high cost of living area that you may not have thought of.

Taxes

Yes, higher cost of living areas often have higher taxes too. If you live in New York City, you pay a state income tax as well as a city income tax. But I’m not talking about that. There is another tax consequence that you may not realize when you live in a high cost of living area. When you file your taxes, there are credits and deductions for various things such as student loan interest and for having children, however, these credits and deductions phase out and are completely eliminated at certain incomes. Presumably, the reason for the benefit of the tax credit or deduction being cutoff at a certain income limit is because that person makes enough money and the benefit is intended for those making less. This makes sense but when you live in a high cost of living area and your basic living expenses are much higher, you might be cut off from taking advantage of these tax benefits even though you may not be as well off financially as your counterparts living in lower cost of living areas.

Let’s take for an example the student loan tax deduction. The deduction does not take into account where you live nor does it take into account the amount of student loan debt you have. If you live in New York City and have a modified adjusted gross income (MAGI) of over $65,000, the deduction starts to phase out and with a MAGI of $80,000, you will get no deduction. So a person with a MAGI of $80,000 living in NYC with $100,000 in student loan debt will get no benefit from the student loan tax deduction, while someone in let’s say Memphis, Tennessee who makes $63,000 and has $30,000 in student loan debt will get a tax deduction. According to the cost of living calculator on Nerdwallet, you would only need to make $44,798 in Memphis to maintain the same standard of living as someone making $80,000 in New York City. (Note: I input Queens, New York when using the calculator. If I used Manhattan where the cost of living is even higher, someone living in Memphis would only have to earn $30,260 to maintain the same standard of living as someone earning $80,000 in Manhattan.) Check out this site for more information about the student loan deduction as well as the calculator to figure out your tax benefit if you qualify.

The same situation applies to a family with a child who may benefit from the child tax credit. The tax credit starts phasing out for a family with a MAGI of $110,000 and at an MAGI of $140,000 there is no more benefit. A family living in NYC will likely have higher housing costs as well as child care costs. There are a multitude of tax benefits that phase out as your income rises such as the earned income credit and saver’s credit. You also can no longer contribute to a ROTH IRA if you reach a certain income level.

Financial Aid for College

When your child is ready for college and you fill out the financial aid application, your income will be a big factor in the amount of financial aid your child will receive. However, living in a high cost of living area really isn’t taken into account in the determination. According to Edvisor, “generally, every $10,000 increase in parent income will cause about a $3,000 decrease in need-based financial aid.” So in the example above where you could have a similar standard of living making $40,000 less, you would be expected to pay about $12,000 more for college if you live in the higher cost of living area even though the two families may have the same amount of disposable income.

While I understand that where you live is a choice and that higher cost of living areas often have more and better paid job opportunities, I wanted to point out the costs of living in these areas other than the obvious ones. It just cannot be disputed that living in a high cost of living area will affect one’s disposable income, yet this is not taken into account when filing taxes or filing for college financial aid. What are other hidden costs of living in a high cost of living area? Do you think it’s fair that the cost of living is not taken into account?

Is There a Penalty For Contributing to a 529 Plan?

529 NYS saves
A little over three years ago when I got the wonderful news that my wife and I were expecting, I already started thinking about college. Yea I’m a planner. You’ve got to start planning early right? I opened a 529 plan without much thought. That’s what everyone does to save for their child’s college tuition and expenses I assumed. Well it seems that there are some people who think otherwise.

Recently, I overheard a conversation where a grandmother offered to contribute to her grandchildren’s college savings account as a gift. The father of the children informed the grandmother that he did not open a 529 account for his kids because he heard that having such an account would reduce the amount of financial aid that the kids would receive. The comment raised my eyebrows but I didn’t think much of it. I just assumed the father was making an excuse because he never opened an account.

Not too long after I overheard this conversation, I was having lunch with a few co-workers, and one co-worker who has college-age children said that he regretted contributing to a 529 plan. He said that he saved all that money in the 529 plan and his daughter didn’t get much financial aid, whereas his neighbor didn’t save much and his child was rewarded with a much better financial aid package. He advised us that we’d be better off taking a home equity loan or having a grandparent open a 529 plan.

I was determined to get to the bottom of this because I didn’t want to save all this money and be penalized for doing so. So I did a little research to see whether what these 529 bashers said had any merit. Before I begin, I want to say that parents should make sure they are saving enough for retirement before they think about saving for their kid’s college education. There are always lower cost options for higher education. There are also student loans, but there are no retirement loans.

First, let me go through the pros and cons of a 529 plan

PROS

-Your money grows tax-deferred
-When you withdraw the money for qualified college expenses, you are exempt from federal taxes
-Some states offer a tax deduction for contributions into your state’s plan. I live in New York which is a highly taxed state so the tax deduction is a great benefit. I learned from Holly who blogs at Club Thrifty that Indiana offers a 20% tax credit for contributing into its 529 plan which is even more awesome.

CONS

-If your child does not go to college and the money is not used for qualified college expenses, there is a penalty to withdraw the money. You can, however, transfer the account to another child or grandchild, or even to yourself.

Now let’s get to the arguments made that there is a penalty for saving in a 529 plan whereby your child’s financial aid will be reduced.

Yes, when you apply for financial aid using Free Application for Federal Student Aid (FAFSA), it will ask you for your assets in the 529 account. FAFSA reduces need-based aid by a maximum of 5.64 percent of the parents’ asset value. So if you have $10,000 in a 529 plan, financial aid could be reduced by $564. Other assets such as a stock account, CD, and savings account are also assessed as 5.64 percent. FAFSA does not, however, consider money that is in a retirement account, a life insurance policy or your home equity (many private college do consider home equity). Assets held in the students name are assessed at a 20% rate so putting accounts in your child’s name will affect financial aid eligibility much more. While saving in a 529 plan can reduce the amount of financial aid your child may receive, 5.64% is pretty negligible when you consider the benefits of the 529 plan. I will continue to contribute to my child’s 529 plan.

Income affects financial aid much more than the assets in a 529 plan.
That is what I said to my co-worker when he argued that the 529 plan was a horrible plan. He and his wife have a pretty high income so I’m sure that played a much bigger role in the reduced financial aid. The parent contribution from income is assessed on a bracketed scale, from 22 percent to 47 percent of discretionary income, and the student contribution from his/her income on the FAFSA is assessed as a flat 50 percent of discretionary income.

How about a home equity line of credit?

My co-worker suggested that he would have been better off if he had contributed extra to his mortgage payments rather than contributing to the 529 plan. While home equity is not considered an asset under FAFSA, many private colleges will consider your home equity in its financial aid calculation. Also, with home equity lines of credit, the interest rate is usually variable so there’s a risk that interest rates will increase making the payments burdensome. There are pros and cons to using a home equity line of credit and you can read more about it here and here.

What if grandparents open a 529 plan for my child?

Assets in a 529 plan that a grandparent opened will not be considered an asset for financial aid purposes. However, if the grandparent withdraws the money from their 529 plan to pay for college expenses, that money will be counted on next year’s FAFSA as income, which may drastically reduce the following year’s financial aid package. Income is assessed at a much higher rate. One way around this issue is if you wait until the last year to use the money from the grandparent’s 529 plan.* Remember: When parents withdraw funds from their 529 plan to pay for qualified college expenses, that money WILL NOT be considered income for purposes of FAFSA.

*UPDATE: A recent rule change taking effect in the 2017-2018 school year, the base-year income on the FAFSA will reflect the student’s income from two years prior rather than one. This will allow a grandparent to use 529 assets a year earlier without impacting the student’s eligibility for financial aid.

How about using a life insurance policy to pay for college?

While reading about financial aid and 529 plans, I stumbled onto a website by a self-proclaimed college financial aid expert salesman. He said that 529 plans were not the best place to save for college because the stock market is too volatile and that there are too many fees. He recommended investing with a variable life insurance policy because it is not counted as an asset when determining financial aid. First let me address the claim by this insurance peddler…I mean college financial aid expert…that the stock market was too volatile. A 529 plan is only a vehicle, you can invest in aggressively or more conservatively based on your risk-tolerance. There are different investment options where you can invest in a mix of stocks, bonds and even CDs. The Finance Buff wrote an interesting post regarding age based 529 plans where the investment becomes more conservative the closer your child gets to college age.

The argument by the “financial aid expert” that investment fees are too expensive was even more hilarious being that he was recommending a life insurance policy, which often have very high fees, expenses and premiums. I’m not sure about other 529 plans, but New York’s 529 plan uses Vanguard funds which have ultra-low fees and expenses. The only truth about investing in a life insurance policy is that the assets there do not count as an asset. However, in my opinion, the cons clearly outweigh that one pro. So if someone suggests taking out a life insurance policy to pay for college, please run for the hills.

Let me just note that some colleges use their own formulas, I mainly went over how the feds do it on FAFSA. Also, I am not an expert on this topic (But at least I’m not a self-proclaimed financial aid expert who peddles life insurance). Make sure you do your due diligence and seek advice from a reputable financial advisor or accountant as these issues can be complicated.

Check out these resources to do your own research:
The College Solution
Fin Aid
Saving For College
How are you saving for your child’s college education?

Does What School you go to Determine What You Can Achieve?

Nassau Hall, Princeton

As it is spring, many of my co-workers’ children are anxiously awaiting acceptance letters from the colleges they applied to. The biggest worries I hear from the parents is the costs. And why wouldn’t it be? College tuition has skyrocketed , while student loan debt has outpaced other forms of debt. My son is not even two yet, but I’m a bit of a planner so I wonder what the costs will be for my son in about 16 years. With the rate tuition has been increasing, college will not be affordable for the majority of people. I have a feeling though, that the college tuition and student loans are in a bubble which will burst much like the housing/mortgage bubble. The costs are just unsustainable. Mark Cuban also thinks that there is a tuition bubble and you can read some of his reasoning on his blog. Nevertheless, the price of college will always be expensive. But is going to a big name college, no matter the costs, a good idea?

Where You Go is Not Who You’ll Be

Even though it has been many years, I still remember fretting about scoring high on my SATs, getting high grades, and padding my resume with extracurricular activities so that I could get into a good school. Because getting into a good school would determine the jobs I could get, the money I would make…ultimately it determines how our lives will turn out. Right? Well, Frank Bruni argues that this is not true in his book published recently titled “Where You Go Is Not Who You’ll Be: An Antidote to the College Admissions Mania” While going to a big name school will undeniably provide some networking value and look good on a resume, these benefits are probably overstated. He contends that motivated kids can get a good education almost anywhere they go, and lists successful Fortune 500 execs, Pulitzer Prize winner, among others, who went to public universities and schools that don’t have major reputations.

Lynn O’Shaughnessy, a journalist and author who is a college expert, wrote an interesting post regarding this issue, saying:

It matters not at all where they got their degrees but rather what they did with their time in the colleges they did attend. It matters what kind of person they are, how persistent they are, how hard they work, how creative they are, and how they present themselves.

I couldn’t agree more. Ultimately, a hard-working, intelligent and ambitious student will make the most of themselves and become successful no matter where they go to school. Furthermore, if you equate earning power to success, I think the major you choose is sometimes even more important. Another statement that Mrs. Shaunghessy makes which I found quite intriguing is that:

Sometimes the poor kid who had to pay his way through Chico State has the most pluck and is the most driven. These types of employees are sometimes the most successful of all, because they are used to working hard from the get-go and did not come by anything in life through their dad’s connections. They have no sense of entitlement, so are willing to get their hands dirty for the mission.

I’m not sure if all employers will have this mindset, but if I was in charge of hiring, I would feel the same way. I think many times those students who have grown up with many obstacles, but are able to persevere and overcome those hurdles have the abilities to be successful. I was accepted to a relatively “big name” university, and did receive some scholarship money to help out. However, it was still expensive and my father said that we could not afford it. I can’t say for sure if my career path would have been different if I had gone there, but I did go to law school so my undergrad degree probably wouldn’t have been as important. What would have been a certainty, though, is that I would have much more student loan debt. Both my wife and I went to public universities, and I would have no problem sending my son there. Of course, if he is accepted to the “big name” school and we had the financial ability to send him there, I don’t know if I would deny him that opportunity if he really wanted to go. But, going to a big name school no matter the costs is just not a good decision.

Do you think going to a big name college is a requirement to have a successful career?