Is It Possible to Save for College?


About 16 years ago I sat down and predicted the growth of my son’s college savings account.  I was planning to put away $2,000 each year into an Educational Savings Account (ESA).  Using an investment calculator, and using an estimate of a 12% return (about the average return for the stock markets), I predicted I’d have about $140,000 by the time my son was ready to go to college.  With in-state tuition at about $12,000 per year, plus money for food and housing, I was figuring a cost of about $30,000 per year, so the ESA would at least get him through undergraduate school.  He could then do research/teaching/etc. to help fund grad school if he went, and hopefully get out debt-free or fairly close.  That was the plan.

              

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Unfortunately, then came the 2001-2003 stock market, where returns were low or negative.  Things finally picked up after the 2003 tax cuts (yes, tax cuts do spur the economy, despite what some Liberal pundits will tell you), but then stocks fell during the 2008 housing market crash.  Since that point things grew at a modest pace, until Trump was elected, from which point on things have been on fire.  Despite the fairly good markets from 2009 – 2016, and the great market over the last 10 months, my annualized rate-of-return has been around 3.5% instead of 12%.

So, sitting here with about two years until the first tuition bills come in, my son’s account has a little over $52,000 in it today, instead of the $108,000 I predicted.  This is enough to pay for about two years’-worth of college expenses, but not four.  Alternatively, it is enough to pay for tuition, but not for room-and-board.  This has left me with a big dilemma:

How should I invest for the next couple of years, if at all?

With less than two years remaining, if I really need the money in two years, I should really put it all into bank CDs.  I cannot predict what the markets will do over such a short period of time, and they have about a 1/3 chance of being lower in two years than they are today,  There is a small chance, maybe one in ten, that they will be 25% lower or more, meaning I may only have around $39,000.  Then again, if we do see some great returns over the next couple of years, for example if Trump is able to pass big tax cuts and spur the economy, I could get 20% returns and have almost $75,000 when the first tuition bill arrives.  Note that my original predictions assumed I stayed fully invested in stocks the whole time, which was probably a bad assumption due to the risk of doing so during the last couple of years.

Another question this raises, however, is

Is it possible for a middle-class family to really save up and pay for college?

Granted, perhaps we should have been putting $4,000 or $5,000 away each year, with $2,000 in an ESA and then the rest in taxable accounts or a 529 plan after we maxed out the ESA.   But I don’t see how most families who don’t make $150,000 per year could afford that.  I mean, we have been very disciplined compared to many people our age.  Despite having an income far less than $150,000 per year, we paid off our home about six or seven years ago, leaving a lot of free cash flow available that many families who keep a constant mortgage don’t have.  Frankly, I don’t know how families who keep a mortgage are able to pay for the things they buy.  (Maybe they don’t, since the median amount of debt families who have a credit card balance is $17,000, according to Nerdwallet.)  Paying for everything and not using credit, including the things that come up like medical bills and auto repairs, I’m really glad we don’t have that $1,000 or $1500 mortgage payment each month.

I do think that many families should be able to get their children through college debt-free or close to it, but saving up everything ahead of time may not be possible.  Once our son gets into college, we could direct some of our regular income towards his room-and-board.  He is also likely to get scholarships that will cover most or all of his tuition.  If he also gets a part-time job and makes $500 per month, that would cover about half of his room and board.  Still, it does make you wonder why college prices are so high that many people need to get loans to get through.

Luckily in our case (and good planning and hard work create luck), we have some resources beyond the ESA to help pay for college.  Because of this, I will probably keep the ESA fully invested in stocks, hoping that we’ll see a couple of good years to boost the account balance.  If we see a drop in the next couple of years, we can cover costs with other funds for the first year or two while we wait for the ESA to recover a bit.  Really we don’t need to assume we’ll need to tap the account right away.

So what do you think?  Is it possible for families making $80,000 per year to save up for college?  Are tuition costs worth the value of the product they provide?  Is it worth it to run up loans to pay for college?

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Empty Nest Insurance- Start Your Kids with a Nest Egg


Today the news is full of stories of children returning home to stay after college.  The recession has certainly made it difficult for some to find jobs.  In some cases parents may also be making their homes a little too comfortable. With few rules, no expenses and no responsibility, who wouldn’t want to stay?

By starting children out early learning about saving and investing, and by giving them a little nest egg with which to start, you can dramatically reduce the chances that they will be knocking on your door, duffel bag in hand after college.

Starting an investment fund can be very quick and easy.  It simply takes a couple thousand dollars and some mutual funds.  If you start a fund about the time they are born, and add to it as they get those checks from relatives early on, and then match their contributions once they start to earn their own money, you can build up a substantial fund by the time they leave the house.  This is money they can then use when they have the unexpected expenses that always occur instead of running up credit card debt.
              

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The first step is to find a fund family with a low enough minimum.  I personally like Vanguard because their funds have very low expenses and the minimums for many of them are only a couple of thousand dollars.

You are looking for a fund that invests in a large number of stocks over a broad range of the market.  Good choices would be a largecap fund such as an S&P500 fund or a midcap or smallcap fund.  Selecting specific sector funds or ETFs is probably not a good idea since you want something you can hold for years rather than needing to move in and out of it, incurring capital gains taxes.


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Once you have selected a fund, simply create a custodial account in the child’s name and send in a check.  (Warning:  When your kids go to college, the college may see the custodial account and expect it to be used for tuition before they’ll kick in financial aid.  If you’re worried about this, keep the money in your name and then gift it to your child over a period of a year or two, staying below the gift tax exemption, when they are near graduation.)  As time passes, add extra money to the fund.  You should avoid the temptation to make many if any changes – you want to minimize expenses and taxes.  Just let it grow with the economy.  If you need to do something, wait for dips and buy more shares.

Once the fund has grown large enough, you should consider selling part and using the proceeds to buy another fund in a different sector of the market.  For example, if you’ve amassed $15,000 in a largecap fund, you may want to sell half and buy a smallcap fund.  This diversification will reduce the risk of losses and smooth out the fluctuations that occur.  In general, different sectors of the market do well at different times.


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Note that capital gains and dividends will be tax-free below a threshold amount, but be sure to check with your accountant on what those minimums are in any given year.  They are generally less for investment income than earned income.  You may also need to file tax returns in some years if the income is large enough even when they haven’t made enough to pay taxes.  Payment of quarterly estimates may also be required.  Minimization of trading, and thereby the realization of gains, will delay the time at which you will need to start preparing tax returns for their accounts.

Once the child reaches 18, the money will be theirs (you have no say over this).  You therefore should have been teaching them all along that the money is there to help them in emergencies, such as when the car breaks down, and not just for day-to-day expenses.  You should also be teaching them to leave the principle alone and just spend the interest/dividends.  In that way, even though they may waste some, hopefully there will be enough remaining when they are older and wiser to help secure their financial security.

By giving your children a nest egg with which to start their lives, you can help keep them out of debt, help them have a down payment for a house when they are ready, and be able to stay out on their own between jobs and other issues. You will also give them an extra source of income that they can use throughout their lives.

 

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is It Worth It to Put Money Away for College?


Most of the time it feels good to live a financially stable life, which is where we are after spending the last 20 years doing things like buying used cars, a smaller home than we could get a loan for, and eating in.  It is nice to have money in the checking account to pay for the various $600 emergencies that come up like car repairs.  It is great to be able to pay for unexpected medical bills that come with having kids without worrying about finding the money.  A few months ago, we even bought a few acres of land to use for camping or just hanging out and were able to do so by just selling a few stocks.  Really, the land is almost an investment in that it will keep up with inflation at least.  The only cost is property taxes and a minimal amount of upkeep.

There are sometimes, however, when you wonder about being financially responsible.  The first is when real estate is really doing well and your friends with the 80/20 loans and HELOCs up to their eyeballs are seeing their net worths increase a hundred thousand per year because home prices are climbing quickly.  At times like that you wonder if you really should have accepted the lure of leverage like everyone else and bought a bigger house with a lot less down.  Luckily, times like the 2008 housing bust are there to remind you of why you made that 20% down-payment and then paid off your 15-year loan in twelve years.

  

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The second time where i wonder if saving up is worth it, which is what we’re staring straight in the face, is when you start to look at college tuition and financial aid.  We have a son who is just two short years away from college, which means that we’ll be sending out applications late next year and seeing what offers we get on tuition.  Looking at tuition offers is something I’m not looking forward to.

Our income really isn’t that high.  We’re upper-middle class, but are on one-income and certainly not making the salary of doctors and those high up in the business world.  Based on income alone, I’m sure we’d receive some tuition relief from many colleges.    With our net worth, however, I’m sure we won’t get any offers of financial aid from the government, nor should we.  I am hoping that there are some true scholarships – where they bribe your child to go to their school because of his/her grades and accomplishments – that my son can win since he really deserves them.  He’s had straight A’s since 6th grade and already scored in the 30’s on his ACT during his first try as a Sophomore, sans any prep classes.  Because I’m thinking that our net worth will knock us out of the possibility of any sort of financial aid – I probably wouldn’t even bother filling out the forms, except I’m sure some of the scholarships, such as the state lottery scholarship, will probably require it.

      

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It’s not that I mind just paying for college.  I think everyone who is able should do so.  It is irritating to see Money Magazine  giving out all sorts of advice on how upper-middle class people, who could pay for college if they wanted to and made it a priority, can manipulate their accounts and financial situation to “maximize their student aid.”  What is bothersome, however, is how I perceive college tuitions are set by the colleges.

You see, just as with healthcare, the prices on the books for most colleges are not the real price.  They are like the MSRP sticker on the car window.  It may say that tuition is $40,000 per year, but almost no one actually pays that.  After you get an offer, the college looks at your financial situation and decides how much you really need to pay.  Some people pay nothing.  Some people pay $10,000 per year.  Some people pay $25,000.  And it isn’t like the people paying nothing have any different classes, access to professors, or dorms than those paying full price.

And I’m not taking anything away from someone who came from a home with one parent who worked extra jobs to put food on the table and obviously didn’t have any money to put away for college.  In that case I think the student should get a break because there are great students who come from everywhere and we don’t want just the kids of upper-middle class parents and the wealthy going to colleges.  Plus, making an investment in a child that made good grades and prepared for college without a parent looking over his/her shoulder constantly and driving them also makes great sense as a society.  Such a child has shown that they are self-driven.  These are the kind of people you want to provide with tools to create things and to lead people.

What irks me is seeing people who have the means having no penalty for not putting money away for college, as would be the responsible thing to do.  In fact, there appears to be a penalty for being responsible.  From what I’ve heard, when schools decide how much you need to pay for tuition, they may look for any money in the child’s name, like custodial accounts that were set up when they were minors, and assume that money would be spent on tuition.  They might also look at college savings accounts like 529 Plans and Coverdell Savings Account (educational IRAs) and count that as the family’s expected contribution.


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So let’s say that Sammy Student walks up to the bursar’s office at WhatsamattaU, which has a list price of $25,000 per year, and has $20,000 in mutual funds that he gained by putting away birthday gifts from relatives and summer jobs.  Let’s also say that his family has put away $36,000 in an educational IRA, which has grown to $80,000 with investing.  The family makes $80,000 per year in income.  The school might then decide that Sammy must pay the $80,000 in tuition over the four years since they assume he’ll use all of the money in the educational IRA and the money in his mutual fund account for tuition and some of the $80,000 in room and board over the four years.  They assume the family will kick in another $15,000 per year for room and board from their income, so Sammy and his family end up paying $160,000 of the full $180,000 price.

Next comes Franklin Freshman, whose family also makes $80,000 per year.  Franklin spent all of the money he got from birthday gifts.  His parents just figured that things would work out for college somehow and went on an extra vacation each year instead of putting any money away for Franklin’s college.  When Franklin gets to the bursar’s office, because he and his parents have no money saved, the school decides that his tuition would be $5,000 per year, expecting Franklin’s parents to pitch in $20,000 per year, including $15,000 per year for room and board.  Franklin and his family get the same education, but only pay $80,000 – half of the price Sammy’s parents paid.  Both families have the same income and the same advantages.  One just chose to save for college and the other did not.  Part of the money Sammy is paying therefore goes to cover some of Franklin’s expenses.

So, we’re basically encouraging people to not save for college, because if they do save they’ll pay more than if they don’t.  That makes me wonder, am I being a sucker for saving up?  Should I encourage my kids to spend their birthday money on games, fun, and maybe a car while they’re in high school, rather than saving and investing?  My goal is to have them start an emergency fund to help them get a good start in life, rather than hitting the streets with nothing after college, but maybe the college will just scoop up any savings they have anyway.  I’m a bit late on the college savings accounts, having saved for 16 years already.  Maybe I should have just invested it elsewhere or just bought a new car or two along the way.

Has anyone out there already made it through the college tuition game?  What was your experience?  Is it worth it to save up?  Are there advantages?

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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