College savings article from Money magazine

[disneysteve]

I also find it interesting that everyone's basing their assumption on this couple's current income... I think a lot of people have a tough time when kids are young. All of of sudden there are less hours in the day to work - you need a bigger house, more food, more clothes, etc.

If this couple was making that kind of money all along then they should have more $ saved, especially for retirement. However, if their first years were like ours it would be tough to do.

I think this is a good point. Very few people start out their careers earning what they will be earning 20 or 30 years later. I certainly earn more today than I did 10 years ago when my daughter was born. I also save a larger percentage of my income today than I did back then.

The problem is for too many people, as their income grows, they manage to increase their spending but not necessarily their savings.

 

[deltachi8]

I am more concerned about this families retirement savings than I am about their college savings. I am one of those people who does not believe that parents owe their kids a college education. I got my 4-year degree without one dime of assistance from my parents. Now, that said, if parents are able and willing to contribute that is okay too. We do have a college savings plan for our DS, although we have no intention of handing him a free ride even though we likely could fully fund his higher education. He will be contributing to some of the cost of that education.

$7,000-$9,000 today will buy two years + books/fees for a student at many community colleges, with money left over if the child opts to live at home during these two years. 15 credits will cost $1950 per semester at a community college near my home. I personally think that community college is a great way for students to get their generals out of the way, and then transfer to a university or college for their final two years. There is also the option of taking a halftime load and working halftime. My point is there are ways to make college work even if parents haven't socked away a ton of money for their kids to attend.

The family in that article needs to seriously kick themselves into gear regarding their retirement though!

Very nice, well thought out post.

When I went to college (the first time) I really didnt want to but everyone said you had to (i probably just wasnt ready) and my parents said they would pay it all. Great times..I failed out. One of the main reasons...I had no real stake in it, it wasnt my bank book being effected. Foolish? Yep. Selfish? Yep. Common for an 18-20 year old? Many times.

When I went back, it was on my dime. I worked full time and attended school full time. I took on the loans, I applied for the grants. I knew how much everything cost and it made me take it sooooo much more seriously. I earned an Associates with high honors and my BS Suma Cum Laude.

So when my DS is ready for college (if he chooses to go), he will get some help from me, but it will be mostly on his efforts.

Also, I could not recommend community college more for the first year or two of school. It helps the transition and helps you find out where you want to go.

As for retirement, its another discussion, but i wont judge what others choose to do with their money, its theirs, they eraned it, they have plenty of information to go by, they can make up their own minds.

 

[crisi]

I think this is a good point. Very few people start out their careers earning what they will be earning 20 or 30 years later. I certainly earn more today than I did 10 years ago when my daughter was born. I also save a larger percentage of my income today than I did back then.

The problem is for too many people, as their income grows, they manage to increase their spending but not necessarily their savings.

But you can't PLAN on making more. There are lots of people who won't see significant increases to their income. I know a number of people who planned to pay for college with the next raise, next promotion, or the next job - but the raises have barely covered cost of living and promotions aren't automatic. If it isn't there, though, it isn't there. And not everyone values paying for their kids college.

It is wrong to judge the family in the article - even if we had a whole history of their finances they could just have different values. However, the article is interested and you can take away some lessons.

On the community college thing - it CAN work, but you need to know what pitfalls your individual plan has and step around them. Research is key (or luck). Don't ASSUME that the credits will transfer or that they will apply to the major you want. Don't assume that getting accepted as a transfer student does not mean going through an acceptance process - it may be harder to transfer in than get admitted as a freshman.

 

[kfeuer]

But you can't PLAN on making more. There are lots of people who won't see significant increases to their income. I know a number of people who planned to pay for college with the next raise, next promotion, or the next job - but the raises have barely covered cost of living and promotions aren't automatic. If it isn't there, though, it isn't there. And not everyone values paying for their kids college.

That's so true--DH's 2-3% annual raises haven't even covered the increases in our health insurance premiums, much less the increased cost of everything else! The only way he can make more is to take a job that involves a lot of travel, which is something we've chosen not to pursue since our children are still so young. I've gotten some nice raises, but with only working 18 hours a week they don't make much of a difference.

I've got a question (I know nothing about college financing/aid etc.)--my parents have set up investment accounts for each of my son's in my boy's names. Is that a mistake as far as college aid goes? If so, any recommendations on how to fix it?

 

[disneysteve]

Also, when it comes to college savings, SOMETHING is better than nothing. If you can only manage to give your kids a couple thousand per year, it's better than giving them nothing.

This is so true. I think lots of people meet with a planner or use an online calculator, see the huge number and get scared off. Yes, college might cost $200,000, but that doesn't mean if you don't save that much your kid can't go. Save what you can, help to the extent you are able. And don't forget that you can also fund some college costs out of current income while your child is in school. Those numbers usually don't enter into the projections at all.

 

[disneysteve]

I've got a question (I know nothing about college financing/aid etc.)--my parents have set up investment accounts for each of my son's in my boy's names. Is that a mistake as far as college aid goes? If so, any recommendations on how to fix it?

Well, I wouldn't call any savings for college a mistake, but it would be better from a financial aid standpoint for your parents to invest that money themselves in their own names and just use it to help pay college costs when the time comes. That way it wouldn't enter into the financial aid calculations.

 

[sweet maxine]

*************

 

[kfeuer]

Well, I wouldn't call any savings for college a mistake, but it would be better from a financial aid standpoint for your parents to invest that money themselves in their own names and just use it to help pay college costs when the time comes. That way it wouldn't enter into the financial aid calculations.

But would they have to pay taxes on the investment gains if they did that? I almost wonder if we shouldn't move that money to a 529 plan, but I don't want to lock it in to having to be used for college in case they decide not to go.

 

[WDWorld2003]

kfeuer - That's a tough one. If something happens to your parents then the money is not part of their estate - it belongs to your children and no inheritance taxes, etc. have to be paid.

However, we are finding out that when it comes time for college (this year!) all amounts saved are counted. My daughter had some money invested by her grandfather in her name, we had a 529 and she had some of her own savings and all of this comes into play when applying for FAFSA, scholarships, or any financial assistance from the colleges.

To date, she has not received any assistance or scholarships and probably will not until this saved money is spent and at today's prices it won't take long! She has excellent grades and has been involved in many volunteer activities and was really hoping to get a small scholarship or two. You may want to speak to a financial adviser that is very knowledgeable in this area (ours was not!) and find out the best place your parents should start a fund.

I do think it may be better for your parents to just gift them an amount each year during their college years from investments they have made. We've also had to pay income tax each year on the investment her grandfather made in her name. It's not a lot and we're very, very grateful for the contribution to her education. But, had we known what we know now I think there may have been better avenues.

 

[crisi]

But would they have to pay taxes on the investment gains if they did that? I almost wonder if we shouldn't move that money to a 529 plan, but I don't want to lock it in to having to be used for college in case they decide not to go.

The answer to that depends on your parent's income, how much they intend to save for your children, and a whole lot of other factors. Inheritence tax thresholds are so high that most people won't hit them - if they have assets enough to hit them, they should be talking to an estate planner (attorney and/or CPA) now - steps may be able to be taken to ease any estate tax burden. If they are wealthy enough that they intend to save significant amounts of money for your kids, they should see a CPA to understand all the consequences. Gift tax, 529s, estate tax, trusts, etc. are highly complicated, and you are going to want to make sure you consult a professional.

 

[crjack]

This is so true. I think lots of people meet with a planner or use an online calculator, see the huge number and get scared off. Yes, college might cost $200,000, but that doesn't mean if you don't save that much your kid can't go. Save what you can, help to the extent you are able. And don't forget that you can also fund some college costs out of current income while your child is in school. Those numbers usually don't enter into the projections at all.

This is exactly what we were just discussing when reviewing our recent college funds for our children. Right now, we fund both accounts but at our current investment rate it wouldnt fund two private school tuitions...possibly state schools but even so not 100%.

Right now we live on one full time income(DH) and my part time salary but as our children get older I will be back to work full time. That will be extra money that will go directly towards college.

Our mortgage will also be paid off as they start college so with that debt gone and two full time salaries, we should have more money available every month to put towards the tuition, in addition to what we have saved.

We have also made sure we have funded our 401k's well first so that we will be in good shape to focus extra on college when that time comes.

College is so competitive these days I'm more nervous about my children getting in than I am paying for it!!

 

[arminnie]

One key is taking community college credits with an eye towards the university. Not everything will transfer, so it's wise to work carefully with an advisor and make sure that you choose wisely.

I might also add that it is so important pay attention to what you are taking with respect to your degree program period.

I am dealing with a student now who was told FOUR weeks before graduation that he is one unit short of his degree requirements because they don't want to count a 3 hour course taken in another section of THE SAME UNIVERSITY!!! And this is all post-Katrina where other students are being allowed to tranfer hours from ridiculous courses at ridiculous schools.

And this was for a very difficult Asian language course - taught at the night school because there is no day class offered.

Highly selective schools (public and private) can be very, very picky about courses they will allow from other colleges. And often for good reason. I know students at some of the less selective colleges whose mandatory freshman math classes are exactly what they had (and aced) in the 10th grade.