Other than retirement, we only have one major expense left in life: college for our kids.
Some might say that it’s not really our expense but one for our kids, but we’ve always wanted to pay for our kids to go to college if they were so inclined.
This post will detail what we’ve done to pay for it as well as the path chosen by each of our children.
Background
Many years ago when our kids were toddlers (they are 20 and 18 now) we started saving for their college expenses. We saved in Education IRAs/Education Savings Accounts initially and graduated to 529s. We lived in Michigan at the time and when we started the state’s 529 was well-rated. In addition we got a tax break for being in-state investors.
Throughout the years, we socked away money here and there in an effort to build a fund that could cover a good amount of college costs. The problem is, you don’t know how much to save. If your kid goes to an elite school and you get zero aid, that could be $50k per year or more. If they earn a full-ride scholarship, you pay nothing. That’s a wide spread and is certainly unknowable 15 years ahead of time.
So we (mainly me) decided to save what should be adequate for a reasonable college education with some (not a lot) of scholarship monies. We certainly weren’t going to qualify for need-based aid, so our kids would be limited somewhat.
In addition, we wanted to incentivize them to look at college as a business proposition. It is an investment that should lead to a payoff — long-term employment in their chosen field at a greater financial level than what they could have otherwise obtained without the degree. They needed make decisions based on the fact that this was an investment and they should expect a return. In other words, no racking up $200k in college debt for a job paying $20k per year.
Our Plan
With these things in mind, we took the following steps:
- We saved $90,000 for each child.
- We talked them through the purpose of college (to get a job) as well as the cost/benefits of various schools, jobs, etc.
- We told the kids they would have $90,000 to spend for college.
- If they spent more than this, they would have to make up the difference, either by borrowing, saving in advance, or working. As part of this, we advised against leaving college with debt, but the decision was up to them.
- Here’s the key: If they spent less than the $90k, they got to keep the difference.
- Caveat: They would have to earn a college degree to get any difference. They couldn’t get part way there and claim the rest of the money or simply take the money and head to the Caribbean after high school.
- If they wanted to take college classes while they were at home, then we would pay for the costs of the classes ourselves, not out of their college funds. (Both our kids were home-schooled and it’s common for kids to take “dual enrollment” classes in high school. These are college classes that count for college credit but also count as credit towards high school graduation).
With this sort of plan we thought we would encourage the kids to consider the cost/benefit options with various college choices.
Tale of Two Kids
As you might expect, each of the kids reacted differently to the plan.
Our son (20) has never really liked school. While he did ok, he heart was never really into it. He’s more creative and a free spirit. He’s also a bit entrepreneurial. He took business/marketing classes at a local high school (as a supplement to homeschooling) and really enjoyed them. He earned college credits along the way (I think he earned 6 credits) and placed third in a regional business plan competition. So he’s probably not going to go to college (though you never know).
His current plan is to work a bit, save some money, and start his own business. Not a bad plan, but he does need to develop a viable business model. Not sure if we’ll help him or not financially (or if he would take help) — that’s to be settled down the road. But if he doesn’t use his college money, it will be absorbed back into our finances.
Of course there’s the issue of how to get it out of the 529 without penalties, but that’s a subject for a different post.
My daughter’s (18) plan is as follows:
- Take as many college classes while in high school as possible. She could have graduated high school last year or this, but has decided she’ll stay one more year to rack up the credits. Her objective is to enter college in the fall of 2017 with 60 credits (two years of college) under her belt.
- Take two years of college on campus and get her 4-year degree. She will spend $20k-$25k per year to do this based on the school she likes (subject of another future post) and the scholarships available.
- Even at $25k per year for two years, this only adds up to $50k, leaving her with $40k to pocket when she graduates.
So that’s it for now. Of course, things could change as we are dealing with young adults prone to changing their minds. But I wanted to share our plans as I’ll be writing more about college costs/plans in the future.
What are your thoughts on these plans? Any suggestions to add?
I love the approach and we are taking a similar one in our household. My kids are a little younger than yours, at 14 and 16. We have around $60k saved per child which covers about half at a state school. They know that is all there is on our end and it’s only to be used for education – they must cover the difference with scholarships, loans, etc…
The wrinkle that you added which is intriguing, is that you’re letting your kids keep the difference if they don’t spend it all. I had not thought about that idea, but I like it! Best of luck!
The plans seem okay. I like that you emphasized that college is mostly to get the credentials to open doors to good employment and the incentive plan regarding the funds available.
We have a 20 year old that we did not save for college for (we didn’t want to have the money tied up in a 529). We spent ~$100,000 for tuition from pre-school through high school and figured we’d just pay for college as needed, as tuition was an expense we were use to paying. Our child was always an excellent student and when it came to college was frugally minded, chosing the college where there is little out-of-pocket cost and by choice paying for everything except car insurance and medical expenses. Given that we have spent little on undergraduate education (only one more year of classes) we will probably help with a future expense (graduate school should that path be taken or money towards a down payment on a house). There is also $30K+ in an UGMA (from gifts received over the years, much of it from us in lieu of expensive gifts).
I’m curious to see other comments.
21 and 23 years ago our children came into the world and people ask now “how we managed to saved money for college?” Well it is not like you wife gave birth yesterday. We had 21 and 23 years to save an plan. Like you we saved in a 529 plan. My wife and I command a very health salary and we knew that we would not qualify for need based aid as we made too much money. Did we save everything? no but we save a big chunk. The rest came from savings like paying off the mortgage and then applying that savings to college expenses. My goal was to guide them into wise choices of careers where they will make a salary to live outside of our the house and not be so straddled with tons of debt and a low paying career where they are living in my basement into their 30’s.
College is a big business and they are getting greedy. I see in the near future AP classed will no longer be accepted as college credit. Harvard announced this last year that they will no longer accept AP classes. My guess is others will follow. My sons wanted to take some classes at the community college and he was told they would not transfer as “they were not calculus based or not including the total curriculum taught at the university”. Warning for you who think the classes will transfer from a community college.
They both studied engineering. One just finished in December after 4 ½ years and the other still has 2 years to go. Our first son qualified for some scholarship money along the way which helped with the tuition payments along with he had two summers of paid internships where he save a good chunk of money for college. He graduated with honors and now has a full time position where he is commanding a salary that will afford him the ability to move out an live on his own whenever he decides. The second son works quite hard as he is going to a rather difficult and challenging university. Michigan Technological University is one of only a handful of universities still offering metallurgical materials science engineering and is not and inexpensive university. Our second son is staying on campus this summer hired in by the university to assist doctoral students with their research. He is gaining valuable experience working with machines he will use in his field and connections within the industry. He is getting paid but the experience will be incredibly valuable beyond the pay.
When I see a high school friend of my oldest son who are borrowing $20k a year for a degree in business in sports marketing, I really question both the student and the parents judgment. But then again his intention is to play college hockey and college is secondary.More like a hockey degree.
I applaud the several of their friends who are students who is working part time going to the community college to get there basics done and then hitting the university to finish, or living at home and going to the local university and working. Minimize the debt.
My approach for my 4-year old is similar. I’ve already saved about half the cost of our state public university and once his account reaches the full cost of our public university, I’ll probably stop saving or cut way back. The account can compound over the next 14 years and so if the market is good, he’ll have a little extra to go to a better school, or maybe he’ll get scholarships for undergrad and have money left over in his 529 plan to help fund graduate school. I really like your approach of telling your kids how much you have saved so, if they want to go to graduate school, they can make an informed decision and choose a less expensive undergrad. My parents were in a better position than me and told me I could go anywhere I was accepted, and that was pretty motivating, too. At any rate, having a clear plan from the beginning and letting your kids in on it seems like the way to go.
I like the independence you give them in the decision making process and make them OWN it.
I have a question. Say you saved 90K in your 529 and if you child uses only 50K (25K/yr). How do you get the 40K out of 529? or you plan that they will use it later for higher ed?
Thanks
I’m still researching that and will write another post once I have an answer.
I believe I’m able to take out money even for scholarships they may earn.
I think I’m also able to take out money now for the college classes she’s taking while in high school.
So as long as the cost gets close to $90k at “retail”, I should be able to get it all out without penalty.
That will at least be the case for my daughter’s account.
For my son’s, I’m still working on that. Stay tuned.
You are able to take money out for college classes the child takes while in highschool. I’m doing that currently for my son.
How do you do it? What are the requirements in order to get that money out for AP classes they’ve earned credits to college?
Thanks for sharing the info!
ESI,
I am a few years away from having to deal with this but think that you have a good system in place. I’d recommend your children register on this website and look for small scholarships where there is less competition. Anything they win is basically money in their pocket so it’s really a worthwhile return on effort.
-Mike
http://www.fastweb.com/
Thanks for the link! I’ll pass that along to my kids.
Ah, so here’s the talk! Well, I guess the plan. Nice one.
Have you tried whipping your son to get cracking on the books? Remember to tell him dad is broke and you are 100% on your own after you graduate! But then… you already told them about the $90,000! That sounds like a FORTUNE to a young folk. I think I woulda told them they had $20,000, and then surprised them at the end if they did well and got a good job 🙂
Best thing you can make them do right now is work at McDonald’s for 6+ hour shifts on their feet and make them SUFFER dealing with grouchy customers. It WILL change their lives for the better!
Sam
Maybe I’ll bring my son to SF and have you talk some sense into him!!!
I think one of the reasons my daughter is driven is that she’s worked a retail job (20 hours a week or so) for the past year and a half. She certainly appreciates the value of a dollar.
Sounds very Similar to my plan. I have $100k in a 529 for each of 3 kids.
As far as getting the money out that is not used for college, of course try every way that you can that counts as a qualified withdrawal. But I’m satisfied that for non-qualified withdrawals, the 10% penalty and the income tax are both only for the earnings portion, and the income tax rate can usually be that of your child’s if you select it to be distributed directly to them.
Given savings for college tuition don’t drag on for as long as retirement, the portion on the savings that is actually earnings is generally not huge, usually much less that half of the account is earnings. And your kid are much more likely to be in something like todays 15% tax bracket that young, so you;re really only being hit with 10%+15%=25% of the <50% earnings portion of the money withdrawn. So basically your highest overall tax+penalty hit will be like 10% of the leftover money distributed. Not the worst thing in the world. But again, there are also a lot of ways around this so hit those first.
It’s true that it’s not a killer but the amount lost is not inconsequential either.
Let’s assume I have $100k left over (details here: https://esimoney.com/save-much-college/ ) with $65k from contributions and $35k from earnings.
On that $35k I’d pay $5,250 in taxes at 15% and $3,500 in the 10% penalty. That’s a total of $8,750.
As you say, it’s less than 50% of the earnings, but it’s also a decent used car. Do I really want to take that much of a hit?
I just came across this post and wanted some input on my plan. I’ve been thinking about this a long time. I want to support my children’s desire for higher education, but at the same time incentivize them to select a school & program that will provide a good return on their investment of time and money. My wife and I both feel that college years are very formative, where life-long friends and often spouses are found, so choosing a school is impactful.
Similar to you, I want to set a baseline amount that I would give them. I have 3 kids in a 5 year range, so felt that a fixed baseline amount would be unfair to the youngest. I live in PA, so decided that the baseline would be the cost of the state university the year they enter college (regardless of the college they go to). This way the baseline would be indexed by the tuition inflation. For example, this year Penn State tuition is about $35K, times 4 years, equals $140K. By the time the youngest enters college, this may be $160K. I also offered to pay 50% of the next $50K, and then provide a loan for the balance which they will need to pay back. Conversely, if they earn a scholarship or go to a less costly school, we will split the first $50K and then the balance is theirs.
While all this seems reasonable, it’s not uncommon for college to cost $60K+ per year, leaving the kids with up to $80K in debt. Is this fair? I don’t know. I sometimes feel I could maybe cover the whole nut, but then again, I’d hate to spend $200K for a degree that pays $35K a year. I hope that with this method they are properly incentivized.
I’d love to hear people thoughts on this plan.
My two cents is you can have whatever plan works for you. I think the keys are:
1. Setting a ceiling on what you’ll pay. It needs to be high enough, of course, to be reasonable. Ours equated to 2.5 years or so at a good (not great/high-priced) school at full tuition.
2. It needs to be shared with them well enough in advance that they can do something positive to impact it (i.e. take AP classes for college credit, go to community college, work on scholarships, etc.)
3. There has to be enough incentive for them to take action. Unfortunately “have less debt” doesn’t seem like a motivator these days. The chance to walk away from college with $30k in cash has been a big motivator for our daughter and she’s made some great choices to make that happen.
I think you’re saying you’d provide $60k or so, right? ($35k plus 50% of $50k) If so, the only suggestion I’d make is maybe letting them keep 100% of any scholarship money they get — should be a big incentive for them.
I actually meant 4 years x $35K = $140K, plus 50% of the next $50K.
Ok, well then, that seems like more than enough IMO.