Saving for college as an adult

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Topic Author
eml
Posts: 7
Joined: Tue Jun 15, 2021 1:42 am
Location: california

Saving for college as an adult

Post by eml »

Hi, new posting to the forums, though I've been lurking for a while. Really have benefitted from the great advice here and thankful to the community :)

I'm in the fairly unique situation of having taken time away from my undergraduate education to work a full-time job in the IT industry for the last few years. I still plan to finish my degree (in computer science/engineering, from a top US university) as a full-time student in the next 3-5 years, and am trying to figure out the best place to put my savings for it, both in terms of AA and tax-advantaged accounts.

Paid off my small federal student loan and I've been saving cash over the past few years with the intention of using it for school, but only now have thought of doing more than sitting with it in a savings account. Some more details:

Age: 23
State: CA
Marginal federal tax bracket: 35%
Marginal state tax bracket: 10.3%
Estimated cost of education remaining: ~$220k (yay tuition inflation!)
Current cash savings earmarked for investment (minus emergency fund): ~$350k
401(k) and Roth IRA maxed to IRS contribution limits
Taxable account: 90% US equities, 10% international equities

A few options I'm considering:

- Opening a 529 plan in my name and contributing the full estimated cost of my education to it. Would probably keep most of it in an intermediate-term bond index fund, perhaps a small amount in US equities.
- Contributing to the 529 plan my parents opened for me when I was little. I'm told there are differences in how assets are assessed for the purposes of student aid calculations and expected contributions depending on who owns the account, even if I'm the beneficiary.
- Keeping the full cost of education in a savings account, similar what I'm doing today.
- Investing the full cost of education in a taxable account (since I'm already maxed on Roth IRA), which I don't love since I don't really have the risk tolerance to put a significant portion of my college savings into equities on this time horizon, and bonds are tax-inefficient.

Everything above and beyond what I'd put in a tax-advantaged account or hold in a savings account I'd plan on investing in my taxable account.

What do you think is the best option here, given my goals and time horizon? Are there obvious options I'm missing that I should consider instead?

Thanks so much for your advice and thoughts here!
exodusNH
Posts: 10347
Joined: Wed Jan 06, 2021 7:21 pm

Re: Saving for college as an adult

Post by exodusNH »

eml wrote: Tue Jun 22, 2021 9:14 am Hi, new posting to the forums, though I've been lurking for a while. Really have benefitted from the great advice here and thankful to the community :)

I'm in the fairly unique situation of having taken time away from my undergraduate education to work a full-time job in the IT industry for the last few years. I still plan to finish my degree (in computer science/engineering, from a top US university) as a full-time student in the next 3-5 years, and am trying to figure out the best place to put my savings for it, both in terms of AA and tax-advantaged accounts.

Paid off my small federal student loan and I've been saving cash over the past few years with the intention of using it for school, but only now have thought of doing more than sitting with it in a savings account. Some more details:

Age: 23
State: CA
Marginal federal tax bracket: 35%
Marginal state tax bracket: 10.3%
Estimated cost of education remaining: ~$220k (yay tuition inflation!)
Current cash savings earmarked for investment (minus emergency fund): ~$350k
401(k) and Roth IRA maxed to IRS contribution limits
Taxable account: 90% US equities, 10% international equities

A few options I'm considering:

- Opening a 529 plan in my name and contributing the full estimated cost of my education to it. Would probably keep most of it in an intermediate-term bond index fund, perhaps a small amount in US equities.
- Contributing to the 529 plan my parents opened for me when I was little. I'm told there are differences in how assets are assessed for the purposes of student aid calculations and expected contributions depending on who owns the account, even if I'm the beneficiary.
- Keeping the full cost of education in a savings account, similar what I'm doing today.
- Investing the full cost of education in a taxable account (since I'm already maxed on Roth IRA), which I don't love since I don't really have the risk tolerance to put a significant portion of my college savings into equities on this time horizon, and bonds are tax-inefficient.

Everything above and beyond what I'd put in a tax-advantaged account or hold in a savings account I'd plan on investing in my taxable account.

What do you think is the best option here, given my goals and time horizon? Are there obvious options I'm missing that I should consider instead?

Thanks so much for your advice and thoughts here!
The college you get your degree from doesn't really matter all that much in the scheme of things, especially since you've already had work experience.

What about taking some of the freshman and sophomore classes at a community college? You don't get a better calculus education at $50,000/yr vs a $1200 class. Once you get into labs and projects, then you can make an argument that "top university" will have better options.
tashnewbie
Posts: 4284
Joined: Thu Apr 23, 2020 12:44 pm

Re: Saving for college as an adult

Post by tashnewbie »

You’re doing extremely well financially without a college degree. Why the desire or need to go back now? Do you think you need it to continue advancing in your career?

How many years will it take to get the degree?
livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Re: Saving for college as an adult

Post by livesoft »

I doubt you will get any financial aid from the usual sources for going back to college mostly because of your savings.

If your income is low enough while you are in college, then you should be able to take advantage of the tax credits described in IRS Publication 970 including the AOTC and the LLC which are better deal than a 529 plan for tax savings, BUT they are limited to something like $4,000 of your qualified higher education expenses (QHEE) which could be tuition, so maybe you should plan to not use a 529 plan for 100% of your college expenses. Otherwise, a 529 plan is not a bad way to go, but may not have the tax savings that you are thinking.

As for AA, I really do not think it matters that much as you will not have time to make big gains nor will you have time to make big losses. I realize many people will be aghast at that statement, but I like risk. If you invest 100% in equities and have losses, I do not think it is going to stop you from paying for college.
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Colorado14
Posts: 1792
Joined: Thu Apr 07, 2011 4:58 pm
Location: Colorado

Re: Saving for college as an adult

Post by Colorado14 »

Does your employer provide tuition assistance? I would start there and have the employer pay for your classes. It may take several years for you to complete the degree; you're young so time is on your side. Also consider if certification(s) rather than a degree would be more valuable. Good luck!
Topic Author
eml
Posts: 7
Joined: Tue Jun 15, 2021 1:42 am
Location: california

Re: Saving for college as an adult

Post by eml »

exodusNH wrote: Tue Jun 22, 2021 10:40 am The college you get your degree from doesn't really matter all that much in the scheme of things, especially since you've already had work experience.

What about taking some of the freshman and sophomore classes at a community college? You don't get a better calculus education at $50,000/yr vs a $1200 class. Once you get into labs and projects, then you can make an argument that "top university" will have better options.
Good question, and really good advice! Definitely considered that, especially when deciding where to go to school. I'm already to the point in my education where I'm taking specialized classes (even as a freshman you have the flexibility to choose classes that are directly relevant to your major/areas you want to explore). Totally agree that Calc 101 is similar most places, but an ML research opportunity or robotics lab might not be. I've been fortunate enough to get exposure to those kinds of things even early on and would like to keep expanding my sphere of knowledge outside things I've directly worked with.
Topic Author
eml
Posts: 7
Joined: Tue Jun 15, 2021 1:42 am
Location: california

Re: Saving for college as an adult

Post by eml »

tashnewbie wrote: Tue Jun 22, 2021 11:13 am You’re doing extremely well financially without a college degree. Why the desire or need to go back now? Do you think you need it to continue advancing in your career?

How many years will it take to get the degree?
Good question and thanks! I consider myself incredibly fortunate to have the opportunities I've had so far—in no small part due to dumb luck life happens to throw one's way from time to time :)

As to motivation, it's not necessarily about the piece of paper. My current opportunity came to me in large part thanks to people from school, and I'm hoping the experience will help me build my network even more and give me time to explore potential career directions that might also be fulfilling while I'm still young.

I have two and a half years left.
Topic Author
eml
Posts: 7
Joined: Tue Jun 15, 2021 1:42 am
Location: california

Re: Saving for college as an adult

Post by eml »

livesoft wrote: Tue Jun 22, 2021 11:35 am I doubt you will get any financial aid from the usual sources for going back to college mostly because of your savings.

If your income is low enough while you are in college, then you should be able to take advantage of the tax credits described in IRS Publication 970 including the AOTC and the LLC which are better deal than a 529 plan for tax savings, BUT they are limited to something like $4,000 of your qualified higher education expenses (QHEE) which could be tuition, so maybe you should plan to not use a 529 plan for 100% of your college expenses. Otherwise, a 529 plan is not a bad way to go, but may not have the tax savings that you are thinking.

As for AA, I really do not think it matters that much as you will not have time to make big gains nor will you have time to make big losses. I realize many people will be aghast at that statement, but I like risk. If you invest 100% in equities and have losses, I do not think it is going to stop you from paying for college.
Thanks for the really helpful insight! I'll look into those tax credits, since I probably won't be making any income during those years.

Before your comment, I didn't fully appreciate the tax savings being minimal on this horizon, but you're probably right that I likely won't have substantial cap gains (or losses). The additional flexibility might be a point in favor of a taxable. I imagine the greater risk here would be to have overfunded a 529 and then having to pay the penalty on non-qualified distributions?

Thinking more about it, a full bond AA is probably too conservative. Maybe 60/40 is better. As a buffer if there's a year or two of loss, I have excess funds that I haven't been earmarking for education in a taxable account that I could dip into to pay the bills.
Colorado13 wrote: Tue Jun 22, 2021 12:29 pm Does your employer provide tuition assistance? I would start there and have the employer pay for your classes. It may take several years for you to complete the degree; you're young so time is on your side. Also consider if certification(s) rather than a degree would be more valuable. Good luck!
I don't think they do. Not sure about grad school, continuing education, or certs. If they do, I might look into it as a way to invest in my skills while I work anyway, even if it's not progress towards a degree... I think self-investment is still worth something :)
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Saving for college as an adult

Post by MattB »

eml wrote: Tue Jun 22, 2021 10:26 pm Thinking more about it, a full bond AA is probably too conservative. Maybe 60/40 is better. As a buffer if there's a year or two of loss, I have excess funds that I haven't been earmarking for education in a taxable account that I could dip into to pay the bills.
Yeah. You're in a weird spot where your time horizon is too short to be all in with equities but bonds aren't returning anything. Might be best just to bite the bullet and get school done once you're able to pay for it.
HereToLearn
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Joined: Sat Mar 17, 2018 5:53 pm

Re: Saving for college as an adult

Post by HereToLearn »

I would hesitate to contribute to the 529 plan your parents opened years ago in case you end up overfunding it and needing to withdraw funds beyond the cost of college. Your recent contributions will be mingled with your parents' old contributions for an averaged cost basis, and you will have to pay taxes + a 10% penalty on the earnings. I don't know enough about financial aid to know if there would be any advantage to a parent owned 529 vs student owned. If parent owned offers an advantage, then have one of your parents open a new 529 plan.

Since you do not plan to return to school for three to five years, you will still be paying for school five to seven years from now. How about funding a 529 with the money you feel comfortable investing in equities and leaving the remainder in bonds in your taxable account? If equities continue to increase, you will realize tax-free gains in the 529. Keep in mind that you are only allowed two investment changes in the 529 each calendar year.

Definitely claim the AOTC as it provides a $2500 federal tax credit for $4000 education spending. Only $1000 of the AOTC is a refundable tax credit, so you would need to have $1500 in federal tax liability in order to be able to take full advantage of AOTC.

I noticed your comment that you will not be earning money during your college years. Not even summer internships? Those tech positions can easily pay $25K+/summer and most likely higher with your experience. You may find yourself able to take advantage of the zero percent capital gains space during these lower income years, assuming you have capital gains you can realize from your current working years.

Good for you for returning to complete your degree and kudos on your success to date.
Wash.Invest
Posts: 703
Joined: Sat Jun 13, 2009 1:25 am

Re: Saving for college as an adult

Post by Wash.Invest »

Colorado13 wrote: Tue Jun 22, 2021 12:29 pm Does your employer provide tuition assistance? I would start there and have the employer pay for your classes. It may take several years for you to complete the degree; you're young so time is on your side. Also consider if certification(s) rather than a degree would be more valuable. Good luck!
Propose this to employer (if they do not already have a plan in place for EDU Assistance), many do (including Walmart, McD... so I hope an IT employer sees the benefit). My employer paid (reimbursed) me for (5) degrees. Many high performers got 'Fellowships' to Stanford, MIT, and Cornell. (paid wages + school and housing + daily stipend ... entire family accompanied student for 2+ yrs. )

For savings / asset allocation.... At your age, I would keep full invested in growth equities and get a low interest student loan (minimal amount) Pay it off, or pay it down LATER.

As suggested... find a cheaper university. (I'm partial to hiring GREAT very solid engineers (and educators) from Uof WY, ~$3500/yr tuition) They have a very strong work ethic and are well educated and quite responsible. (Many are farm / ranch kids so have been doing responsible and dangerous work for 10 yrs BEFORE college!)

USA college is going to be very trite / juvenile after you have been in the workspace for several yrs. I would look overseas for a FREE college !! (I took several international job assignments and that really helped my resume and pay. An international U could be a very engaging experience. I hired STEM from international schools and in many courses they were may times more knowledgeable and certainly had a far better skillset of applying their knowledge to the work than most USA college grads.
International college

https://www.valuecolleges.com/internati ... education/
https://www.collegechoice.net/popular-i ... -students/
https://www.goabroad.com/articles/degre ... ree-abroad
https://www.bestvalueschools.com/rankin ... -students/
https://www.mastersportal.com/articles/ ... grees.html
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cchrissyy
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Location: SF bay area

Re: Saving for college as an adult

Post by cchrissyy »

You are doing very well already!

I am not sure it will help you to finish the degree but if you truly think so, and if your employer will not pay for it, I suggest that in a couple years you find a new employer who will! That way you don't have to pull from your savings.
60-20-20 us-intl-bond
Topic Author
eml
Posts: 7
Joined: Tue Jun 15, 2021 1:42 am
Location: california

Re: Saving for college as an adult

Post by eml »

MattB wrote: Tue Jun 22, 2021 11:01 pm
eml wrote: Tue Jun 22, 2021 10:26 pm Thinking more about it, a full bond AA is probably too conservative. Maybe 60/40 is better. As a buffer if there's a year or two of loss, I have excess funds that I haven't been earmarking for education in a taxable account that I could dip into to pay the bills.
Yeah. You're in a weird spot where your time horizon is too short to be all in with equities but bonds aren't returning anything. Might be best just to bite the bullet and get school done once you're able to pay for it.
Heh, I guess awkwardness comes a bit with the territory. On the one hand, bond yields being higher would certainly be useful for this use case, but I recognize that for most longer-term investment scenarios, equities are the way to go.
HereToLearn wrote: Tue Jun 22, 2021 11:42 pm I would hesitate to contribute to the 529 plan your parents opened years ago in case you end up overfunding it and needing to withdraw funds beyond the cost of college. Your recent contributions will be mingled with your parents' old contributions for an averaged cost basis, and you will have to pay taxes + a 10% penalty on the earnings. I don't know enough about financial aid to know if there would be any advantage to a parent owned 529 vs student owned. If parent owned offers an advantage, then have one of your parents open a new 529 plan.
That's a really good thing I didn't think about. Given that my chances of getting free student aid are fairly low anyways with my savings (and, frankly, I think it's better for those resources to go to folks who need them), it's probably not worth stressing out over. The only student aid I'm really angling for is low-interest student loans.
HereToLearn wrote: Tue Jun 22, 2021 11:42 pm Since you do not plan to return to school for three to five years, you will still be paying for school five to seven years from now. How about funding a 529 with the money you feel comfortable investing in equities and leaving the remainder in bonds in your taxable account? If equities continue to increase, you will realize tax-free gains in the 529. Keep in mind that you are only allowed two investment changes in the 529 each calendar year.
Interesting strategy. The rule of thumb I have in my head from reading a little about AA is to avoid putting bonds in taxable, is there something about my situation that changes the usual calculus?
HereToLearn wrote: Tue Jun 22, 2021 11:42 pm I noticed your comment that you will not be earning money during your college years. Not even summer internships? Those tech positions can easily pay $25K+/summer and most likely higher with your experience. You may find yourself able to take advantage of the zero percent capital gains space during these lower income years, assuming you have capital gains you can realize from your current working years.
I feel quite silly for forgetting about that! I'd likely do internships in industry or perhaps research. So I'd likely have enough income to take advantage of nonrefundable credits.
Topic Author
eml
Posts: 7
Joined: Tue Jun 15, 2021 1:42 am
Location: california

Re: Saving for college as an adult

Post by eml »

StealthRabbit wrote: Wed Jun 23, 2021 2:12 am
Colorado13 wrote: Tue Jun 22, 2021 12:29 pm Does your employer provide tuition assistance? I would start there and have the employer pay for your classes. It may take several years for you to complete the degree; you're young so time is on your side. Also consider if certification(s) rather than a degree would be more valuable. Good luck!
Propose this to employer (if they do not already have a plan in place for EDU Assistance), many do (including Walmart, McD... so I hope an IT employer sees the benefit). My employer paid (reimbursed) me for (5) degrees. Many high performers got 'Fellowships' to Stanford, MIT, and Cornell. (paid wages + school and housing + daily stipend ... entire family accompanied student for 2+ yrs. )

For savings / asset allocation.... At your age, I would keep full invested in growth equities and get a low interest student loan (minimal amount) Pay it off, or pay it down LATER.
It's funny you mention this, I just filled out our benefits survey and there were questions about a hypothetical student loan repayment assistance benefit, which might be a point in favor of this strategy. Curious: is there a major conceptual difference between doing this and holding those equities on margin? It feels like I'd be taking on a debt liability and betting that my equity returns would outpace interest. Just want to understand the reasoning a little more, since these things are hard to wrap one's brain around :)

StealthRabbit wrote: Wed Jun 23, 2021 2:12 am USA college is going to be very trite / juvenile after you have been in the workspace for several yrs. I would look overseas for a FREE college !! (I took several international job assignments and that really helped my resume and pay. An international U could be a very engaging experience. I hired STEM from international schools and in many courses they were may times more knowledgeable and certainly had a far better skillset of applying their knowledge to the work than most USA college grads.
That is something I worry about a little bit, though not in terms of the rigor of the material (I still use my university's free online courses a lot to learn and am pretty convinced I'd still get a lot of value out of an in-person education). More just being at a different stage in life than my peers, which will be an adjustment.

With respect to going international, totally agree with you that it's a great thing as both a career builder and life experience. A really nice benefit of my school is that they're quite generous about paying you to participate in international research and study programs, and I've already taken advantage of it once to go abroad for a semester... one of the best decisions I've ever made!
cchrissyy wrote: Wed Jun 23, 2021 2:35 am You are doing very well already!

I am not sure it will help you to finish the degree but if you truly think so, and if your employer will not pay for it, I suggest that in a couple years you find a new employer who will! That way you don't have to pull from your savings.
.

Thanks for the kind words :) I haven't explored this as much as I should (since I've had the perhaps misguided notion that a lot of these benefits are for covering distance-learning masters and things like that). Definitely thinking about places that have student loan assistance, that could be huge if I were able to take out low-cost student loans and have an employer cover a portion of the payments.
HereToLearn
Posts: 1537
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Re: Saving for college as an adult

Post by HereToLearn »

eml wrote: Wed Jun 23, 2021 10:44 am
MattB wrote: Tue Jun 22, 2021 11:01 pm
eml wrote: Tue Jun 22, 2021 10:26 pm Thinking more about it, a full bond AA is probably too conservative. Maybe 60/40 is better. As a buffer if there's a year or two of loss, I have excess funds that I haven't been earmarking for education in a taxable account that I could dip into to pay the bills.
Yeah. You're in a weird spot where your time horizon is too short to be all in with equities but bonds aren't returning anything. Might be best just to bite the bullet and get school done once you're able to pay for it.
Heh, I guess awkwardness comes a bit with the territory. On the one hand, bond yields being higher would certainly be useful for this use case, but I recognize that for most longer-term investment scenarios, equities are the way to go.
HereToLearn wrote: Tue Jun 22, 2021 11:42 pm I would hesitate to contribute to the 529 plan your parents opened years ago in case you end up overfunding it and needing to withdraw funds beyond the cost of college. Your recent contributions will be mingled with your parents' old contributions for an averaged cost basis, and you will have to pay taxes + a 10% penalty on the earnings. I don't know enough about financial aid to know if there would be any advantage to a parent owned 529 vs student owned. If parent owned offers an advantage, then have one of your parents open a new 529 plan.
That's a really good thing I didn't think about. Given that my chances of getting free student aid are fairly low anyways with my savings (and, frankly, I think it's better for those resources to go to folks who need them), it's probably not worth stressing out over. The only student aid I'm really angling for is low-interest student loans.
HereToLearn wrote: Tue Jun 22, 2021 11:42 pm Since you do not plan to return to school for three to five years, you will still be paying for school five to seven years from now. How about funding a 529 with the money you feel comfortable investing in equities and leaving the remainder in bonds in your taxable account? If equities continue to increase, you will realize tax-free gains in the 529. Keep in mind that you are only allowed two investment changes in the 529 each calendar year.
Interesting strategy. The rule of thumb I have in my head from reading a little about AA is to avoid putting bonds in taxable, is there something about my situation that changes the usual calculus?
HereToLearn wrote: Tue Jun 22, 2021 11:42 pm I noticed your comment that you will not be earning money during your college years. Not even summer internships? Those tech positions can easily pay $25K+/summer and most likely higher with your experience. You may find yourself able to take advantage of the zero percent capital gains space during these lower income years, assuming you have capital gains you can realize from your current working years.
I feel quite silly for forgetting about that! I'd likely do internships in industry or perhaps research. So I'd likely have enough income to take advantage of nonrefundable credits.
I should really not be offering any investment advice because I am woefully uninformed, so hopefully someone with more wisdom will jump in to correct me if I am wrong. (I still cannot figure out quoting even though my son has tried to demonstrate.)

My thinking was that if you plan to pay for college yourself using your own funds, and if you would have some of those funds invested in equities during the five to seven year from now time period when you will be paying for college, would it not make sense to take advantage of the tax-free growth inside the 529 plan? If you stash the money in a 529 today and do not use it to pay for college until 2027, you will not pay tax on any of the gains on that money. If you hold bond funds in the 529, you will be 'wasting' the tax-free earnings potential. I am a big fan of 529 plans, but in your situation, I would not fund a 529 now unless you were certain that you will be returning to college and that you will be paying for it.

AFAIK, you cannot hold specific positions in a 529, but instead would choose an equity fund offered by the 529 administrator. Repeating what I wrote above that you are only allowed to change your investments within a 529 twice per calendar year. Once you reach the disbursement stage, you can elect to liquidate the equity funds to pay for the current semester, thereby reducing your exposure without using one of your two changes per calendar year.

You can also use a 529 to repay up to $10K in student loans (recent provision of SECURE Act). I know that others have suggested loans, but please look at the terms for subsidized and unsubsidized student loans. The subsidized loan amounts are capped at very low levels, and I believe both the rates and repayment terms may differ for unsubsidized. Also, you may fall into a gray area as a non-dependent undergrad.

And yes, I think your federal tax liability from your summer earnings will be high enough to take advantage of the AOTC credits. Here's hoping that your summer employers offer you the opportunity to contribute to their Roth 401K so that you can continue to build your accounts while attending college.
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