Did a cash out refi for college funds, but now need some direction

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Fennec
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Did a cash out refi for college funds, but now need some direction

Post by Fennec »

Longtime lurker, first time poster here. I’ve visited occasionally over the years and have seen such helpful people here. I’m hoping to get some thoughts from others about how to approach my current situation.

I have a high school junior who will be applying to universities this fall, and I recently completed a cash out refi at 2% fixed 10 yr to help pay for college. She’s a high test scorer (based on PSAT cut score I expect NMSF; ACT and SAT were taken this past week so we’ll see about those but she did very well on them her freshman year) and a 4.0 UW GPA IB Diploma candidate, and is interested in STEM (ME, materials science, data science). State U is fine but not illustrious for engineering, and she definitely wants to go OOS. We only have to plan for one kid in college in case that makes a difference.

Playing around with various school’s net price calculators, it would appear we are full pay since 5.64% of assets exceeds COA. Income usually is around 150K but for 2020 it was 190K due to realized capital gains, so the 190K is what we’ll be using for our first FAFSA/CSS application.

I freed up about 150K in the refi with the hope that the market will do better than 2% over the course of 5-10 years to make it worth it. I realize that makes our countable assets higher, but since we appeared to be full pay based on assets prior to the refi, I felt that wouldn’t have much impact on any merit aid if there is any forthcoming. But I don’t know for sure about this.

I guess what I’m struggling with is how to treat the refi cash - treat it as its own bucket of money that needs to be kept in something “safe,” or absorb it into our greater financial picture, realizing that money is fungible? This is mostly a psychological/emotional question I guess, but I welcome any perspectives to make it more logical.

I’m thinking of parking the money in a dividend paying ETF, and using the dividends to make prepayments toward the principal. Does that seem reasonable? Then, as tuition comes due, I’ll sell enough to cover tuition, and then shunt it through the 529 for the state tax deduction. Due to gift limits, I guess I should put 30K into the 529 this year.

Currently, there’s about 20K in I bonds and 38K in a 529 that will for sure go toward college. There will be no loans (other than this refi) taken out to pay for school. Depending on the school, we’ll consider spending more if it is a dream school. Fortunately so far she has no dream school, but as we research schools more (and hope to visit them!) I assume there will be one that floats to the top of the list.

Thanks in advance for your thoughts.
bloom2708
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Re: Did a cash out refi for college funds, but now need some direction

Post by bloom2708 »

What happens if you put the $150k in an ETF and it drops to $75k?

Now you owe $150k and don't have the college money.

I'd keep 80% "safe" and 20% max in stocks index funds.

Things could really go sideways and with college you have a 5 year window. Not long enough to expect recovery.
KlangFool
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Re: Did a cash out refi for college funds, but now need some direction

Post by KlangFool »

OP,

1) Which state are you in? This is an important question. The chances of she is a NMSF is dependent on the state.

2) What is the asset allocation (AA) of your whole portfolio? Why do you need to invest this 150K separately? I do not see a reason why you need to do this? You can just invest this 150K as per your AA

A) You pay the college year by year. It is not one lump sum.

B) If it is 100% stock in your taxable account and the stock market drop 50% and it becomes 75K, so what?

i) You sell 75K of stock in your taxable account realize 75K of tax loss.

ii) You exchange 75K of the bond in your 401K to stock.

iii) Effectively, you are selling 75K of the bond.

3) If she is a NMSF and she gets a full-ride scholarship to a university, you would have to think long and hard whether it is worthwhile to pay 100K to 200K extra to go somewhere else. I just do not see how it is worthwhile. If she is very good, she can get a full-ride to a top university for her graduate degree. If she is not that good, why spend the money? The 100K to 200K could be better spend as the down payment to her first house.

KlangFool
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KlangFool
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Re: Did a cash out refi for college funds, but now need some direction

Post by KlangFool »

Fennec wrote: Tue Apr 20, 2021 12:30 pm
she definitely wants to go OOS.
Fennec,

I told my kids that I only pay for in-state public university. If they want to go OOS or spend more, they have to find the money to pay for the difference. And, I am not co-signing a student loan for them.

KlangFool
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Topic Author
Fennec
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Re: Did a cash out refi for college funds, but now need some direction

Post by Fennec »

Thank you both for taking the time to respond. Reading your replies did help clarify my own feelings further.
KlangFool wrote: Tue Apr 20, 2021 3:27 pm OP,

1) Which state are you in? This is an important question. The chances of she is a NMSF is dependent on the state.

2) What is the asset allocation (AA) of your whole portfolio? Why do you need to invest this 150K separately? I do not see a reason why you need to do this? You can just invest this 150K as per your AA

A) You pay the college year by year. It is not one lump sum.

B) If it is 100% stock in your taxable account and the stock market drop 50% and it becomes 75K, so what?

i) You sell 75K of stock in your taxable account realize 75K of tax loss.

ii) You exchange 75K of the bond in your 401K to stock.

iii) Effectively, you are selling 75K of the bond.

3) If she is a NMSF and she gets a full-ride scholarship to a university, you would have to think long and hard whether it is worthwhile to pay 100K to 200K extra to go somewhere else. I just do not see how it is worthwhile. If she is very good, she can get a full-ride to a top university for her graduate degree. If she is not that good, why spend the money? The 100K to 200K could be better spend as the down payment to her first house.

KlangFool
I'm not a good BH I don't actually know what our AA is right now. But it is a goal of mine to corral all our accounts into Quicken so that I can actually figure this out. Ultimately I'd love to whittle down our holdings into something like a three or four fund portfolio but it's going to take time because of the capital gains. But your point is taken that I should look at the 150K as part of our overall investing strategy.

Her PSAT cut score is good enough to be NMSF in any state, in any past year. This year? Who knows, but I think it's almost a sure thing. Having researched where NMS money would get her the most monetary aid has led me to conclude that those are not schools that would be a good fit for her. She's our only child, anything left over when we pass will go to her and she knows it, and she's surprisingly frugal with her money. By which I mean to say that she won't want to spend money for college unless she really thinks the school is worth it since she knows that's less money left later down the road.
bloom2708 wrote: Tue Apr 20, 2021 2:16 pm What happens if you put the $150k in an ETF and it drops to $75k?

Now you owe $150k and don't have the college money.

I'd keep 80% "safe" and 20% max in stocks index funds.

Things could really go sideways and with college you have a 5 year window. Not long enough to expect recovery.
Thanks for your input, it did help me sort out how to look at the 150K. We are fortunate in that we have enough other sources to pay for college and our mortgage. If these were our only college funds though, I think I would play it more conservatively as you suggest.
KlangFool
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Re: Did a cash out refi for college funds, but now need some direction

Post by KlangFool »

Fennec wrote: Tue Apr 20, 2021 5:31 pm
Her PSAT cut score is good enough to be NMSF in any state, in any past year. This year? Who knows, but I think it's almost a sure thing. Having researched where NMS money would get her the most monetary aid has led me to conclude that those are not schools that would be a good fit for her. She's our only child, anything left over when we pass will go to her and she knows it, and she's surprisingly frugal with her money. By which I mean to say that she won't want to spend money for college unless she really thinks the school is worth it since she knows that's less money left later down the road.
Fennec,

1) You are making 150K to 190K per year.

2) You have to do a cash out refinance to pay for the college education. This means that financially, you are not doing very well and you are probably "house poor". Aka, you have to borrow in order to pay for college education.

3) Someone with more annual savings could pay for the college education out of the annual savings and money in the taxable account.

4) Realistically, can you really afford it?

<< By which I mean to say that she won't want to spend money for college unless she really thinks the school is worth it since she knows that's less money left later down the road.>

5) Does she know that you have to borrow money in order to pay for college education?

6) Have you told her? If not, how would you know that she may not change her mind once she know this?

7) Have she ever work? If not, how does she really know how much it takes to earn and save 100K? 200K?

8) My daughter interned during high school. She worked through summer in high school too. She had about 30K of her own money. When it was between I pay for in-state public university and spending her own money on the difference for private or out-of-state, she choose in-state public.

9) I made about the same income as you. I paid for my kids' (2 kids) college education out of my annual savings and the taxable account. I did that while I was unemployed for more than 1 year.

10) Good luck to you on what ever you choose. But, please let your daughter know that you have to borrow in order to pay for the college education. Don't burden her with your decision without full disclosure. She might choose differently if she have the complete information.

KlangFool
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Topic Author
Fennec
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Re: Did a cash out refi for college funds, but now need some direction

Post by Fennec »

KlangFool wrote: Tue Apr 20, 2021 6:11 pm
Fennec wrote: Tue Apr 20, 2021 5:31 pm
Her PSAT cut score is good enough to be NMSF in any state, in any past year. This year? Who knows, but I think it's almost a sure thing. Having researched where NMS money would get her the most monetary aid has led me to conclude that those are not schools that would be a good fit for her. She's our only child, anything left over when we pass will go to her and she knows it, and she's surprisingly frugal with her money. By which I mean to say that she won't want to spend money for college unless she really thinks the school is worth it since she knows that's less money left later down the road.
Fennec,

2) You have to do a cash out refinance to pay for the college education. This means that financially, you are not doing very well and you are probably "house poor". Aka, you have to borrow in order to pay for college education.

<< By which I mean to say that she won't want to spend money for college unless she really thinks the school is worth it since she knows that's less money left later down the road.>

5) Does she know that you have to borrow money in order to pay for college education?

6) Have you told her? If not, how would you know that she may not change her mind once she know this?

7) Have she ever work? If not, how does she really know how much it takes to earn and save 100K? 200K?

8) My daughter interned during high school. She worked through summer in high school too. She had about 30K of her own money. When it was between I pay for in-state public university and spending her own money on the difference for private or out-of-state, she choose in-state public.

9) I made about the same income as you. I paid for my kids' (2 kids) college education out of my annual savings and the taxable account. I did that while I was unemployed for more than 1 year.

10) Good luck to you on what ever you choose. But, please let your daughter know that you have to borrow in order to pay for the college education. Don't burden her with your decision without full disclosure. She might choose differently if she have the complete information.

KlangFool
Oh, sorry, my apologies if it wasn't clear that we have money in taxable accounts to pay for college. I did say in the opening post that 5.64% of our assets more than covers annual COA which is why I think we'll be full pay. Even with the refi, we are still only 35% LTV and honestly could pay it off in full whenever we want. I didn't need to do a cash out, but thought it would be a good time with a 2% loan to take some equity out and with college on the horizon it seemed like a good enough reason. Perhaps that wasn't the best call on my part, which is part of why I'd like to earn more than 2% on that cash out money.

She has been working since she was 14, and does appreciate what it takes to earn money. I've started a Roth IRA for her and have introduced the concept of DCA, I've shown her how to do an online trade in her account, and we have talked about some basic personal finance info. She happens to work as a teller at a credit union so that also helps her money sense. She often has funny stories to share about her day at work.

I appreciate your concern, and feel it comes from a place of sincerity, and thank you for taking the time to offer advice.
Big Dog
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Re: Did a cash out refi for college funds, but now need some direction

Post by Big Dog »

are you in a state that provides a tax deduction for contributions to a 529? If so, I'd go that route.

As for colleges, not a particular fan of paying OOS fees for a public, but with her stats, she should be eligible for merit aid at some publics, but a lot of privates mostly lower down the food chain. OTOH, even a top school like USC offers a half-tuition discount to many NMSF's.

As for your investment, not sure I understand why you took out the refi cash. You already have at least seven figures in a taxable account (if your assets exceed 5.6% of...). Why not just spend it down as needed? Essentially, you just levered your investment portfolio by using an increased mortgage. Nothing wrong with that, but college expense is almost irrelevant to this transaction.
KlangFool
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Re: Did a cash out refi for college funds, but now need some direction

Post by KlangFool »

Fennec wrote: Tue Apr 20, 2021 7:39 pm
Oh, sorry, my apologies if it wasn't clear that we have money in taxable accounts to pay for college. I did say in the opening post that 5.64% of our assets more than covers annual COA which is why I think we'll be full pay.
Fennec,

This is the part that I disagreed.

A) Yes, you may not qualified for need-based scholarship.

B) But, if she is a MNSF, she should qualify for a fair amount of merit scholarship at some universities. And, they could be OOS too.

C) And, the difference between those that give her a full-ride scholarship and those who don't may not be big enough to justify paying the difference.

My co-worker's daughter is a NMSF. She had a full-ride scholarship to University of Virginia. The parent took out a student loan to send her to Northwestern University instead.

KlangFool
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leviathan
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Re: Did a cash out refi for college funds, but now need some direction

Post by leviathan »

Fennec wrote: Tue Apr 20, 2021 12:30 pm Due to gift limits, I guess I should put 30K into the 529 this year.
Just in case you don't know, you can put 150k (5 years' contribution) into 529 all at once (superfunding).
tribegiant
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Re: Did a cash out refi for college funds, but now need some direction

Post by tribegiant »

Probably a minor point but when filling out the FAFSA this October, you will use tax year 2019. That may help with aid. Also, don't disregard private colleges regarding aid. My daughter will be a freshman in September with identical stats as yours as well as income very similar to yours. We received 20k institutional aid as well as 20k in merit. Bottom line was about 4k less than state flagship!
ADower
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Re: Did a cash out refi for college funds, but now need some direction

Post by ADower »

KlangFool wrote: Tue Apr 20, 2021 3:30 pm
Fennec wrote: Tue Apr 20, 2021 12:30 pm
she definitely wants to go OOS.
Fennec,

I told my kids that I only pay for in-state public university. If they want to go OOS or spend more, they have to find the money to pay for the difference. And, I am not co-signing a student loan for them.

KlangFool
100% agree. In pretty much every state there is a "top tier" school.
Topic Author
Fennec
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Re: Did a cash out refi for college funds, but now need some direction

Post by Fennec »

Big Dog wrote: Tue Apr 20, 2021 7:47 pm are you in a state that provides a tax deduction for contributions to a 529? If so, I'd go that route.

As for colleges, not a particular fan of paying OOS fees for a public, but with her stats, she should be eligible for merit aid at some publics, but a lot of privates mostly lower down the food chain. OTOH, even a top school like USC offers a half-tuition discount to many NMSF's.

As for your investment, not sure I understand why you took out the refi cash. You already have at least seven figures in a taxable account (if your assets exceed 5.6% of...). Why not just spend it down as needed? Essentially, you just levered your investment portfolio by using an increased mortgage. Nothing wrong with that, but college expense is almost irrelevant to this transaction.
Thanks for your perspective. Yeah, I see your point. It wasn't necessary to do, but we're looking into creating a living trust and one thing we were advised is that it's cumbersome to refi if the home is already in a trust so I wanted to get a refi done first. And to get a 2% rate I needed to do a cash-out since our remaining balance wasn't high enough to get such a good rate, so I rationalized it by mentally telling myself the money would go to college "in lieu" of taking out fed or private loans. But you're totally right about me essentially levering our investment portfolio. I should just own that.

We do get a state tax deduction for 529 contributions, so I will for sure be directing money that way first before paying the school.
KlangFool wrote: Tue Apr 20, 2021 7:50 pm
Fennec wrote: Tue Apr 20, 2021 7:39 pm
Oh, sorry, my apologies if it wasn't clear that we have money in taxable accounts to pay for college. I did say in the opening post that 5.64% of our assets more than covers annual COA which is why I think we'll be full pay.
Fennec,

This is the part that I disagreed.

A) Yes, you may not qualified for need-based scholarship.

B) But, if she is a MNSF, she should qualify for a fair amount of merit scholarship at some universities. And, they could be OOS too.

C) And, the difference between those that give her a full-ride scholarship and those who don't may not be big enough to justify paying the difference.

My co-worker's daughter is a NMSF. She had a full-ride scholarship to University of Virginia. The parent took out a student loan to send her to Northwestern University instead.

KlangFool
Yeah, it's hard to plan well when so much is unknown. I can hope for scholarships but I can't plan on them.

Ouch on passing up a full-ride to UVA. Back in the day, I passed on a full-tuition scholarship to UChicago because I got a full-ride at State U. Financially the best move, but I've always wondered how my life would've been different. My life is good, don't get me wrong, but State U was my safety and not my goal school. That question has always stuck with me, and that probably colors my view on schools for my child. State U was fine, not great, but that was many years ago and it might be different now.
leviathan wrote: Tue Apr 20, 2021 8:01 pm
Fennec wrote: Tue Apr 20, 2021 12:30 pm Due to gift limits, I guess I should put 30K into the 529 this year.
Just in case you don't know, you can put 150k (5 years' contribution) into 529 all at once (superfunding).
Thanks, actually I did know that. I prefer having control over the money before it goes into the 529 at this point since I can only change allocation within the 529 once a year, and I have it set to moderate growth right now with college just a year away. I purposely didn't fund the 529 very much because I didn't like the penalties on withdrawals if I had leftover funds in there. Honestly, we have just one beneficiary (all nephews/nieces have already graduated college) and neither of us have any impetus to go back to school.
tribegiant wrote: Tue Apr 20, 2021 8:40 pm Probably a minor point but when filling out the FAFSA this October, you will use tax year 2019. That may help with aid. Also, don't disregard private colleges regarding aid. My daughter will be a freshman in September with identical stats as yours as well as income very similar to yours. We received 20k institutional aid as well as 20k in merit. Bottom line was about 4k less than state flagship!
Congrats, that's fantastic news about your daughter! Especially in this crazy year that scrambled everything up for incoming college freshman!

Our college counselor told me FAFSA would be based on 2020. Since she'll be in the entering class of 2022, it's the 2020 1040 that will be considered. I was confused since we'd be filling it out in Oct 2021, I wasn't sure if the two year mark would be 2019 or 2020, but it's based on the college entry year.
ADower wrote: Wed Apr 21, 2021 9:09 am
KlangFool wrote: Tue Apr 20, 2021 3:30 pm
Fennec wrote: Tue Apr 20, 2021 12:30 pm
she definitely wants to go OOS.
Fennec,

I told my kids that I only pay for in-state public university. If they want to go OOS or spend more, they have to find the money to pay for the difference. And, I am not co-signing a student loan for them.

KlangFool
100% agree. In pretty much every state there is a "top tier" school.
Yeah, I went to the "top tier" public which is the same one she would be going to, and it wasn't all that. It was free for me, but it wasn't a great fit. I'm in a different position in life than my parents were, and I want her to have the opportunities I didn't.
KlangFool
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Re: Did a cash out refi for college funds, but now need some direction

Post by KlangFool »

Fennec wrote: Wed Apr 21, 2021 11:44 am
Yeah, I went to the "top tier" public which is the same one she would be going to, and it wasn't all that. It was free for me, but it wasn't a great fit. I'm in a different position in life than my parents were, and I want her to have the opportunities I didn't.
Fennec,

And, it may or may not be helpful to her with this opportunity. It may limit her resourcefulness.

My niece is a NMSF. She won a full-ride scholarship to study International Business at Arizona State.

A) First year, she studied at Arizona State.

B) Second year, she studied as foreign exchange student at Spain

C) Third year, she studied as foreign exchange student at Paris, France

D) Forth year, she studied as foreign exchange student at Beijing, China

E) Fifth year, she went back to Arizona State to finish her degree.

The total cost of the college education is ZERO. She is fluent in 4 languages: English, Spanish, French, and Mandarin. She created her own way to study International Business.

KlangFool
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KlangFool
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Re: Did a cash out refi for college funds, but now need some direction

Post by KlangFool »

OP,

When you gives someone a fish, the person will eat the fish that is given. But, at the same time, you are taking away the opportunity for that person to look for their own fish and get a different fish than anyone else.

In a world, where a high school student in Mongolia can take free MIT lesson over the Internet and won a scholarship to study in MIT. And, many of top universities lessons are free and available to anyone with Internet access. What separate a resourceful and motivated person outside the USA versus someone that pays a lot to attend the same lesson in person?

I have no answer. I am just giving you something to think about.

KlangFool
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Topic Author
Fennec
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Re: Did a cash out refi for college funds, but now need some direction

Post by Fennec »

KlangFool wrote: Wed Apr 21, 2021 12:06 pm
Fennec wrote: Wed Apr 21, 2021 11:44 am
Yeah, I went to the "top tier" public which is the same one she would be going to, and it wasn't all that. It was free for me, but it wasn't a great fit. I'm in a different position in life than my parents were, and I want her to have the opportunities I didn't.
Fennec,

And, it may or may not be helpful to her with this opportunity. It may limit her resourcefulness.

My niece is a NMSF. She won a full-ride scholarship to study International Business at Arizona State.

A) First year, she studied at Arizona State.

B) Second year, she studied as foreign exchange student at Spain

C) Third year, she studied as foreign exchange student at Paris, France

D) Forth year, she studied as foreign exchange student at Beijing, China

E) Fifth year, she went back to Arizona State to finish her degree.

The total cost of the college education is ZERO. She is fluent in 4 languages: English, Spanish, French, and Mandarin. She created her own way to study International Business.

KlangFool
ASU is on our list as a matter of fact, mostly on the radar because of generous NMSF monies and their honors college. What an interesting approach your niece took, sounds like it worked out well for her.

My kid has already told me that our State U is the standard she'll be comparing other schools against, and that will include the costs of attending. She also is planning on applying for outside scholarships, so she plans to take on some of this herself, but the bottom line is we will support her in whichever school that seems to be the best fit for her. This thread and others about college on Bogleheads has solidified my thinking on that. As ever, thanks for the conversation and bringing up topics for consideration.
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