Paying for college help

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kazcaid
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Joined: Wed Apr 08, 2015 11:01 pm

Paying for college help

Post by kazcaid »

Hi Bogleheads,

I am looking for advice on the best way to pay for college for two children (one middle of second year and the other in the middle of first year at a state university). Up to this point, I have been paying out of pocket and one son was attending community college for free, but is not transferring. I am also not sure how to ask and phrase my questions so I apologize for the following explanation.

I was originally thinking of using a Roth account for savings (I don’t think we will make more in retirement) as opposed to the State of Oregon 529 Plan for a portion of the tuition and the rest out of pocket. Back when I setup the Roth account, the 529 plan allowed for a tax deduction up to $4,865 for joint filers. They have since changed to a $300 tax credit which I don’t believe is the same benefit as before the change. I was planning to transfer a portion out of the Roth savings and place into the 529 plan and then make up the rest out of pocket. I no longer follow that plan since the state is no longer giving the deduction.

My wife’s 403b fidelity advisor has said that according to our plan we have enough saved for our retirement so that’s why I was thinking paying out of pocket. We hope to retire within the next couple of years if we can with kids in college.

One thing I did not take into account is that if we stop contributing to our tax deferred plans ($~26K for each of us; max) out we will end up paying more in taxes. Our tax preparer says that we save about $10k in taxes by maxing our accounts. I don’t want to lose out on the tax savings. I have been thinking of other ways to pay for college and below are several scenarios. I am sure there are many more.

1. Federal Direct Unsubsidized Loan: $5500/per year (based on student aid offer) + Roth + out of pocket
2. Gift stock shares from investment club stock account to students and they pay for college
3. Use Roth until depleted to original contribution and take out loans (federal direct and private)
4. Home equity loan (house is paid off)
5. Take tax hit and pay out of pocket
6. Take a partial tax hit; pay out of pocket, cover remainder with Roth savings

If you need more information before commenting please let me know. I know I did not provide much financial or tuition information since I am trying to keep it sort of simple. Another question I have is how much tax savings and credits would my wife receive that will offset some of out of pocket costs. Our MGAI is below $160K, but that would change if we contribute less to our retirement accounts. Thanks for any input and advice.
clin341
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Re: Paying for college help

Post by clin341 »

kazcaid,

I'm sure there will be several who differ from my opinion but based on what you've laid out, I would look at a cash out refinance (instead of home equity) and the Federal Direct Unsubsidized loan.

My reasoning for cash-out refi is that the rates are currently low and with high(ish) inflation, this makes sense to me. I am assuming a home equity loan is not at a fixed rate. A refi to a fixed rate would be.

For the Federal Direct Unsubsidized loan, my thought is that I would want my child to have skin in the game and make sure he/she understand this liability is their responsibility. Also, at 3.73% fixed (currently), it does not seem like a bad rate.

Just my 2 cents,

Clin
Topic Author
kazcaid
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Re: Paying for college help

Post by kazcaid »

Thanks for the reply. I am not sure about the cash-out refi since we have paid off our loan. I assume you cant refi if you don't have a loan? We have talked to my son about having skin in the game especially if he doesn't put 100% effort into school. He picked the school since they offered him a spot on the football team. No scholarship at this point due to the number of covid super seniors. If he does well that may change in the future.
KlangFool
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Re: Paying for college help

Post by KlangFool »

OP,

One key item that you did not take account of is

AOTC -> American Opportunity Tax Credit

https://www.irs.gov/credits-deductions/individuals/aotc

Those tax credit may taken care of your additional taxes.

KlangFool
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ncbill
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Re: Paying for college help

Post by ncbill »

kazcaid wrote: Tue Jan 18, 2022 11:49 am Thanks for the reply. I am not sure about the cash-out refi since we have paid off our loan. I assume you cant refi if you don't have a loan? We have talked to my son about having skin in the game especially if he doesn't put 100% effort into school. He picked the school since they offered him a spot on the football team. No scholarship at this point due to the number of covid super seniors. If he does well that may change in the future.
Don't forget the military options to pay for undergrad if football doesn't work out.

E.g., ROTC scholarships, or in many states joining the National Guard gets tuition waived at pubic, in-state schools.

My kids all covered at least their undergrad tuition (one went to a service academy) that way.
livesoft
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Re: Paying for college help

Post by livesoft »

Are these adults working to pay for some of their own college expenses?
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Big Dog
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Re: Paying for college help

Post by Big Dog »

Not a fan of using retirement savings. How much is the COA for next year?

Walk-ons, even Preferred walk-ons, typically have to move up the depth chart to earn a scholly. (So even when the Super Seniors finally graduate, he'll still need to earn some PT.)
dak
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Re: Paying for college help

Post by dak »

livesoft wrote: Tue Jan 18, 2022 5:44 pm Are these adults working to pay for some of their own college expenses?
How is this a relevant? OP appears to have expressed a desire to fund his children's higher education.

OP - You appear to desire to minimize the overall cost to you of funding these education expenses. Given that they are already in school, any 529 plan activity would be of limited or no value since your state has devalued the income tax deduction that you previously enjoyed for your contributions.

Based on your comment that a $26K 401k contribution results in a $10K tax savings, we can infer that you are a high income earner. That is a great place to be, but does limit the AOC credit that Klangfool mentioned above as that is subject to a phaseout based on AGI.

Given the facts that you presented, I would get the loans, maintain as much of the tax deferred contributions as possible, and then assist the kids by paying off the loans as they come due. This lets you maintain some of the tax savings of the 401K contributions.

The one thing I would not do is spring on the kids that they are now responsible for student loans. The time for that discussion was before the application process began or in the event of some great change in family circumstances. (I know you did not suggest that, but I am well aware of similar situations that have occurred in our circle of acquaintances and it does not end well, hence my heave handed admonition :-)
livesoft
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Re: Paying for college help

Post by livesoft »

dak wrote: Tue Jan 18, 2022 7:04 pm
livesoft wrote: Tue Jan 18, 2022 5:44 pm Are these adults working to pay for some of their own college expenses?
How is this a relevant? OP appears to have expressed a desire to fund his children's higher education.
The OP could borrow money from their kids to pay for their college education.
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Topic Author
kazcaid
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Re: Paying for college help

Post by kazcaid »

livesoft wrote: Tue Jan 18, 2022 5:44 pm Are these adults working to pay for some of their own college expenses?
Yes, they have been working when they are able too, but I have been having them save their money. Trying to get them thinking of investing for their retirement at an early age. Tried to get one son to invest in a roth, but he went ahead with ETFs, AMC and now into crypto. Both are very responsible with money so I at least have made some progress in that arena. If needed, we would make them pay but at this point too many kids are discouraged with the cost of school and scared of the potential of going into debt. They hear about the horror stories of kids graduating with large student loans. I probably don't have the most orthodox approach, but so far so good.
Topic Author
kazcaid
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Re: Paying for college help

Post by kazcaid »

KlangFool wrote: Tue Jan 18, 2022 11:55 am OP,

One key item that you did not take account of is

AOTC -> American Opportunity Tax Credit

https://www.irs.gov/credits-deductions/individuals/aotc

Those tax credit may taken care of your additional taxes.

KlangFool
I will take any deductions or credits are that available, but I am not really sure what we qualify for until we do our taxes.
Last edited by kazcaid on Tue Jan 18, 2022 8:05 pm, edited 1 time in total.
Topic Author
kazcaid
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Joined: Wed Apr 08, 2015 11:01 pm

Re: Paying for college help

Post by kazcaid »

Big Dog wrote: Tue Jan 18, 2022 5:55 pm Not a fan of using retirement savings. How much is the COA for next year?

Walk-ons, even Preferred walk-ons, typically have to move up the depth chart to earn a scholly. (So even when the Super Seniors finally graduate, he'll still need to earn some PT.)
The roth is being used as a savings account so don't really consider it for retirement, but it would be nice to have. Yeah, not counting on scholarships, but would be nice. Son (21yr) COA ~$14,421 (tuition and fees) and Son (18yr) COA ~$11,100 (tuition and fees).
Jack FFR1846
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Re: Paying for college help

Post by Jack FFR1846 »

The Staffords go up to $6500 and then $7500, so the kids can take out more as they're progressing.

You can put money into a 529....see that it is there....then take it out again. I did that with my son as our state was even worse with only $100 in state credit for $2000 for a MFJ couple contribution. You don't have to leave it there for years.
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Topic Author
kazcaid
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Joined: Wed Apr 08, 2015 11:01 pm

Re: Paying for college help

Post by kazcaid »

dak wrote: Tue Jan 18, 2022 7:04 pm
livesoft wrote: Tue Jan 18, 2022 5:44 pm Are these adults working to pay for some of their own college expenses?
How is this a relevant? OP appears to have expressed a desire to fund his children's higher education.

OP - You appear to desire to minimize the overall cost to you of funding these education expenses. Given that they are already in school, any 529 plan activity would be of limited or no value since your state has devalued the income tax deduction that you previously enjoyed for your contributions.

Based on your comment that a $26K 401k contribution results in a $10K tax savings, we can infer that you are a high income earner. That is a great place to be, but does limit the AOC credit that Klangfool mentioned above as that is subject to a phaseout based on AGI.

Given the facts that you presented, I would get the loans, maintain as much of the tax deferred contributions as possible, and then assist the kids by paying off the loans as they come due. This lets you maintain some of the tax savings of the 401K contributions.

The one thing I would not do is spring on the kids that they are now responsible for student loans. The time for that discussion was before the application process began or in the event of some great change in family circumstances. (I know you did not suggest that, but I am well aware of similar situations that have occurred in our circle of acquaintances and it does not end well, hence my heave handed admonition :-)
I think we can get the AOC credit since both my wife and I max out our plans (403b for her and 457b for him). Yes, I agree with paying them off as they come due unless they are willing to take on the payments. One seemed shocked when he found out he may have loans. They are scared of them and don't want to end up like a lot of kids graduating being thousands in debt. I told at one of them that even though they would have a loan they would eventually at some point get paid back like when we die. Both are good kids and don't want to burden us, but at the same time they don't want to go into debt.
Topic Author
kazcaid
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Joined: Wed Apr 08, 2015 11:01 pm

Re: Paying for college help

Post by kazcaid »

livesoft wrote: Tue Jan 18, 2022 7:09 pm
dak wrote: Tue Jan 18, 2022 7:04 pm
livesoft wrote: Tue Jan 18, 2022 5:44 pm Are these adults working to pay for some of their own college expenses?
How is this a relevant? OP appears to have expressed a desire to fund his children's higher education.
The OP could borrow money from their kids to pay for their college education.
Lol, this subject even came up with one son since his AMC stock was up (he bought early). I was like, hey can I borrow from you to pay for you and your brothers tuition. He did not reply, he is waiting for the short squeeze so maybe after that happens if it does.
inbox788
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Re: Paying for college help

Post by inbox788 »

kazcaid wrote: Mon Jan 17, 2022 10:32 pm I was originally thinking of using a Roth account for savings (I don’t think we will make more in retirement) as opposed to the State of Oregon 529 Plan for a portion of the tuition and the rest out of pocket. Back when I setup the Roth account, the 529 plan allowed for a tax deduction up to $4,865 for joint filers. They have since changed to a $300 tax credit which I don’t believe is the same benefit as before the change. I was planning to transfer a portion out of the Roth savings and place into the 529 plan and then make up the rest out of pocket. I no longer follow that plan since the state is no longer giving the deduction.
Depending on your income, it might be worth capturing the $300 credit. (If $3000 gets you 10% return for what requirements?)

The Oregon 529 Plan – A Tax Change Makes a “Meh” Plan Less Attractive
https://springwaterwealth.com/the-orego ... ttractive/
1. Federal Direct Unsubsidized Loan: $5500/per year (based on student aid offer) + Roth + out of pocket
Unsubsidized loans accrue 3.73% interest. Not great, but might be tolerable depending on alternatives. No collateral. Any fees or points?
2. Gift stock shares from investment club stock account to students and they pay for college
What is this? A taxable account? Tax rate? Seems like a decent choice.
5. Take tax hit and pay out of pocket
What is the tax hit? Are you talking income or taxable investments? If the latter, do you have any lower return investments where the gains aren't all that much to tap into?
kazcaid wrote: Tue Jan 18, 2022 7:48 pmThe roth is being used as a savings account so don't really consider it for retirement, but it would be nice to have.
Don't touch the Roth account unless you absolutely have to. I'd look into taxable investments first?
Big Dog
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Re: Paying for college help

Post by Big Dog »

Personally, I'd use current cash flow, have the kid max out student loan, and consider a Parent Plus loan for the rest. Spending down a Roth is not something that I would get behind. The Parent Plus loans have lousy rates, so the alternative is to refi your house, adn take out some equity.
KlangFool
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Re: Paying for college help

Post by KlangFool »

kazcaid wrote: Tue Jan 18, 2022 7:39 pm
KlangFool wrote: Tue Jan 18, 2022 11:55 am OP,

One key item that you did not take account of is

AOTC -> American Opportunity Tax Credit

https://www.irs.gov/credits-deductions/individuals/aotc

Those tax credit may taken care of your additional taxes.

KlangFool
I will take any deductions or credits are that available, but I am not really sure what we qualify for until we do our taxes.
kazcaid,

<< What are the income limits for AOTC?

To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).>>
https://www.irs.gov/credits-deductions/individuals/aotc

KlangFool
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celia
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Re: Paying for college help

Post by celia »

kazcaid wrote: Mon Jan 17, 2022 10:32 pm My wife’s 403b fidelity advisor has said that according to our plan we have enough saved for our retirement so that’s why I was thinking paying out of pocket. We hope to retire within the next couple of years if we can with kids in college.
If you already have a lot in tax-deferred (employer plans or tIRAs), you could decrease your contributions and pay for college that way.

Don't touch your Roths. Those are the most valuable dollars you have! They also have the ability to create future tax-free growth.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
kazcaid
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Re: Paying for college help

Post by kazcaid »

celia wrote: Tue Jan 18, 2022 11:19 pm
The reason why it's hard to decrease contributions is that our tax bill will go up. Currently, we are roughly saving over $10,000 in taxes per year. The original intent of the Roth was for college and my understanding is that if we plan to withdraw less from our retirement (lower tax bracket) than we currently make than the Roth is not as important. Seems like our current tax savings can pay for a lot of interest if we take out loans for the short term.
Topic Author
kazcaid
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Re: Paying for college help

Post by kazcaid »

inbox788 wrote: Tue Jan 18, 2022 8:41 pm
kazcaid wrote: Mon Jan 17, 2022 10:32 pm I was originally thinking of using a Roth account for savings (I don’t think we will make more in retirement) as opposed to the State of Oregon 529 Plan for a portion of the tuition and the rest out of pocket. Back when I setup the Roth account, the 529 plan allowed for a tax deduction up to $4,865 for joint filers. They have since changed to a $300 tax credit which I don’t believe is the same benefit as before the change. I was planning to transfer a portion out of the Roth savings and place into the 529 plan and then make up the rest out of pocket. I no longer follow that plan since the state is no longer giving the deduction.
Depending on your income, it might be worth capturing the $300 credit. (If $3000 gets you 10% return for what requirements?)

The Oregon 529 Plan – A Tax Change Makes a “Meh” Plan Less Attractive
https://springwaterwealth.com/the-orego ... ive/[quote]
Yeah, we probably should capture the $300 per child. We can funnel what ever we pay for tuition into a 529 account and then pull it right back out. Right now we are paying about $3000 per month which covers all costs including dorms. Since the college is letting use a credit card for payments, we opened (for Wife) a Chase Sapphire Preferred card to get the signup 90,000 points and now a racking up additional points using my Chase Sapphire Reserve Card for monthly payments. We pay the card off each month so no payments. We both like to travel so we can at least get something back from tuition payments. When other child transfers to University from free Community College then we can do that as much and we will need money from the other mentioned sources.
1. Federal Direct Unsubsidized Loan: $5500/per year (based on student aid offer) + Roth + out of pocket
Unsubsidized loans accrue 3.73% interest. Not great, but might be tolerable depending on alternatives. No collateral. Any fees or points?

Ok, thanks!
2. Gift stock shares from investment club stock account to students and they pay for college
What is this? A taxable account? Tax rate? Seems like a decent choice.
Yes, we have two options one from common stock drip account and the other from the investment club stock account. Not sure which one is better. Here is info on the basics. https://www.nerdwallet.com/article/inve ... ing-stocks
5. Take tax hit and pay out of pocket
What is the tax hit? Are you talking income or taxable investments? If the latter, do you have any lower return investments where the gains aren't all that much to tap into?
The less we contribute to our tax deferred savings accounts (403b and 457b) the more we pay in taxes.
kazcaid wrote: Tue Jan 18, 2022 7:48 pmThe roth is being used as a savings account so don't really consider it for retirement, but it would be nice to have.
Don't touch the Roth account unless you absolutely have to. I'd look into taxable investments first?
We would only be pulling the contributions. We set up the Roth account in lieu of the 529 account in case our kids decided against college. My understanding it is not needed as much if we plan to make less in retirement than we are making now. Am I correct? https://www.investopedia.com/articles/p ... th-ira.asp
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celia
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Re: Paying for college help

Post by celia »

kazcaid wrote: Thu Jan 20, 2022 12:19 am
celia wrote: Tue Jan 18, 2022 11:19 pm
The reason why it's hard to decrease contributions is that our tax bill will go up. Currently, we are roughly saving over $10,000 in taxes per year.
You are NOT saving taxes. You are just DEFERRING them until later when you withdraw or convert.

But you WILL be saving taxes if your marginal tax bracket during the withdrawal or Roth conversion year is less than this year’s marginal tax rate. But this is not likely for those who are super-savers and max out several tax-deferred accounts. The more they tax-defer, the larger the account balances are and the larger future RMDs are.

I am just cautioning you about having higher taxes later on. Note that today’s historically low tax brackets won’t be around forever. Right now, they expire in 2025.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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