Contribution to 401k vs taking loan for kids college

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wackerdr
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Contribution to 401k vs taking loan for kids college

Post by wackerdr »

50 year old, divorced. , about 650k in IRA, 50k in 401k, 300k in brokerage, 250k in real estate and home equity. Mortgage about 200k left, 40 year loan at 2.75% interest. These numbers are my networth after divorce.

Salary is 220k, pretty stable job, and see no issues holding through recession and beyond. Company does 100% matching on 4% of salary.I may also get 10k - 15k annual bonus ( pre-tax)

Tax: single + 1 dependent ( for tax purposes). Not sure if I qualify for head of household , and if it would mean reduced marginal tax rate.

Situation: I have 2 teens with the elder one starting college this fall, and second one 4 years later. So 8 years of college beginning this year. My elder one’s college is at 55k per year, including room and board. For younger one, I assume to be in the same ball park, after factoring inflation.


Dilemma: I can contribute 30k per year on 401k. If I do this, I will need to take educational loans. Given the interest rates, and my tax rate, it better to forego contributions to 401k, or to do just enough to get the matching? ; or is it better to contribute fully to 401k and take loan to fund college?


For the purpose of this discussion, assume that I want to fund the college, and not to have my kids take loans. I am also not expecting my ex to contribute


Thank you for your replies.
huck22
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Re: Contribution to 401k vs taking loan for kids college

Post by huck22 »

If you’re insistent on paying for college, cut your 401k contribution to 4% to receive the full company match and then use the rest to cover college. Not my personal recommendation, but do what you have to do.
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arcticpineapplecorp.
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Re: Contribution to 401k vs taking loan for kids college

Post by arcticpineapplecorp. »

1. you might be able to be head of household depending upon which of you will claim and who is supporting the kids more than 50% of the time and if they have any income above the limit (around $4000 a year or so). You can look into more of the guidelines here: https://turbotax.intuit.com/tax-tips/fa ... /L4Nx6DYu9

2. it could be better to have the kids take the loans than you. Here's why. Depending upon their income their loans could be made more affordable through Repaye if they qualify and if they qualify for PSLF they could have the unpaid portion untaxable after 10 years. If they don't qualify you could always help them out paying the loans later anyway even if it's their obligation. They'd get to defer the loans until 6 months after graduation. If you take the loans now I'd assume you'll be paying right away?

3. If the school costs $55k per year they'll come out of school with $220k of school loan debt.
Clark Howard's rule for affordable education is to make sure their first year's salary upon graduation is equal or less than their total school loan debt. In other words, they shouldn't be taking out $220k of debt unless they're planning on making $220k the first year they graduate. Are they? Because if they are, they'll be able to pay off the school loan in the standard 10 year repayment plan. If not, they won't. It's a rule of thumb, that works. If you plan to make $80k after graduation, you really shouldn't graduate with more than $80k of debt.
Again: Never borrow any private student loan money! If a degree exceeds what you can borrow under the federal student loan program, you should either pick a cheaper school or work your way through school.

source: https://clark.com/loans/how-do-student-loans-work/
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ChrisRx
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Re: Contribution to 401k vs taking loan for kids college

Post by ChrisRx »

40 year loan on mortgage? Is that a typo?
HereToLearn
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Re: Contribution to 401k vs taking loan for kids college

Post by HereToLearn »

arcticpineapplecorp. wrote: Wed May 31, 2023 9:44 pm 1. you might be able to be head of household depending upon which of you will claim and who is supporting the kids more than 50% of the time and if they have any income above the limit (around $4000 a year or so). You can look into more of the guidelines here: https://turbotax.intuit.com/tax-tips/fa ... /L4Nx6DYu9

Can you explain the $4K earnings limit? I claimed HOH while my children were in college, and there were summers that each of them earned more than $4K. I filed using TT for myself and my children, and always checked that they were being claimed as a dependent on someone else's taxes.

Thanks!
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dogagility
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Re: Contribution to 401k vs taking loan for kids college

Post by dogagility »

wackerdr wrote: Wed May 31, 2023 9:33 pm Thank you for your replies.
Rather than considering 401k vs college loan, I'd focus on your living expenses. With an income of about $230K, what are your living expenses? Can you not live on 80-90K after taxes, retirement contributions and funding college?
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arcticpineapplecorp.
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Re: Contribution to 401k vs taking loan for kids college

Post by arcticpineapplecorp. »

HereToLearn wrote: Wed May 31, 2023 10:17 pm
arcticpineapplecorp. wrote: Wed May 31, 2023 9:44 pm 1. you might be able to be head of household depending upon which of you will claim and who is supporting the kids more than 50% of the time and if they have any income above the limit (around $4000 a year or so). You can look into more of the guidelines here: https://turbotax.intuit.com/tax-tips/fa ... /L4Nx6DYu9

Can you explain the $4K earnings limit? I claimed HOH while my children were in college, and there were summers that each of them earned more than $4K. I filed using TT for myself and my children, and always checked that they were being claimed as a dependent on someone else's taxes.

Thanks!
sorry, it's more about claiming a dependent (or qualifying relative) than the head of household deduction (and may not apply to qualifying child, just qualifying relative) but you have to have a dependent to claim head of household. i can't recall all the details off the top of my head, but you can't claim head of household because you have a dependent even if you meet some of the other rules (qualifying relative) even if you provide > 50% of their support and they lived with you for more than 6 months of the year, etc if...
Your relative can't have a gross income of more than $4,400 in 2022 and be claimed by you as a dependent. Do you financially support them? You must provide more than half of your relative's total support each year.
maybe the OP's ok with his situation, read more: https://turbotax.intuit.com/tax-tips/fa ... /L4Nx6DYu9
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leeks
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Re: Contribution to 401k vs taking loan for kids college

Post by leeks »

Expect the college kid to contribute some from summer and part time employment.
toddthebod
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Re: Contribution to 401k vs taking loan for kids college

Post by toddthebod »

You can borrow for college. You can't borrow for retirement.
Admiral
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Re: Contribution to 401k vs taking loan for kids college

Post by Admiral »

I'm surprised nobody has discussed your portfolio, which I read as $1m at age 50 (not counting primary home).

That is a solid nest egg. I guess my answer would be based on a few questions:

How long do you plan to work? What is your expected retirement budget? What is your expected SS payment (and pension, if applicable)? Is the divorced spouse contributing to education costs?

It may very well be that you will be fine with a modest continued contribution (say enough to get the match but not above that) if you plan to work for 17 more years. If you plan to stop work in five years, then you likely would not be fine on your current budget.

You'd really have to pencil out things to know whether cutting back makes more sense than taking college loans. When we hit 7 figures as our oldest began college, we also cut back from the >$40k we were saving per year. But, my spouse has a large pension that will be available in 6 years, so we were comfortable doing that.

In general the advice to borrow for education, when needed, is solid. People get huge loans for expensive new cars all the time; education is an appreciating asset. It may be the case that you (or the child) borrows now, and then later you can help them with the loan payments if necessary, as you would have a larger pile of money.
the_wiki
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Re: Contribution to 401k vs taking loan for kids college

Post by the_wiki »

The real problem is the $55k per year college cost, not how to pay for it.
Admiral
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Re: Contribution to 401k vs taking loan for kids college

Post by Admiral »

the_wiki wrote: Thu Jun 01, 2023 9:29 am The real problem is the $55k per year college cost, not how to pay for it.
The OP did not ask for advice on solving that problem.
queenofthemadhouse
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Re: Contribution to 401k vs taking loan for kids college

Post by queenofthemadhouse »

I would have the student utilize federal loans up to the $5.5k limit. If you want to assume responsibility for them unofficially, you could, but the terms are better than Parent PLUS loans.

I would also push down hard on the AGI if you can get under $160k (or even $180k) and qualify for part of the AOTC. If that’s impossible, it might make sense for ex spouse to claim child if they have income but are under the $160k limit. The tax credit could be their contribution (or part of it).
Chuck
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Re: Contribution to 401k vs taking loan for kids college

Post by Chuck »

I'll ignore the question about whether the $55k college is a good idea.

What do the next 8 years look like? You need to spend $55k per year. Your $300k in brokerage assets is worth at least $37.5k per year, ignoring growth. The tax savings on your $30k 401k contribution is at least $7200. Your kids should each be able to cough up the remaining $10,300. (They should definitely take the $5500 federal loan, which are $6500 and $7500 junior and senior years.) Meanwhile, you'll have contributed $310,000 to your 401k. You'll also have had nearly $1M in income post-tax ($130k per year), all of which you don't need to spend. Honestly, you should be able to cashflow the 55k. Your cost of living must be wild. Either way, you should be fine.
Admiral
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Re: Contribution to 401k vs taking loan for kids college

Post by Admiral »

Chuck wrote: Thu Jun 01, 2023 9:56 am I'll ignore the question about whether the $55k college is a good idea.

What do the next 8 years look like? You need to spend $55k per year. Your $300k in brokerage assets is worth at least $37.5k per year, ignoring growth. The tax savings on your $30k 401k contribution is at least $7200. Your kids should each be able to cough up the remaining $10,300. (They should definitely take the $5500 federal loan, which are $6500 and $7500 junior and senior years.) Meanwhile, you'll have contributed $310,000 to your 401k. You'll also have had nearly $1M in income post-tax ($130k per year), all of which you don't need to spend. Honestly, you should be able to cashflow the 55k. Your cost of living must be wild. Either way, you should be fine.
I agree it's reasonable to spend some of the $300k in taxable (though of course there may be a cap gains tax cost to do so) and I would definitely do that; how much depends on what's earmarked for retirement. If it were me, I would backdoor Roth up to the max per year, and then spend some of it down to fund college. Few people need $300k in a taxable account, it's just needless taxation.

We are cashflowing both private school and college at the same time; it is very expensive but I graduated college with no debt and preferred that my kids do so as well. My feeling is their career choices should not be limited by the amount of money they have to repay when they are just starting out. I know and respect that others feel differently. My kids do both work, however, to earn spending money.

OP: it would be helpful if you could post even a basic breakdown of your monthly net earnings and your expenses.
Pdxnative
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Re: Contribution to 401k vs taking loan for kids college

Post by Pdxnative »

As others suggest, I’d spend down the taxable to supplement what I could cash flow. Likely you’d be borrowing a fairly small amount after that. Probably makes sense to maintain 401k contributions even if it means borrowing some. Remember that reducing 401k contributions by 30k doesn’t net you 30k toward college. After cash flow + taxable I’m not clear you’d need to make that choice though.

Is there a chance of merit or in-state tuition for kid #2? If so I wouldn’t necessarily assume 55k costs for eight years. (And I’m not saying that cost is too high; our kids went to expensive schools and it was worth every penny and then some).

But it’d be helpful to know how much you can cash flow each year.
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TomatoTomahto
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Re: Contribution to 401k vs taking loan for kids college

Post by TomatoTomahto »

toddthebod wrote: Thu Jun 01, 2023 8:36 am You can borrow for college. You can't borrow for retirement.
This oft-repeated mantra has one problem: you can usually delay retirement but college is generally on a timetable.
I get the FI part but not the RE part of FIRE.
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ruralavalon
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Re: Contribution to 401k vs taking loan for kids college

Post by ruralavalon »

wackerdr wrote: Wed May 31, 2023 9:33 pm 50 year old, divorced. , about 650k in IRA, 50k in 401k, 300k in brokerage, 250k in real estate and home equity. Mortgage about 200k left, 40 year loan at 2.75% interest. These numbers are my networth after divorce.

Salary is 220k, pretty stable job, and see no issues holding through recession and beyond. Company does 100% matching on 4% of salary.I may also get 10k - 15k annual bonus ( pre-tax)

Tax: single + 1 dependent ( for tax purposes). Not sure if I qualify for head of household , and if it would mean reduced marginal tax rate.

Situation: I have 2 teens with the elder one starting college this fall, and second one 4 years later. So 8 years of college beginning this year. My elder one’s college is at 55k per year, including room and board. For younger one, I assume to be in the same ball park, after factoring inflation.


Dilemma: I can contribute 30k per year on 401k. If I do this, I will need to take educational loans. Given the interest rates, and my tax rate, it better to forego contributions to 401k, or to do just enough to get the matching? ; or is it better to contribute fully to 401k and take loan to fund college?


For the purpose of this discussion, assume that I want to fund the college, and not to have my kids take loans. I am also not expecting my ex to contribute


Thank you for your replies.
You could consider withdrawing from the "300k in brokerage", rather than either reducing 401k contributions or taking out loans.

Have you estimated how much your annual retirement spending will be? About how long until expected retirement?

We were able able to cash flow the college expenses for our four children (3 at flagship state universities,1 at a private university).
Last edited by ruralavalon on Thu Jun 01, 2023 10:47 am, edited 1 time in total.
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delamer
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Re: Contribution to 401k vs taking loan for kids college

Post by delamer »

Admiral wrote: Thu Jun 01, 2023 9:14 am I'm surprised nobody has discussed your portfolio, which I read as $1m at age 50 (not counting primary home).

That is a solid nest egg. I guess my answer would be based on a few questions:

How long do you plan to work? What is your expected retirement budget? What is your expected SS payment (and pension, if applicable)? Is the divorced spouse contributing to education costs?

It may very well be that you will be fine with a modest continued contribution (say enough to get the match but not above that) if you plan to work for 17 more years. If you plan to stop work in five years, then you likely would not be fine on your current budget.

You'd really have to pencil out things to know whether cutting back makes more sense than taking college loans. When we hit 7 figures as our oldest began college, we also cut back from the >$40k we were saving per year. But, my spouse has a large pension that will be available in 6 years, so we were comfortable doing that.

In general the advice to borrow for education, when needed, is solid. People get huge loans for expensive new cars all the time; education is an appreciating asset. It may be the case that you (or the child) borrows now, and then later you can help them with the loan payments if necessary, as you would have a larger pile of money.
I agree with this holistic approach. And it isn’t clear what current funds you are considering using to pay for college in addition to cash flow, so consider these suggestions in that context.

You have enough in your taxable account to cover almost 6 years of college at the prices you are quoting.

That should be on the table.

As should cutting your other expenses; do a deep dive into your expenses, see what you are spending now and how that may change over the next several years. Here’s a simple one — if you are paying $10,000/year in groceries for two people and one of them is going to be gone in a year, you’ve just saved $5,000.

Remember, of course, that you’ll need to budget to make any loan payments, which will add to your expenses.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
toddthebod
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Re: Contribution to 401k vs taking loan for kids college

Post by toddthebod »

TomatoTomahto wrote: Thu Jun 01, 2023 10:41 am
toddthebod wrote: Thu Jun 01, 2023 8:36 am You can borrow for college. You can't borrow for retirement.
This oft-repeated mantra has one problem: you can usually delay retirement but college is generally on a timetable.
Counterpoint: You can write a check to pay off your kids' loans whenever you feel like it, but your unused tax-advantaged space disappears every December 31st.
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TomatoTomahto
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Re: Contribution to 401k vs taking loan for kids college

Post by TomatoTomahto »

toddthebod wrote: Thu Jun 01, 2023 11:08 am
TomatoTomahto wrote: Thu Jun 01, 2023 10:41 am
toddthebod wrote: Thu Jun 01, 2023 8:36 am You can borrow for college. You can't borrow for retirement.
This oft-repeated mantra has one problem: you can usually delay retirement but college is generally on a timetable.
Counterpoint: You can write a check to pay off your kids' loans whenever you feel like it, but your unused tax-advantaged space disappears every December 31st.
That’s a good point. Disclosure: we had intended to back off on retirement savings if necessary, but had the good fortune to be able to cash flow tuition due to increased income without having to change our tax deferred savings. So, in real life, I don’t know what we would have done.
I get the FI part but not the RE part of FIRE.
Topic Author
wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

Thank you all for your replies and suggestions.

I am thinking of the following broad strategy and prioritization

1. Contribute maximum allowed 30k to 401k
2. Let kids take federal loans up to the allowed limit ( subsidized or unsubsidized ) . I see this covers 20k overall for each kid.

3. Get kids to take Sallie Mae or similar loans for another 35k - 40k so that each will have loan of about 1 year of college

4. (A) Maximize monthly savings and pay most of remaining tuition from cash flow. I need to Look at my spend closely. As few members suggested, based on my salary , I should be able to do cash flow AND fund the college.

(B)My expenses have been about 8.5k - 9k a month including mortgage and property taxes.

(C) After contributing full 401k, full HSA, I am typically left with 15k - 20k a year. There may be expense creep or leakage , which I should look at closely.

I will post a separate thread asking for guidance on spend management.



5. If the above is not sufficient, sell brokerage as needed, to fund the shortfall.

Any suggestions welcome .
delamer
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Re: Contribution to 401k vs taking loan for kids college

Post by delamer »

wackerdr wrote: Thu Jun 01, 2023 12:43 pm Thank you all for your replies and suggestions.

I am thinking of the following broad strategy and prioritization

1. Contribute maximum allowed 30k to 401k
2. Let kids take federal loans up to the allowed limit ( subsidized or unsubsidized ) . I see this covers 20k overall for each kid.

3. Get kids to take Sallie Mae or similar loans for another 35k - 40k so that each will have loan of about 1 year of college

4. (A) Maximize monthly savings and pay most of remaining tuition from cash flow. I need to Look at my spend closely. As few members suggested, based on my salary , I should be able to do cash flow AND fund the college.

(B)My expenses have been about 8.5k - 9k a month including mortgage and property taxes.

(C) After contributing full 401k, full HSA, I am typically left with 15k - 20k a year. There may be expense creep or leakage , which I should look at closely. May be

I will post a separate thread asking for guidance on spend management.



5. If the above is not sufficient, sell brokerage as needed, to fund the shortfall.
Your kids can’t take loans, other than the Stafford in your #2, without a co-signer. So if you go with #3, you’ll be on the hook for payments.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Topic Author
wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

Admiral wrote: Thu Jun 01, 2023 10:25 am
Chuck wrote: Thu Jun 01, 2023 9:56 am I'll ignore the question about whether the $55k college is a good idea.

What do the next 8 years look like? You need to spend $55k per year. Your $300k in brokerage assets is worth at least $37.5k per year, ignoring growth. The tax savings on your $30k 401k contribution is at least $7200. Your kids should each be able to cough up the remaining $10,300. (They should definitely take the $5500 federal loan, which are $6500 and $7500 junior and senior years.) Meanwhile, you'll have contributed $310,000 to your 401k. You'll also have had nearly $1M in income post-tax ($130k per year), all of which you don't need to spend. Honestly, you should be able to cashflow the 55k. Your cost of living must be wild. Either way, you should be fine.
I agree it's reasonable to spend some of the $300k in taxable (though of course there may be a cap gains tax cost to do so) and I would definitely do that; how much depends on what's earmarked for retirement. If it were me, I would backdoor Roth up to the max per year, and then spend some of it down to fund college. Few people need $300k in a taxable account, it's just needless taxation.

We are cashflowing both private school and college at the same time; it is very expensive but I graduated college with no debt and preferred that my kids do so as well. My feeling is their career choices should not be limited by the amount of money they have to repay when they are just starting out. I know and respect that others feel differently. My kids do both work, however, to earn spending money.

OP: it would be helpful if you could post even a basic breakdown of your monthly net earnings and your expenses.
Thanks for your suggestion. Will post my spend and hopefully there is some fat that I can trim
Topic Author
wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

delamer wrote: Thu Jun 01, 2023 12:51 pm
wackerdr wrote: Thu Jun 01, 2023 12:43 pm Thank you all for your replies and suggestions.

I am thinking of the following broad strategy and prioritization

1. Contribute maximum allowed 30k to 401k
2. Let kids take federal loans up to the allowed limit ( subsidized or unsubsidized ) . I see this covers 20k overall for each kid.

3. Get kids to take Sallie Mae or similar loans for another 35k - 40k so that each will have loan of about 1 year of college

4. (A) Maximize monthly savings and pay most of remaining tuition from cash flow. I need to Look at my spend closely. As few members suggested, based on my salary , I should be able to do cash flow AND fund the college.

(B)My expenses have been about 8.5k - 9k a month including mortgage and property taxes.

(C) After contributing full 401k, full HSA, I am typically left with 15k - 20k a year. There may be expense creep or leakage , which I should look at closely. May be

I will post a separate thread asking for guidance on spend management.



5. If the above is not sufficient, sell brokerage as needed, to fund the shortfall.
Your kids can’t take loans, other than the Stafford in your #2, without a co-signer. So if you go with #3, you’ll be on the hook for payments.
I need to be the cosigner, but they will be the primary borrower, and I am on the hook only if they default. Correct?
delamer
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Re: Contribution to 401k vs taking loan for kids college

Post by delamer »

wackerdr wrote: Thu Jun 01, 2023 12:57 pm
delamer wrote: Thu Jun 01, 2023 12:51 pm
wackerdr wrote: Thu Jun 01, 2023 12:43 pm Thank you all for your replies and suggestions.

I am thinking of the following broad strategy and prioritization

1. Contribute maximum allowed 30k to 401k
2. Let kids take federal loans up to the allowed limit ( subsidized or unsubsidized ) . I see this covers 20k overall for each kid.

3. Get kids to take Sallie Mae or similar loans for another 35k - 40k so that each will have loan of about 1 year of college

4. (A) Maximize monthly savings and pay most of remaining tuition from cash flow. I need to Look at my spend closely. As few members suggested, based on my salary , I should be able to do cash flow AND fund the college.

(B)My expenses have been about 8.5k - 9k a month including mortgage and property taxes.

(C) After contributing full 401k, full HSA, I am typically left with 15k - 20k a year. There may be expense creep or leakage , which I should look at closely. May be

I will post a separate thread asking for guidance on spend management.



5. If the above is not sufficient, sell brokerage as needed, to fund the shortfall.
Your kids can’t take loans, other than the Stafford in your #2, without a co-signer. So if you go with #3, you’ll be on the hook for payments.
I need to be the cosigner, but they will be the primary borrower, and I am on the hook only if they default. Correct?
I’m not sure of the legalities as to who is primary. But, yes, you’d be on the hook and your credit could be impacted if — unbeknownst to you — they miss payments. I can’t remember if it was on this forum or elsewhere, but I read about a case where the child had stopped making payments, was afraid to tell the co-signer parent, and the parent’s credit was trashed due to multiple missed payments.

This was a private loan.

Plus, of course, the loans could affect your ability to borrow even if the payment record is pristine.

The government’s Parents Plus loans are the best place to start in terms of understanding your options. It’s my understanding these are usually superior to private loans. But they are the parent’s responsibility to repay.
Last edited by delamer on Thu Jun 01, 2023 1:33 pm, edited 2 times in total.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Pdxnative
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Re: Contribution to 401k vs taking loan for kids college

Post by Pdxnative »

Are you now saying you expect your kids to pay off the loans? That is quite a bit different than what I thought you were suggesting.

Why are you reticent to spend from the brokerage account before taking loans?
queenofthemadhouse
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Re: Contribution to 401k vs taking loan for kids college

Post by queenofthemadhouse »

Not for Parent Plus loans. They would have to get private loans.
stoptothink
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Re: Contribution to 401k vs taking loan for kids college

Post by stoptothink »

TomatoTomahto wrote: Thu Jun 01, 2023 10:41 am
toddthebod wrote: Thu Jun 01, 2023 8:36 am You can borrow for college. You can't borrow for retirement.
This oft-repeated mantra has one problem: you can usually delay retirement but college is generally on a timetable.
How so? Walk around any college campus and you'll see plenty of undergrads not in the 17-22 age range and the reasons are many (late bloomers, went to work directly out of high school, employer paying for a degree, military, etc.). But, many of the people I know who are retired did not have the choice of doing it on their timeline (ie. they became physically incapable of continuing to work, were let-go and unable to find something else, etc.). Would seem to be that the college timeline is generally more flexible than the retirement one, unless you are wealthy.
Last edited by stoptothink on Thu Jun 01, 2023 1:33 pm, edited 1 time in total.
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wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

Pdxnative wrote: Thu Jun 01, 2023 1:13 pm Are you now saying you expect your kids to pay off the loans? That is quite a bit different than what I thought you were suggesting.

Why are you reticent to spend from the brokerage account before taking loans?
I mean it’s not a set in stone principle to me to pay their college 100%. I would love to if I can. Given my financial position, I think I can pay those loans off, even if it’s in their name for a while .

Spending from brokerage account would mean capital gains. If I don’t contribute to 401k, that’s taxable in current year. If I take loan, there is interest. I am trying to figure out if all 3 options are roughly equal, or if one is better than the other.
Chuck
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Re: Contribution to 401k vs taking loan for kids college

Post by Chuck »

The advantage of the loan is that you can take the capital gains on the brokerage assets when its convenient. You can also borrow from the brokerage.
KlangFool
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Re: Contribution to 401k vs taking loan for kids college

Post by KlangFool »

OP,

1) What is your annual savings/investment? At your gross income of 200+K per year, you can afford to pay for the college education and contribute 30K to 401K.

2) You have 300K in the taxable account. There is no reason why you cannot spend down the taxable account and contribute to the 401K. Why would you choose to pay more taxes by stop contributing to the 401K?

3) If you need to take loan for the kid's college education, you cannot afford to pay for the college education.

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TomatoTomahto
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Re: Contribution to 401k vs taking loan for kids college

Post by TomatoTomahto »

stoptothink wrote: Thu Jun 01, 2023 1:25 pm
TomatoTomahto wrote: Thu Jun 01, 2023 10:41 am
toddthebod wrote: Thu Jun 01, 2023 8:36 am You can borrow for college. You can't borrow for retirement.
This oft-repeated mantra has one problem: you can usually delay retirement but college is generally on a timetable.
How so? Walk around any college campus and you'll see plenty of undergrads not in the 17-22 age range and the reasons are many (late bloomers, went to work directly out of high school, employer paying for a degree, military, etc.). But, many of the people I know who are retired did not have the choice of doing it on their timeline (ie. they became physically incapable of continuing to work, were let-go and unable to find something else, etc.). Would seem to be that the college timeline is generally more flexible than the retirement one, unless you are wealthy.
One of mine was what is euphemistically called a “non-traditional” student. He did the community college thing while working as an EMT and finally became a full time student. His reasons were his own, and were not related to our ability to fund things. As far as I’m concerned, it was a significant (self-imposed) handicap.

But, all’s well that ends well.
I get the FI part but not the RE part of FIRE.
Pdxnative
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Re: Contribution to 401k vs taking loan for kids college

Post by Pdxnative »

wackerdr wrote: Thu Jun 01, 2023 1:32 pm
Pdxnative wrote: Thu Jun 01, 2023 1:13 pm Are you now saying you expect your kids to pay off the loans? That is quite a bit different than what I thought you were suggesting.

Why are you reticent to spend from the brokerage account before taking loans?
I mean it’s not a set in stone principle to me to pay their college 100%. I would love to if I can. Given my financial position, I think I can pay those loans off, even if it’s in their name for a while .

Spending from brokerage account would mean capital gains. If I don’t contribute to 401k, that’s taxable in current year. If I take loan, there is interest. I am trying to figure out if all 3 options are roughly equal, or if one is better than the other.
Yes, I understand cap gains taxes are part of the calculation. But what’s your cost basis? All 300k isn’t cap gains.

It’s up to you how you handle this, obviously. But if you’ve been telling your kids you’ll fund their college, and they chose a college based on that, it’s a pretty significant shift to say you’ll pay off the loans “if you can.” I’d get clear on who is ultimately responsible.

Loans for college can be a good planning tool for parents. But I wouldn’t say that having student loans equal to one year of salary is a great goal for students in their early earning years. Graduating debt free is a great feeling and provides a lot of freedom to take some career risks/opportunities early on.

Anyway, seems to me if you can cash flow 15-20k/year, taking another 35-40k/year from taxable (only some of which will be taxable) isn’t a big problem. Especially if it allows you to continue to fully fund 401k.

As others have mentioned, you might find you can cash flow more once one kid is away and after analyzing your budget.
lakpr
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Re: Contribution to 401k vs taking loan for kids college

Post by lakpr »

55k per year sounds like zero financial aid, other than loans.

Why not split the $300k in brokerage account into two, transfer the $150k to the child's name (he/she is now legally an adult, right?), then have them use the $150k to pay for the school tuition on their own? Should cover 3 years worth of college.

With little to no other expected income, they will be able to realize up to $40k in capital gains and pay zero tax on it. They will also be able to truthfully claim they are NOT claimed as a dependent on someone else's return (they are using their own money). No implications on financial aid, there wasn't any to begin with.

YOU, will just have to file a Form 709 for the $150k gift to your child.

Curious: does your user handle mean you live in Chicago? And is your child going to Univ of Chicago?

edited to add: The student should have at certain amount of earned income to be claimed as a non-dependent for my above scheme to work ( I believe it is $4,400 for 2023? Need to look that up); which is a fairly low bar I think if your kid can get a part time job on campus. I realize it may not be possible for THIS year, but perhaps for 2024 and beyond?
Last edited by lakpr on Thu Jun 01, 2023 2:19 pm, edited 1 time in total.
Chuck
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Re: Contribution to 401k vs taking loan for kids college

Post by Chuck »

I just want to say it's refreshing to have an OP who reads the posts and has a discussion. :)
FreddyC
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Re: Contribution to 401k vs taking loan for kids college

Post by FreddyC »

In these pay-for-college threads, the notion recurs that being on the hook as a co-signer is somehow a significant problem. It will require more attention to detail (to ensure primary payer is paying if you haven’t already undertake that responsibility). But this doesn’t really speak to question of pay upfront vs cash flow. It speaks to assist or leave the student to pull themselves up by their own boot straps. Because guess what? If you are cash-flowing college, you are not on the hook to pay off a loan only because you already have provided the capital upfront. So the decision comes down to loan financing terms, willingness/ability to pay, etc.

In other words, it doesn’t make much sense to say, I’m not willing to be on the hook for a loan so put one on the pay upfront side of the ledger.
LuckyInLife
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Re: Contribution to 401k vs taking loan for kids college

Post by LuckyInLife »

queenofthemadhouse wrote: Thu Jun 01, 2023 9:51 am I would have the student utilize federal loans up to the $5.5k limit. If you want to assume responsibility for them unofficially, you could, but the terms are better than Parent PLUS loans.

I would also push down hard on the AGI if you can get under $160k (or even $180k) and qualify for part of the AOTC. If that’s impossible, it might make sense for ex spouse to claim child if they have income but are under the $160k limit. The tax credit could be their contribution (or part of it).
The MAGI limit for OP to be able to claim AOTC is not going to be $160k unless he is re-married. It is only $80k for someone who is single or head of household.
queenofthemadhouse
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Re: Contribution to 401k vs taking loan for kids college

Post by queenofthemadhouse »

Doh. You are right. Might be worth looking at the ex spouse is they are under the limit, or possibly the young adult claiming themselves if school is paid for by loans in their name.
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Wiggums
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Re: Contribution to 401k vs taking loan for kids college

Post by Wiggums »

I’d recommend that you pull the money from wherever sources make sense. In other words, you’ll probably end up pulling a little from here, and a little from there. Take a hard look at your current expenses and consider a little belt tightening while the kids are in college. This is a temporary situation. Long-term you’re in great shape. Your salary is high enough that you need to consider the negative impact on your tax bill by not contributing the full amount to the 401(k). Our kids worked while in college, but I don’t see that as a big source funds.

Good luck to you.
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toddthebod
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Re: Contribution to 401k vs taking loan for kids college

Post by toddthebod »

delamer wrote: Thu Jun 01, 2023 12:51 pm
wackerdr wrote: Thu Jun 01, 2023 12:43 pm Thank you all for your replies and suggestions.

I am thinking of the following broad strategy and prioritization

1. Contribute maximum allowed 30k to 401k
2. Let kids take federal loans up to the allowed limit ( subsidized or unsubsidized ) . I see this covers 20k overall for each kid.

3. Get kids to take Sallie Mae or similar loans for another 35k - 40k so that each will have loan of about 1 year of college

4. (A) Maximize monthly savings and pay most of remaining tuition from cash flow. I need to Look at my spend closely. As few members suggested, based on my salary , I should be able to do cash flow AND fund the college.

(B)My expenses have been about 8.5k - 9k a month including mortgage and property taxes.

(C) After contributing full 401k, full HSA, I am typically left with 15k - 20k a year. There may be expense creep or leakage , which I should look at closely. May be

I will post a separate thread asking for guidance on spend management.



5. If the above is not sufficient, sell brokerage as needed, to fund the shortfall.
Your kids can’t take loans, other than the Stafford in your #2, without a co-signer. So if you go with #3, you’ll be on the hook for payments.
Considering his alternate plan was to pay the tuition directly, I don't see how this is an issue.
BernardShakey
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Re: Contribution to 401k vs taking loan for kids college

Post by BernardShakey »

wackerdr wrote: Wed May 31, 2023 9:33 pm For the purpose of this discussion, assume that I want to fund the college, and not to have my kids take loans.
Kudos to you for trying to figure out how to allow your kids to graduate debt free in the wake of a divorce that has increased financial pressures. I think I would do the following:

1) Contribute fully to retirement accounts/401k to get the full tax advantage.
2) Get yourself on a solid / austere budget for the next few years to free up college money and maybe take advantage of education tax credits
3) Cash flow as much of the education costs as you can; have the kids work some in the summers for spending money, etc.
4) Use the brokerage account to close the funding gap as needed

Good luck!
An important key to investing is having a well-calibrated sense of your future regret.
Admiral
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Re: Contribution to 401k vs taking loan for kids college

Post by Admiral »

OP:

Why do you need (or think you need) $300k in a taxable account? If not for large expenses (read: college) what is this money for? As I noted upthread, I would either spend the money on education (which is a great investment) or get it into Roth ASAP and stop paying taxes on it. Or split the difference. Don't forget you can always pull contributions from Roth if necessary.

You've not adequately explained why taking a loan is preferable to paying for college with money you already have that is not tax-sheltered or reducing your taxable income but rather is adding to your taxable income.

In fact, you probably should max all pre-tax space, do backdoor Roth up to limit each year, and then use the taxable monies for any shortage in living expenses. Controlling cap gains is relatively easy.
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wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

Admiral wrote: Thu Jun 01, 2023 6:08 pm OP:

Why do you need (or think you need) $300k in a taxable account? If not for large expenses (read: college) what is this money for? As I noted upthread, I would either spend the money on education (which is a great investment) or get it into Roth ASAP and stop paying taxes on it. Or split the difference. Don't forget you can always pull contributions from Roth if necessary.

You've not adequately explained why taking a loan is preferable to paying for college with money you already have that is not tax-sheltered or reducing your taxable income but rather is adding to your taxable income.

In fact, you probably should max all pre-tax space, do backdoor Roth up to limit each year, and then use the taxable monies for any shortage in living expenses. Controlling cap gains is relatively easy.
I max out all pre-tax available for me . HSA, Fsa, 401k , are all contributed to allowed limits.

I never contributed Roth since it is post tax , and I prioritized comfort of having it on hand if needed. And secondly, I Dont think my post retirement tax rate would be so high as to take advantage of Roth contributed tax-free withdrawals . I think both could be flawed assumptions. Probably I don’t understand it completely.

Does Roth make sense in every scenario ?

When it comes to college funding, the only thing holding me back from selling is capital gains. All are in long term capital gain ( FBGRX and QQQ) , but need to check cost basis to see exact effect.

I am trying to understand if it is better off to take loan at 7 - 8% , and let brokerage grow and Make full 401k contributions, OR , reduce 401k and sell brokerage as needed. But as other have pointed out, I should be able to fund significant portion from cash flow.
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wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

BernardShakey wrote: Thu Jun 01, 2023 5:58 pm
wackerdr wrote: Wed May 31, 2023 9:33 pm For the purpose of this discussion, assume that I want to fund the college, and not to have my kids take loans.
Kudos to you for trying to figure out how to allow your kids to graduate debt free in the wake of a divorce that has increased financial pressures. I think I would do the following:

1) Contribute fully to retirement accounts/401k to get the full tax advantage.
2) Get yourself on a solid / austere budget for the next few years to free up college money and maybe take advantage of education tax credits
3) Cash flow as much of the education costs as you can; have the kids work some in the summers for spending money, etc.
4) Use the brokerage account to close the funding gap as needed

Good luck!
Thank you.
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wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

KlangFool wrote: Thu Jun 01, 2023 1:43 pm OP,

1) What is your annual savings/investment? At your gross income of 200+K per year, you can afford to pay for the college education and contribute 30K to 401K.

2) You have 300K in the taxable account. There is no reason why you cannot spend down the taxable account and contribute to the 401K. Why would you choose to pay more taxes by stop contributing to the 401K?

3) If you need to take loan for the kid's college education, you cannot afford to pay for the college education.

KlangFool
I do about 40k pre tax, in 401k, HSA and fsa
And I save about 15k on top of that.

Expenses are high, and I checked this afternoon my last 12 months. I am spending nearly 10k a month.

Mortgage , taxes and utilizes add up to only 2,500, which means a huge amount of discretionary spend and lifestyle creep. I think at least 1k a month additional savings should be possible.

Based on feedback I think I should continue contributing to 401k. It is clear I should continue to maximize pretax and work everything else around that.
Last edited by wackerdr on Thu Jun 01, 2023 6:46 pm, edited 2 times in total.
Admiral
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Re: Contribution to 401k vs taking loan for kids college

Post by Admiral »

wackerdr wrote: Thu Jun 01, 2023 6:28 pm
Admiral wrote: Thu Jun 01, 2023 6:08 pm OP:

Why do you need (or think you need) $300k in a taxable account? If not for large expenses (read: college) what is this money for? As I noted upthread, I would either spend the money on education (which is a great investment) or get it into Roth ASAP and stop paying taxes on it. Or split the difference. Don't forget you can always pull contributions from Roth if necessary.

You've not adequately explained why taking a loan is preferable to paying for college with money you already have that is not tax-sheltered or reducing your taxable income but rather is adding to your taxable income.

In fact, you probably should max all pre-tax space, do backdoor Roth up to limit each year, and then use the taxable monies for any shortage in living expenses. Controlling cap gains is relatively easy.
I max out all pre-tax available for me . HSA, Fsa, 401k , are all contributed to allowed limits.

I never contributed Roth since it is post tax , and I prioritized comfort of having it on hand if needed. And secondly, I Dont think my post retirement tax rate would be so high as to take advantage of Roth contributed tax-free withdrawals . I think both could be flawed assumptions. Probably I don’t understand it completely.

Does Roth make sense in every scenario ?

When it comes to college funding, the only thing holding me back from selling is capital gains. All are in long term capital gain ( FBGRX and QQQ) , but need to check cost basis to see exact effect.

I am trying to understand if it is better off to take loan at 7 - 8% , and let brokerage grow and Make full 401k contributions, OR , reduce 401k and sell brokerage as needed. But as other have pointed out, I should be able to fund significant portion from cash flow.
Backdoor Roth has no income limitations. The point is this: taxable monies have tax drag, Roth monies do not. You've already paid income tax on the taxable account funds, so whatever your future tax rate is--higher or lower than today--is irrelevant. I’m not proposing you save directly into Roth instead of in pre-tax (you're above the phaseout anyway, unless you have a Roth option in your workplace plan). I'm proposing you transfer already taxed money. Big difference. You could easily be paying 2% of $300k in taxes each year.
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wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

Admiral wrote: Thu Jun 01, 2023 6:37 pm
wackerdr wrote: Thu Jun 01, 2023 6:28 pm
Admiral wrote: Thu Jun 01, 2023 6:08 pm OP:

Why do you need (or think you need) $300k in a taxable account? If not for large expenses (read: college) what is this money for? As I noted upthread, I would either spend the money on education (which is a great investment) or get it into Roth ASAP and stop paying taxes on it. Or split the difference. Don't forget you can always pull contributions from Roth if necessary.

You've not adequately explained why taking a loan is preferable to paying for college with money you already have that is not tax-sheltered or reducing your taxable income but rather is adding to your taxable income.

In fact, you probably should max all pre-tax space, do backdoor Roth up to limit each year, and then use the taxable monies for any shortage in living expenses. Controlling cap gains is relatively easy.
I max out all pre-tax available for me . HSA, Fsa, 401k , are all contributed to allowed limits.

I never contributed Roth since it is post tax , and I prioritized comfort of having it on hand if needed. And secondly, I Dont think my post retirement tax rate would be so high as to take advantage of Roth contributed tax-free withdrawals . I think both could be flawed assumptions. Probably I don’t understand it completely.

Does Roth make sense in every scenario ?

When it comes to college funding, the only thing holding me back from selling is capital gains. All are in long term capital gain ( FBGRX and QQQ) , but need to check cost basis to see exact effect.

I am trying to understand if it is better off to take loan at 7 - 8% , and let brokerage grow and Make full 401k contributions, OR , reduce 401k and sell brokerage as needed. But as other have pointed out, I should be able to fund significant portion from cash flow.
Backdoor Roth has no income limitations. The point is this: taxable monies have tax drag, Roth monies do not. You've already paid income tax on the taxable account funds, so whatever your future tax rate is--higher or lower than today--is irrelevant. I’m not proposing you save directly into Roth instead of in pre-tax (you're above the phaseout anyway, unless you have a Roth option in your workplace plan). I'm proposing you transfer already taxed money. Big difference. You could easily be paying 2% of $300k in taxes each year.
I think I am understanding what you are saying. Thank you for highlighting it. It’s super helpful.

But to convert brokerage to IRA, I need to sell what I have in brokerage. Correct? That’s what I am reading, and it will have capital gains, . If this understanding is accurate , would it now offset any advantages of tax free withdrawals?
Topic Author
wackerdr
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Re: Contribution to 401k vs taking loan for kids college

Post by wackerdr »

lakpr wrote: Thu Jun 01, 2023 2:07 pm 55k per year sounds like zero financial aid, other than loans.

Curious: does your user handle mean you live in Chicago? And is your child going to Univ of Chicago?
Ya, Chicago based. My son is going to east coast. . Didn’t get into UIUC , and anything else was out of state. He isn’t of Univ of Chicago caliber, but from a cost point of view, it’s private and probably more expensive.
dekecarver
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Re: Contribution to 401k vs taking loan for kids college

Post by dekecarver »

Another option that may be worth consideration:
Offer the kids to borrow the money from you and set up a loan repayment schedule. How that works out really depends on your kids and you in the end. Could be that you write it off one way or the other.

My family used this method and it worked for us, starting with my father and his parents; it was actually pretty cool to find and read the accounting ledger that he and my grandmother ran separately, and the bonus, lol, he received for paying back early, same for me.
Just another option.
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