Planning Ahead for College Finances

Forbidden Drive
Forbidden Drive

I would like to supplement our 529 college savings accounts by opening an account – either investment or Roth IRA – in order to diversify savings vehicles for our kids to use for education or anything else, but I was concerned that having money in their names would limit their chances to qualify for financial aid. So, this question has been bouncing around in my head for a while: who’s name should the kids assets be under? Parent or child?

The answer: parents.

FAFSA FAFSA FAFSA

It’s recommended that all parents with kids in college complete the Free Application for Federal Student Aid (FAFSA) form every year to determine eligibility for financial aid. In this process, all parent and student assets are taken into account and magically calculated to determine your EFC: Estimated Family Contribution. The game here is to get your EFC as low as possible. 

Looking at assets, they are weighted differently. Assets in the child’s name — including a savings account, trust fund, or brokerage account — will count more heavily against the financial aid award than assets in a parent’s name.

Here’s a summary of how a family’s assets are weighted in calculating the Estimated Family Contribution.

FAFSA Chart.png

  • Student assets: 20%; these include savings and investment accounts and real estate
  • Student income: 50% (don’t work too hard, kids!)
  • Parents’ assets: 2.6% – 5.6%; these include savings and investment accounts, real estate, etc., and is based on a sliding scale
  • Parents’ income: 22-47%; based on a sliding scale

*Not included here is gifts used towards tuition – these can count for 50% – 100%.

Student Income and Assets

A student’s savings account can have a big impact on the EFC, but there is an income protection allowance of $6400 (as of this writing in May 2019).

It is advised to have a parent as the owner of a child’s 529 account with the child as the beneficiary so the account is considered a parent’s asset (weighted up to 5.6% vs student asset at 20%) and therefore more favorable in the eyes of FAFSA. There are other nuances around using 529s that should be considered, like what defines education-related expenses, accounts owned by grandparents, etc.

Parents’ Income and Assets 

The biggest impact in the financial aid equation is parents’ income. While no one typically wants to lower their income intentionally,  here are a few things you can do to limit it during college tuition payment times:

  • Avoid large dividends, capital gains, distributions from a mutual fund or withdrawals from a retirement account – any income reported on Form 1040
  • Defer your work bonus (if you can)

Your income is calculated based on your two years of income before the start of the academic year, so start minimizing your income after January 1 of your child’s sophomore year of high school.

As for typical assets in the FAFSA equation:

  • Home equity in a primary home does not count as an asset, but equity in a second home or investment property does count
  • The cash values of whole life insurance policies and annuities are not considered in the FAFSA calculation
  • The value of a family business is not counted on FAFSA if more than 50% is owned and controlled by your family and has less than 100 full-time employees.
  • Parents’ 401(k), Roth IRA and traditional IRAs are not counted in calculating your EFC. (You can withdraw from a Roth IRA penalty-free to pay for college, but the amount you withdraw is considered untaxed income on the FAFSA.)

In Summary

There are quite a few resources out there with more detail and tips on reducing your EFC, like on Road2College. This is also discussed in the context of post-retirement income and FAFSA in this ChooseFI interview with Root of Good.

Separately, the College Scholarship Service (CSS) form is used to determine your eligibility for non-government financial aid, such as a school scholarship and grants. The considerations for CSS differ from FAFSA.

With this, we realized that our two 529 accounts were already set-up in our names with each individual child as the beneficiary (my father-in-law set these up and is way ahead of me here), so we’re set there and will continue to contribute to these accounts to take advantage of the tax savings.

We have also opened Vanguard investment accounts for each child for the occasional deposit when their traditional savings accounts reach a certain threshold. Soon enough, these will be invested in VTSAX.

I hope that compiling what I’ve learned here has helped demystify this a bit – it’s helped us to dig in and learn more about this even though we’re still seven years away. It’s good just to keep the rules of the game in mind as we continue to save and invest.

Related post: Retire Early and Pay for College … is it Possible?

Calculating Our Savings Rate

ski shadow family

I’ve been meaning to calculate my savings rate and finally got down to it: 29%. Eh. I thought it would be more, but I’m maxing my 401k and the kids college will be funded by real estate.
I haven’t yet calculated my husbands, but I anticipate his is about the same but with a few differences, like funding our HSA. 
We’re working to pay down debt, so our savings rate will remain flat for the foreseeable future (three mortgages!).

Here’s the breakdown:

  • 401k: 15% (*just reduced to 13% due to bonus)
  • Employee Stock Purchase Program: 8%
  • FSA: 4.4%
  • 529: 1% – this is just sad
  • Roth IRA: 1%

I wonder what our debt paying rate is? I’m not sure what that’ll tell me, but it will be interesting to calculate. It also varies based on other household spends like kids activities and household repairs. And skiing.

Retire Early and Pay for College … is it Possible?

I have nine years. What will college cost in nine years? It’s a daunting thought and I try my best to avoid it. And think I must I live on Fantasy Island when I say I’m going to retire at the same time I’m sending my two kids off to college. I honestly don’t know if early retirement will be able to happen at the same time. (Loans are not an option – personal parenting goals.)
College is a wild card. Or maybe I want it to be a wild card because all my (limited) research shows tuition will about double and that’s scary. The Vanguard college tuition calculator provides a pretty basic estimate of anticipated costs. Low-ball estimate is that a four-year college education at $100,000 today will increase to $167,000 in nine years.

  • 529s: Today’s standard for college savings. Put it in post-tax, pull it out for education-related expenses without penalty. We have two, established by the kids’ grandfather when they were babies. Our nine-year-old has ~$12k today. We contribute $100/mo. At this savings rate, using a compound interest calculator, this will be almost $40k in 9 years. Maybe enough for one year if we stay at the same contribution rate.
    • We increased our college savings another $100/mo into each of our Roth IRAs. (No, we’re not at the point where we can max these out yet.) Withdrawing from a Roth prior to age 59.5 carries penalties, unless for a qualifying reason. Your child’s education is one.
    • And there’s this: “… most parents should max out their Roth first then look at funding a 529 plan.” With that, we will make a plan to max these out. I wonder if we can squeeze that into 2018?
  • Community College Transfer: I really like the idea of saving on tuition by going for two years at a community college then transferring to a four-year, but there seem to be more drawbacks than positives. Maybe this will shift to being a more common practice in the future, but I can’t plan on that.
  • Having recently moved from Seattle, I’m wondering … perhaps moving back to enjoy the mountains and sound, while taking advantage of UW’s Dual Enrollment would be worth considering. (Reason #458 we should move to Seattle.)
  • Scholarships? This Washington Post article is old, but it probably still stands close to the truth today: 19% of high GPA students receive academic scholarships and 0.7% receive athletic scholarships. This would be really great, but I can’t count on it.
    All PGA players start somewhere
  • Go Pro: Our younger son is eight and has declared that he will be a professional golfer. So be it.
  • Real Estate: Our obvious choice and we’re so so so thankful we have it, because I really don’t think we could achieve the savings rate we’d need to pay for college without loans. We have two rental homes in the crazy Seattle market. We’ve owned one, our ex-primary, for 11 years and the other for four years. Either of them would more than pay for both kids to go to college at today’s average tuition rates. We can’t predict what they’ll be worth in nine years. I don’t have a crystal ball. But this is what will pay for college and enable us to retire around the same time.

    ​I hope.

Why We Decided to Rent vs Sell

cross country driving adventures

We knew we’d return to the East Coast to be closer to family at some point. So, after 10 years of loving life in Seattle, we made the move back to the Philadelphia area.

The Seattle real estate market is insane. We lived in a 1,300 square foot single family home in a desirable neighborhood with great schools and close to downtown (i.e., short commute to Amazon). Prior to purchasing this house in 2006, we sold our Philadelphia home for a nice profit, affording us to pay off my student loans, buy two (used) cars and put 20% cash down on our new Seattle home. This was all without a thought of kids (which came only two short years later). Thankfully, the house worked for our family of four because we quickly realized we couldn’t afford a bigger house that wasn’t a fixer.

During our time in Seattle, we also purchased a smaller investment property in another neighborhood. We didn’t follow the “buy the worst house in the best neighborhood” rule, but we bought what we could afford and got newly renovated (low maintenance) house in a neighborhood we knew was “up and coming.” For three years, we acted as the property managers with no turnover and very few issues.

So, when it came time for us to move, we were torn: sell or rent? The Seattle market has seen such growth: was it a bubble and should we sell now (2016)? Or hold onto the properties with a nice monthly income, hope the long-term growth continues and accept there will be maintenance and management costs? We took a deep breath and decided to rent, turning over the property management to a company that takes 10% off the top of the first rental and 8% off the top of the second. This has proven well worth it! They take care of everything and are prompt to answer any questions of concerns.

In the two years since February 2016, property 1 (primary) has grown in value by 35% and property 2 (investment) has grown by 46%. This doesn’t account for the monthly rent which more than covers the mortgages. So, I didn’t do an entirely accurate comparison, but in the same time period, a $10k investment in VTSAX would have grown around 35%. Selling our properties would provide a much larger investment, so perhaps this would have been a wiser decision, but I like: 1) the passive monthly income and 2) having diversified assets.

The Plan for Property 1:

  • Keep it for the passive income during retirements, or
  • Move back! Right now, we’re thinking about retiring in WA.
  • We also keep in mind that if we sell by 2020, we can avoid paying capital gains tax for having lived there for two of the prior five years.

​We definitely have an emotional tie to this house and neighborhood and simply don’t want to sell it. At least we recognize this!

The Plan for Property 2:

  • Keep it for passive income in retirement, or
  • Sell it to pay for college for two kids in 10+ years, while collecting monthly rent. But, with this, comes real estate market risks and increasing maintenance costs as the property ages.

And, of course, the ever-present threat of an earthquake in the PacificNW that could reduce both properties to a pile of rubble.

The Nightly Rental Option: I recently looked at what nightly vacation rentals would look like for each of these houses, but our steady monthly rent exceeds the estimates. 

We purchased our big, old, inefficient home in the Philly ‘burbs, but the market here is not nearly has hot, so it’s not so exciting to think about. With some improvements coming to the neighborhood that will increase walkability and overall appeal, I’m sure we’ll sell it for more than we bought it, but if you consider the real costs of home ownership, I can’t confidently say we’ll see a profit.

Either way, we’re in a great place with these investments and will keep them for now. I’m not sure what would change that. I’m afraid that if we sell and funnel the profit into investment accounts, we’d be putting all of our eggs in one basket. It’s all about balance!

2018 FIRE Goals

Building on the strong foundation we set in 2017, here are our goals for 2018:

#1: Debt reduction. We made some great strides in 2017 by simply organizing our finances and recognizing that we need to be more aggressive and focused on debt reduction. This will, of course, continue …

Hawaii, 2015

#2: Travel. We haven’t traveled much lately and we NEED to! This is a no brainer: open a Chase rewards card. Actually, I already got mine and my husband will get his soon. We went with the Chase Sapphire. I’m not sure yet if we’ll get as aggressive as the chase gauntlet just yet. We’re thinking a family vacation to the Bahamas … perhaps that’s because it’s freezing cold right now.

​#3: Max out all pre-tax contributions (401k, HSA, FSA).

#4: Increase college savings. Keep 529s at $100 per month and contribute an additional $100 per month into another, separate investment account or Roth IRA for each child.

#5: Save (more) on wireless phone bills. Change DH from Verizon to a Monthly Shared plan with Total Wireless for $60 per month, saving $67 per month. That’s over $800 per year. Cha-ching!

The debt reduction is the biggest nut: credit cards, HELOC, two car loans and three mortgages. It’s daunting, but it’s there and we’re going to make it disappear. POOF!