Host Jon Luskin, CFP® and the do-it-yourself investor community ask questions to financial experts – live.
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Ann Garcia – author of “How to Pay for College: A complete financial plan for funding your child’s education” – answers questions.
Ann is a fee-only fiduciary advisor and partner at Independent Progressive Advisors, and go-to expert on paying for college. She is the author of the critically-acclaimed “How to Pay for College” and a sought-after media guest who’s been quoted in the New York Times, the Oregonian, and U.S. News and World Report, to name a few.
Ann recently launched an interactive online course to help parents (and their advisors) affordably build saving for college and applying for aid into their broader financial plan. Outside of financial planning, Ann is an avid runner, skier and fan of middle school rock concerts.
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[00:00:00] Jon Luskin: Bogleheads® Live is our ongoing Twitter Space series where the do-it-yourself investor community ask their questions to financial experts live on Twitter. You can ask your questions by joining us for the next Twitter Space. Get the dates and times for the next Bogleheads® Live by following the John C. Bogle Center for Financial Literacy on Twitter. That’s @Bogleheads.
[00:00:22] For those that can’t make the live events, episodes are recorded and turned into a podcast. This is that podcast.
[00:00:29] Thank you for joining us for the 42nd Bogleheads® Live, where the do-it-yourself investor community ask questions to financial experts live. My name is Jon Luskin, and I’m your host. Today’s topic is how to pay for college, and Ann Garcia is our guest. She’s the author of “How to Pay for College: A Complete Financial Plan for Funding Your Child’s Education,” and will be answering your questions about paying for college on today’s episode.
[00:00:57] Let’s start by talking about the Bogleheads®, a community of investors who believe in keeping it simple, following a small number of tried-and-true investing principles. This episode of Bogleheads® Live, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a 501(c)(3) nonprofit organization dedicated to helping people make better financial decisions.
[00:01:19] Visit boglecenter.net to find valuable information and to make a tax-deductible donation. Or you can jump straight to boglecenter.net/donate.
[00:01:30] Before we get started on today’s show, some announcements. For our next Bogleheads® Live. We’ll be discussing cybersecurity, how to stay safe online, keeping your money safe online. Steve Ryder will be our guest. That’ll be Thursday, April 13th at 10:00 AM Pacific, 2:00 PM Eastern. You can see the full list of future guests at bogleheads.org/blog/bogleheads-live.
[00:01:53] And if you are listening to this as a podcast and you’re listening to this shortly after the podcast came out, I’m talking about this coming Thursday, the podcast releases on Monday. So, if you’re listening to it on Monday, Tuesday, or Wednesday, then know, in just a few days you’ll be able to join our live Twitter conversation, get your questions answered about staying safe online
[00:02:15] Before we get started on today’s show, a disclaimer: this is for informational and entertainment purposes only, and should not be relied upon as a basis for investment, tax or other financial planning decisions.
[00:02:25] Let me introduce Ann Garcia. Ann Garcia is a fee-only, fiduciary advisor and partner at Independent Progressive Advisors and go-to expert on paying for college. She’s the author of the critically acclaimed, “How to Pay for College” and a sought-after media guest who’s been quoted in the New York Times, the Oregonian and US News and World Report. Ann recently launched an interactive online course to help parents and their advisors affordably build college savings and applying for aid into their broader financial plan. Outside of planning, Ann is an avid runner, skier and fan of middle school rock concerts.
[00:03:03] Ann, thank you for joining us today on Bogleheads® Live. Let’s jump to our first question. We got a similar question from users “HeavyChevy” and “Ray.James” from the Bogleheads® Forums who ask about how savings can decrease awarded aid?
[00:03:21] Ann Garcia: The way it works is the FAFSA, which is the free application for federal student aid, which is the primary financial aid application and the CSS profile, which is an additional financial aid application that’s used for private schools both do count your assets among the resources that you have available to pay for college. So, there is a grain of truth that saving for college will decrease your financial aid.
[00:03:45] However, the rate at which your assets are assessed in the formula is 5.64% of their value, which means that every thousand dollars of savings that you have will cost you $56 in the financial aid formula. That leaves you ahead by $944.
[00:04:02] My recommendation to people is that despite that nominal hit that you’ll take in the financial aid process, you are still better off saving than not saving because what you really want as a parent for your children is that they have choices and more savings will give you more choices.
[00:04:21] Jon Luskin: This one is from username “FlamePoint” from the Bogleheads® Forums who writes: “Several states have programs that allow high school juniors and seniors to take their last one to two years of classes at a local community college. They receive high school and college credit for these classes and do so at minimal cost. Are there other ways to get the word out to students and parents early on so that they can factor this into their decision-making process?”
[00:04:45] Ann Garcia: Those are great programs, and I’m so glad that you brought this up. Most states do have a version of this where, as the questioner mentioned, you can take classes at a junior college or community college during your junior and senior year of high school, and then those credits will transfer over to a four-year college.
[00:05:01] There are a couple of considerations for anyone who earns college credits while they’re in high school. And that can be from these dual enrollment programs, and they have different names depending on your state, or from taking IB classes or from taking dual credit classes. There are lots and lots of ways that students can earn college credits while they’re in high school.
[00:05:22] There are two really important considerations if that’s your path. Number one is you need to make sure that you apply to colleges that will accept those credits, because not all colleges do. Some colleges still require you to complete four years on their campus regardless of how many credits you have accumulated as a high school student.
[00:05:39] In addition, you need to factor in whether you’re pursuing a major that allows for a shorter path to graduation. In a lot of STEM fields, the course sequencing is such that it doesn’t matter how many credits you’ve gotten as a high school student, you’re still going to be a college student for four years.
[00:05:55] The one mistake that I see people making when they have all of these college credits, particularly when they’ve done the community college program, is they say, “oh, I have enough credits that I’m a sophomore or a junior, so I’m not going to apply to college as a freshman.” Even when you get all those credits, you still want to apply to college as a freshman if you have never attended college before. That’s because there are just a lot more scholarships available for freshmen than there are for transfer students.
[00:06:24] Some points to consider as you’re accumulating college credits as a high school student and making sure that you get the most of that, like I said, apply to colleges that are going to accept the credits and you can just Google the college name and transfer credit policy to find out and then still apply as a freshman even.
[00:06:39] These are great, great programs. And, of course, one of the best ways to save money on college is to limit the number of years that you are attending college. And it would be great if there was more information out there about them. And unfortunately, that tends to not be the case.
[00:06:55] So let’s sing it from the rafters: you can attend a community college while you’re a high school student. But know you need to make sure that you get the most value that you can from those credits when you do make the transition to a four-year institution.
[00:07:07] Jon Luskin: Let’s jump to a live audience question.
[00:07:10] Doug: I have a daughter who is a freshman in college, a daughter who is a senior in high school, and a son who is a sophomore in high school. So, I’m going to get triple-whammied pretty soon here. I’ve got 529s for all of them.
[00:07:22] Jon Luskin: 529 is a tax-advantaged investment account for qualified education expenses. Taking money out of the account for unqualified expenses means paying a penalty. Some states even offer a tax deduction for money going into a 529 account.
[00:07:42] Doug: I wanted to get your advice and see if you’d recommend leveraging [Series I Bonds] to save for their education. Thank you.
[00:07:51] Ann Garcia: I Bonds can be a great addition to your college saving plan, particularly when you’re close to college, because you don’t have to worry about that variability of returns. One of the issues with using I Bonds is that the income threshold for the distributions to be a tax-free event for qualified expenses – which is tuition, room and board, books and supplies – is much lower. It’s about $125,000 for married filing joint and about $90,000 for a single filer.
[00:08:21] If you’re under that threshold, then your I Bond distributions will be tax-free. If you’re above that threshold, I Bonds can still be a good savings choice, but you will pay taxes on those distributions regardless of whether they’re a qualified distribution. But I do think in this environment that can be really beneficial.
[00:08:39] On the other hand, if you look at 529s, typically their guaranteed rate options are paying about 3.75% to 4% right now. And then you do get the tax-free distributions out of a 529, and you may get a tax benefit for your contribution.
[00:08:54] So all in, I’d say if you’re not eligible for the tax benefit for the I Bond distribution and you’re not over-saving for college, where you might want to use those funds for something other than college expenses, then I’d say I Bonds can be a good choice, but 529s can accomplish a lot of the same objectives, too.
[00:09:14] Jon Luskin: Username ‘wolf359’ and username ‘er999’ are both asking about prepaid college plans. Tell us about prepaid college.
[00:09:25] Ann Garcia: Prepaid tuition plans can be a great part of your college savings mix. And I say a part of your college savings mix because they have some limitations to them that traditional 529 savings plans don’t have. A prepaid tuition plan is a form of 529 where you are effectively prepaying your tuition, and it’s based on the cost of tuition when you make the contribution.
[00:09:48] Let’s say for the sake of easy math, tuition is $10,000. Today, you contribute $5,000. You have paid 50% of one year of college. Doesn’t matter what happens to the cost of college between now and when your child goes to college. You have paid 50% of a year of college.
[00:10:07] There are only a handful of states that offer these prepaid programs. There’s an additional prepaid tuition program called the “Private College 529,” which is a consortium of private colleges where you get their tuition inflation rate. And they have set of limitations. One that is consistent and across all of them is these plans can only be used for tuition. They cannot be used for books. They can’t be used for room and board. They are tuition-only.
[00:10:31] Another common limitation is that the funds have to stay in the plan for at least three years before you can withdraw them. Typically, not where you want to put money if you’ve got a high school senior. But if you are in a state that offers one of these programs and your kids are freshman, sophomores, maybe eighth graders, that can be a great addition to your college savings mix because you get that guaranteed rate of return with no risk of principal. But again, can’t be used for anything other than tuition.
[00:11:01] The other thing with prepaid plans is they typically have a group of schools where the benefit is the largest. And if you go outside of that group of schools, depending on the plan, you might still get the full inflation rate, or you might get a lesser rate applied to your savings.
[00:11:20] Prepaid tuition plans, like I said, can be a really good addition to your savings mix. They shouldn’t be the only place that you save. And you really need to read the fine print to understand the limitations.
[00:11:30] Jon Luskin: And now we have another live audience question.
[00:11:33] Greg Rutten: The Washington state’s 529 prepaid plan. I know they had made some changes to it where they had reduced the payout amount. And I’d also looked at the tuition rate of growth and there were a couple years that had been 0%. So just would appreciate your comments. Thanks.
[00:11:47] Ann Garcia: The Washington program is interesting. The same criteria apply. Three-year minimum hold period and only using it for tuition. But because of the structure in Washington where education is guaranteed to be funded, there have been plenty of years where there hasn’t been tuition inflation and then you get nothing as a resident in those years.
[00:12:07] If you look at the historical averages over an extended period of time, it’s still been a reasonably good option. But if you look at the historical averages on a 529 savings plan where you’re earning market returns, those have also over extended periods, especially those that don’t include 2022, have also been quite good.
[00:12:25] But if you’re concerned about what the markets are going to do and you’re going to save more in a prepaid plan because you’re concerned about loss of principal, by all means choose the prepaid plan. Definitely some pros and cons and those are all related to what happens with tuition inflation.
[00:12:43] Jon Luskin: Here is another question from the Bogleheads® Forums. This one is from username ‘er999’ who asks: “What income cutoff are you virtually guaranteed to be full pay? I understand that federal government no longer discounts for multiple children in college simultaneously. Do some private schools still discount in this situation?”
[00:13:05] Ann Garcia: What’s the income to be full pay? I think it’s important to understand the broad landscape of college scholarships. The best scholarships come from the colleges themselves. Those are institutional scholarships and they can take one of two forms. One is need-based financial aid and the other is merit aid.
[00:13:21] For need-based financial aid, I’ve seen people with very high incomes still get need-based financial aid. I have a client whose income is over $300,000 and they get need-based financial aid. They have multiple children in college.
[00:13:34] Now the FAFSA is going to stop considering how many college students the family has. The CSS profile, which is the form that’s used by most of the private schools, will continue to ask about number of students in college. A student from a larger family where there will be multiple college students at the same time who is applying to private colleges will probably still see some amount of financial aid being available depending on the college.
[00:14:00] And that’s the hard part about need-based financial aid is it’s the college’s money and it’s up to them to decide how they allocate it among their students. The federal funds for need-based aid are just Pell grant loans and work study primarily. And so, if you’re not eligible for any of those, it is the college’s money that’s going to make up your financial aid package.
[00:14:19] Public colleges are fairly ungenerous with need-based financial aid because they’re going to take federal funds and state funds largely to make up for student need. And it varies a lot from state to state. So, it’s hard to say an income cutoff where you wouldn’t be eligible at public colleges. But, if you get free and reduced lunch, you’re probably eligible for a Pell grant. If you’re not getting free and reduced lunch, you’re probably not getting any need-based aid at the public college.
[00:14:45] At private colleges, because it’s really their money and they choose how much of need they’re going to meet, I wouldn’t say there’s a hard cutoff for that money. On the other hand, if you are not wanting to pay full price, and your income is too high to qualify for aid, you should be looking for colleges that offer merit scholarships to students like yours.
[00:15:05] Colleges all have a tool they’re required to have on their website called a net price calculator. And you can punch in all of your financial information and sometimes academic information and the net price calculator will give you an estimate of what students from families like yours are paying to attend their college currently.
[00:15:23] There’s no guarantees in all of that. I will say our own experience with net price calculators was that every financial aid award that my daughter who applied to private colleges got was within $2,000 of what the net price calculator said.
[00:15:36] The summary of that very lengthy explanation was there isn’t a hard and fast income cutoff for eligibility for financial aid, particularly for students who are applying to private colleges and have multiple siblings who will be attending at the same time. But need-based financial aid depends on the college’s policies. You can also choose to apply to schools that offer merit aid if you don’t want to be paying full price.
[00:16:00] Jon Luskin: This one is from username ‘Grt2bOutdoors’ from the Bogleheads® Forums who writes – this is a question related to what we discussed – “To what extent should a family count on grants or merit aid to defray the costs of attending college?”
[00:16:16] Ann Garcia: The easy answer is to say “you can completely depend on grants and merit aid to defray the cost of attending college if you choose to have your child only apply to colleges that offer them grants or scholarships.” And that’s what I did for both of my kids. And everybody’s fine. There’s certainly nothing wrong with taking that path.
[00:16:41] The key consideration for you is what are the choices that I want to make available to my child and what does my budget look like? If you look at your budget from the perspective of, “Okay, we’ve saved this much, so we can spend a quarter of that every year. We can pay this much out of pocket. Our student can contribute this much. Are we, or are we not okay with a student loan? Any other resources we bring to the table?” Are you eligible for the American Opportunity Tax Credit, for example. Add all those things together and say, “here’s what my college budget is.”
[00:17:13] In many cases, the answer to that is going to be “yes, we need to rely on grants and scholarships to get our kid through college.” And that’s totally fine. You will find colleges that offer grants or scholarships to students like yours.
[00:17:28] Where families get into trouble is when they say, “oh, I absolutely need my kid to go to an Ivy League,” or “I absolutely need my kid to go to XYZ college,” because then you’re putting yourself at the mercy of that college’s financial aid policies. But the vast majority of colleges offer substantial tuition discounts to large swaths of the applicant pool.
[00:17:50] We always talk about the list price of college and the tuition inflation that we see there going up 6% or more every year. This year Stanford announced that they’re going to raise tuition by 7%.
[00:18:02] There’s another number that is even more important than the list price, and that’s the net price. The net price is the amount that families actually pay for college. And that number has stayed flat for about a decade or slightly more since the financial crisis. Last year, in fact, the average tuition discount rate, which was the amount of reductions in tuition through grants and scholarships, was over 50%. So that means that of all the tuition being charged, less than 50% actually gets paid. So, families who want to pay less for college just need to look for colleges that offer the types of scholarship that their student is eligible for and apply to those colleges.
[00:18:43] Jon Luskin: And you just hit on something that you touch on in your book, and you frame it as “it’s not which college, it’s why college.” And when you frame it that way, then it’s less important which college we go to. So, as we remember why we’re going, the benefits we’re going to get from going to college, that can make college a lot more affordable for families.
[00:19:04] Let’s move on to another question. This one from a user from the Bogleheads® Forums ‘Ray.James” who asks: “Are there better ways or areas to keep retirement plan options flexible, but also get aid? For example, save in a mega backdoor Roth for college before putting money into a 529, since that Roth money is considered for retirement and therefore won’t impact financial aid calculations.”
[00:19:32] For those folks who aren’t tax planning or investing nerds, I’m going to give a little more context to this question.
[00:19:38] That mega backdoor Roth contribution, that’s a way for folks to get up to an additional $43,500 into their workplace retirement plans. Now, not all plans offer this feature, but usually you’ll find it at big tech companies. For example, Google offers this. Amazon offers this. Facebook offers this, et cetera.
[00:19:58] Ann Garcia: The challenge with doing Roth contributions is you have to be able to get them back out. There are two considerations with that. If you’re doing mega backdoor Roth contributions, that’s probably going into an employer plan and if you’re still working for that employer, you might not be able to take that money back out while your child is in college if you’re still working there.
[00:20:17] The other thing that people tend to overlook when they use, for example, a Roth IRA instead of a 529 as their savings vehicle of choice is that when you take that money out of a Roth IRA, you do add it back to your income on the FAFSA and on the CSS profile. So, there’s actually a line in the income section where you report all untaxed IRA distributions. And so not just any growth on your Roth IRA, but contributions that were withdrawn for the purpose of paying for college are added to your income on the FAFSA.
[00:20:48] Now the Secure 2.0 Act with the option of doing 529 to Roth IRA rollovers hopefully will help alleviate some of the concerns around funding of a 529. But I think an acceptable alternative for families who really want to keep the door open to use that money for something else is to use a taxable account.
[00:21:08] The other thing with 529s is if you’re overfunded because your kid got scholarships, there’s no penalty on the withdrawals. It’s just tax on the growth in the account. It can be easy to have it have a really minimal tax impact. If you know that’s your kid when they start college, you can set up a plan to just take that money out of the account on an ongoing basis, have the distributions go to them, the growth will be taxed at their income tax rates. At fairly low tax cost.
[00:21:35] The other thing that I encourage people to think about, if you’re using a taxable account, and this is a similar situation where you’ve got multiple kids in college and you might be spending that money over multiple years, is keep in mind that as you sell and realize capital gains, that gets reported on your tax return and your tax return flows through to your FAFSA. And so, as you’re recognizing capital gains by selling taxable assets to pay for college, you are increasing your expected family contribution and reducing your eligibility for financial aid.
[00:22:05] Jon Luskin: That 529 to IRA transfer that is now permitted under Secure Act 2.0 is a really great opportunity for folks who have overfunded a 529. I worked with a couple recently, and they were planning on putting only a very limited amount into a 529, they weren’t even sure if their kids were college bound.
[00:22:27] So because of that strategy, it really made sense for them to fund that 529 with a limited amount, because worst case, they can move all that money eventually to a Roth IRA. In Episode #40 of Bogleheads® Live, Sean Mullaney talks more about this strategy. I’ll link to that in the show notes for our podcast listeners.
[00:22:47] We have another question from the Bogleheads® Forums. “Is there a reliable source that can be used to applying to any particular school that provides a guide as the amounts tied to a certain GPA or ACT or SAT score?”
[00:23:04] Ann Garcia: I had mentioned net price calculators before, and net price calculator is a tool that every college is required to have on their website. Just google the college name and net price calculator and you’ll find it. There you can punch in all of your data. And if the college offers merit awards, typically GPA test scores and other considerations. And they will give you an estimate, like I said, of what students like you pay in the current year for tuition.
[00:23:29] Many colleges that automatically award merit scholarships will publish on their website what their matrices are for awarding those merit awards. And key point, admissions are generally test optional. Merit scholarships often use test scores as a basis for awarding them. So do have your kids take the test. There’s no harm, and there’s potentially great benefit.
[00:23:54] Now, if you don’t want to go manually through every single college and type all your data into that price calculator, there are two great websites. One is collegedata.com. The other is College Navigator. Just Google College Navigator.
[00:24:08] You can enter college names in there and then do a search. And each website has a financial section. And in that financial section it will show what percent of students who were not eligible for any need-based financial aid got a scholarship anyway. And that’s merit scholarships. And it’ll also show the average merit grant.
[00:24:30] Now you can also look up what the median 50th percentile on both of these sites for GPAs and test scores were. Let’s say the median 50 percentile, if that is a 3.7 GPA and your student has a 3.8 GPA, your student is probably going to get a larger merit award at a college that offers merit scholarships.
[00:24:53] There’s another tool for those who want to super geek out on this stuff. That is what’s called the common data set. Google the college name and common data set. And this is a set of data that all colleges collect and publish. And there’s a whole section on financials and there’s a whole section on admissions and that shows that median 50th percentile. It shows what percent of applicants submitted test scores. And it shows what types of financial aid were offered and what the average grant size was.
[00:25:22] Hit the college data website just because it’s the easiest to use, and that’ll give you big picture information. When you find colleges that are interesting, then go back and do those colleges’ specific net price calculators.
[00:25:34] Also, when your kid applies to a college, make sure that they look up any additional scholarships that require an additional application. Most scholarships are awarded simply on the basis of your application and your FAFSA and CSS profile submission. But there tend to be some others that offer more.
[00:25:49] Jon Luskin: Part two for this question: “If an applicant is a high performing individual, but their parents have assets and/or income, are the assets or income considered a negative factor in the award of merit aid?”
[00:26:03] Ann Garcia: There are merit scholarships that have a need component. However, typically they are minimum scholarship of $X, but fully funded to the extent of a student’s need. So as long as that minimum number isn’t $25, it’s okay to have income and assets and have you need to pay a portion of that amount. You’re not sacrificing so much in the process by having some savings.
[00:26:30] And I’ll say my personal experience on the whole savings, and I’m going to harp on college savings because I feel like so much of our college planning tends to be around trying to game the system. What you really want to be doing is providing good choices for your kid. And some of those will come from financial aid eligibility. Some of them will come from your kid being a super awesome person who’s going to do great things and is really accomplished as a high school student. And some of them are going to come from you putting in the work to do the savings to make opportunities available to them.
[00:27:01] My daughter, we joke that in high school she was a D1 athlete. And we felt that personally, personality wise, academically as a student, she was a much better fit for private college. We’re in Oregon, she was offered a full tuition scholarship to the University of Oregon. And that was great. But that school wasn’t a very good fit for her. She got a very generous offer from a private college that is a perfect fit for her. Now very generous from private college is not the same as full tuition scholarship from a public college. Because we had saved, we were able to absorb the difference and have her go there.
[00:27:38] And I think as parents, that’s really what we want for our kids are good choices. And so more savings, more choices. Does it cost you in the aid formulas a tiny bit? Does it gain you in the choices? Yes, by leaps and bounds.
[00:27:51] Jon Luskin: This one is from Bogleheads® user ‘9-5 Suited’ who asks: “What factors should parents weigh when considering the potential return on investment of a less expensive in-state school versus a more expensive private university?”
[00:28:08] Ann Garcia: In our society we tend to equate cost and exclusivity with quality, and that’s not necessarily the case in something as subjective as college. Now, it’s true if you want to be a hedge fund manager or if you want to be a management consultant, then you probably want to go to a brand name college. Everyone else you want to find a college that’s a good fit for your student. And that means it’s a good fit academically, it’s a good fit socially, and it’s a good fit your family’s budget.
[00:28:34] There was a great research study done a few years ago, the Purdue Gallup Index. They interviewed adults who considered themselves successful. And what they wanted to do was find out what about their college experience had led them to be successful as adults. And what they found was that it had nothing to do with where they went to college. It had nothing to do with public versus private. It had nothing to do with the selectivity of the college. It had nothing to do with their major, urban, rural, anything like that.
[00:29:02] What it came down to was six factors. And they were things like being able to apply what you learned in the classroom to a job during your college years, finding mentors, feeling like professors cared about you, engaging in extracurricular activities, participating in a project that took at least a semester to complete.
[00:29:23] And here’s the good news: all of those are available at tons and tons of different college campuses. So, when you’re talking about return on investment, you’re talking about having your child be successful as a college student. That’s the learning. That’s the personal growth. That’s the career development. That’s having a good set of choices. When you find those types of factors in an environment that work for them, that’s what you really want to invest in rather than the name on your diploma.
[00:29:50] Think about your child as a learner. What types of academic environments work for them? Think about how your child makes friends. Are they someone who puts themselves out there or are they someone who needs to be brought along by the crowd? That’s the type of environment that you want to look for them socially on their college campus.
[00:30:07] What’s your budget? Good news is there are loads and loads of college opportunities available at loads and loads of different price points. So, if you can think about those first two characteristics, what makes your student successful as a student and as a person, what makes them engage in their environment, and then map those to your budget, I think you’ll come out with some really great outcomes.
[00:30:29] My kids are perfect example of this. I have twins. They’re both graduating from college this year. My son is at a public college that admits over three quarters of applicants. My daughter is at a private college that has a single digit acceptance rate. Both of them have virtually identical job offers coming out of college. But for the fact that they have different majors, same salary, same corporate management training program, same benefits.
[00:30:55] So, I think if you think about what makes my child successful and use that to guide your search, that’s going to be worth a whole lot more than, which school do they go to? As Jon was saying, “Why college? Not which college?”
[00:31:09] Jon Luskin: And here’s another question from the Bogleheads® Forums. This one asks: “How much should a family target for saving to pay for the cost of college? How much is enough?”
[00:31:18] Ann Garcia: You should come up with a savings plan that works for your family. And then use that to guide your college choices. My rule of thumb on savings is if you’re not maxing out retirement, then no more than 10% of what you contribute to retirement should go into college. So, if you’re putting $10,000 a year into retirement, instead of the $22,500 maximum, then at most $1,000 goes into college. If you want to save more for college, save more for retirement. Move those up, hand in hand.
[00:31:45] Then what you need to do, and this is a particularly important issue for parents of young kids where you’re like, “Oh my gosh, I have this baby. I only have 18 years to save for college. I need to start now and somebody told me $80,000 times inflation times four years. Oh my gosh, I need to save $2,000 a month.” And you’re at a point where you’re paying for childcare for the first time, or maybe one spouse has reduced their work and you’ve got somebody who outgrows their clothes every three months. So, you’ve got a lot of other expenses. Don’t beat yourself up for what you can’t do because you will find good choices at whatever price point.
[00:32:15] I do think it’s important for families to go back and review what you’re doing savings-wise. Make projections about where that’s going to put you for college. And see, “am I on track to choices that I want my child to have?”
[00:32:28] Particularly once your kids get to middle school, you can look at your savings rate, look at your savings balance, and say, “Okay, I’ve got seven more years or six more years to college. What does this look like? Then how much do I think I can pay out of pocket? Am I eligible for the tax credit? Am I okay with student loans? That means my budget is $X. Does that get a four-year option that I like? Maybe it gets me two or three years of college. And we need to be thinking about community college, whether it’s during high school or after high school. We need to think about the pathways to shorten the enrollment period. We need to be looking for scholarships and other programs.”
[00:33:05] Two things I think are really helpful for families to do. One is look up your state’s in-state public colleges scholarships and see what the minimum GPA requirements are to get them. And use those numbers to inform your budget as well. Because most colleges have a scholarship that your child is eligible for as long as your child puts in the work during high school.
[00:33:26] The other thing that I think is really helpful, just reality and sanity check, is go back to the college that you attended and put your info into the net price calculator and see what it would cost for your child to attend. Because you may have a really strong idea in your head of “This is where I want to go. I want my child to have the same opportunities that I did.” And then you look at the numbers and you can go, “oh, well we’re done buying those t-shirts for now.”
[00:33:49] So, be as informed as you can about the cost. Come up with a savings plan that works for your family and just do some check-ins over time to make sure that that savings plan is putting you on a path to where you want to be.
[00:34:00] The great news is, like I said, there are loads and loads of college choices at every price point, including free. My son has a friend who worked for Starbucks all through college, and did their tuition partnership program with Arizona State and just got her degree and really paid $0 for it. There are price points everywhere from $0 to $90,000 a year, and you can find ones that work for you.
[00:34:23] Jon Luskin: I really like that 10% guideline that you suggested just now. Whatever you’re saving for retirement, up to 10% of that, that’s your budget for saving for college.
[00:34:33] And I’ve got one more question. This user from the Bogleheads® Forums writes: “Because of the penalties for overinvesting in 529s, should we conduct most of our college savings outside of those 529 plans?”
[00:34:46] Ann Garcia: So, I do think that 529s are more flexible than people give them credit for. They can be used for trade schools. They can be used for a lot of gap year programs. They can be used for private K-12 tuition. So, don’t discount the things that you can spend a 529 on.
[00:35:03] And if your 529 is overfunded, particularly due to scholarships, you have a lot of low-cost ways of pulling that money out.
[00:35:09] However, I do feel like for most people, 529s are the best way pay for college. The second-best way to pay for college is the way that you’re going to do it. And so, if you’re not comfortable saving in a 529, sure, use a taxable investment account. Use a Roth IRA.
[00:35:24] But again, just think of what the financial aid impacts of those are and do what you can to mitigate those. If it’s a taxable investment account, bring up your cost basis before you hit those FAFSA years so that you’re minimizing the income that comes through to tax return. If it’s a Roth IRA, defer those distributions to those later years of college. And if you do have an overfunded 529, don’t wait until college is over to drain the money out because you have opportunities along the way to do that at much lower cost, particularly while your kid is in college and probably not earning a huge salary, potentially being in the 0% tax bracket.
[00:36:00] Jon Luskin: Ann, I like that strategy you just mentioned of taking money out of that 529 when that college student or recent graduate is in a lower tax rate.
[00:36:11] Ann Garcia: Yeah. And the thing with 529 distributions is anytime it’s non-qualified, it’s taxed to the person who received the distribution. When you take money out of your 529, you can choose to have it go to the account owner, to the beneficiary, or directly to the college. Most parents are horrified at the thought of sending this money to their kid, but that is generally the path that I recommend that people take because if it’s non-qualified, it’s taxed to the kid.
[00:36:36] If the distribution goes to the parent, number one, the risk of tax and penalty being taxed at the parent’s rate is there. And number two, you risk a notice from the IRS saying that you took a non-qualified distribution.
[00:36:49] Jon Luskin: Looks like we have another question from Doug, so I’m going to add him back as a speaker.
[00:36:53] Doug: When you’re saving in a 401(k) at my company, we’ve got a Roth option as well as the traditional. Do the financial folks look at it any differently? So, for example, does it make sense to contribute all of it in the traditional so it brings down your AGI? Or, do they look at retirement savings the same? Thank you.
[00:37:14] Jon Luskin: AGI stands for adjusted gross income. Generally, the higher your AGI, the more taxes you can expect to pay. You might be able to lower your AGI and therefore your tax bill by making contributions to certain pre-tax accounts. This includes a pre-tax workplace retirement plan such as a traditional 401(k), a traditional IRA if your contribution is deductible, or a health savings account.
[00:37:46] Ann Garcia: This is an answer that has changed in the last couple of months with the FAFSA simplification. Post-FAFSA simplification, you will only add back retirement contributions that are listed on your tax return. So, all of your 401(k), 403(b), 457 contributions will reduce your income on the FAFSA going forward.
[00:38:05] Now this change is only on the FAFSA. The CSS profile asks for a much wider range of financial information. And I would assume that they will continue asking about what you put into pre-tax retirement savings.
[00:38:20] So a little bit of a balancing act. Do you optimize for the FAFSA? Do you optimize for the CSS profile? I would say optimize for your retirement and make college choices based on what your budget allows. So, if it’s better for you to make pre-tax IRA contributions, that will lower your AGI and that will be better on the FAFSA, as long as you’re an employee of a company.
[00:38:43] If you are self-employed, you will still be adding those pre-tax contributions back. So, self-employed people are better off contributing to Roth. But if you’re a company employee, maxing out your retirement will be better on the FAFSA. It doesn’t help as much on the CSS profile.
[00:38:58] Super complicated, and it’s unfortunate that it’s kind of bifurcating. What’s good for the FAFSA is not as good for the profile. Typically, those have been the same. So, do what’s best for your retirement, and then adjust your college plans based on that.
[00:39:14] Jon Luskin: Ann, any final thoughts before I let you go?
[00:39:18] Ann Garcia: I think the most important thing that we do as parents in the education process is do right by our kids. And, make sure that the choices that we’re making available to them are choices that put them on a path to success. And when we talk to our kids about money and talking to them about money is important, particularly when it comes to something that’s as big as college, make sure that we’re honest and transparent when we talk about it from the perspective of goals as opposed to limitations.
[00:39:43] My goal is that you go to college, my goal is that you minimize the amount of student loans that you graduate with. My goal is that you get an education that’s a good fit for you.
[00:39:52] When you’re doing that, you’re talking about what you want for them versus talking about the money and putting constraints on their decision-making process.
[00:39:59] Jon Luskin: Well, that is all the time we have for today. Thank you to and for joining us today, and thank you to everyone who joined us for today is Bogleheads® Live.
[00:40:07] The next Bogleheads® Live, we’ll be discussing cybersecurity, how to stay safe, keeping your money safe online. Steve Ryder will be our guest. That’ll be Thursday, April 13th at 11:00 AM Pacific. 2:00 PM Eastern, and if you are listening to this as a podcast and you’re listening to this shortly after the podcast came out, I’m talking about this coming Thursday, the podcast releases on Monday. So, if you’re listening to it on Monday, Tuesday, or Wednesday, then know, in just a few days you’ll be able to join our live Twitter conversation, get your questions answered about staying safe online.
[00:40:43] Between now and then, you can submit your questions for our future guests on the Bogleheads® Forum at bogleheads.org and Bogleheads® Reddit.
[00:40:50] Until then, you can access a wealth of information for do-it-yourself investors at the John C. Bogle Center for Financial Literacy at boglecenter.net and bogleheads.org, the Bogleheads® Wiki, Bogleheads® Twitter, the Bogleheads® YouTube channel, the Bogleheads® on Investing Podcast with host Rick Ferri, Bogleheads® Facebook, Bogleheads® Reddit, The John C. Bogle Center for Financial Literacy on LinkedIn, and local and virtual chapters.
[00:41:19] If you’re listening to this on a podcast, if you could please take a moment to subscribe and to rate the podcast on Apple, Spotify, or wherever you get your podcast.
[00:41:29] Finally, a thank you to Barry Barnitz for his work, and thanks to Nathan Garza and Kevin for editing the show. And a final ‘thank you’ to Jeremy Zuke for transcribing podcast episodes. I could not do it without everybody’s help.
[00:41:43] Finally, I’d love your feedback. If you have a comment or guest suggestion, tag your host @JonLuskin on Twitter.
[00:41:51] Thank you again, everyone. Look forward to seeing you all again next time. Until then, have a great one.
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