I’ve been trying to put nearly all my savings into retirement accounts (401ks/IRAs/HSA) and plan to do so for the next five years. I’ve doing this under the belief that having all my assets in retirement accounts will reduce the cost of my children’s (6 and 10) education by hundreds of thousands of dollars. I was told I don’t understand how net price and college grants work at all… and you folks can straighten me out.
I was under the impression that by today’s rules … If 8-16 years from now, we have a HHI of $200k, a paid off house worth $400somethingK, and 401k/IRA balances of $1.somethingM and no other assets, we will look pretty close to a family with the same HHI that has spent all their money on luxuries over the years instead of saving. In both families, our kids would likely be charged $50somethingK/year to attend many schools even if the schools list prices are into the six figures per year by then. This is what the net-price calculators for a wide variety of schools show when I fill them out, but I’ve been told that net price calculators are not accurate if I have significant assets… and you folks can straighten me out.
I believe that sticking that $1M into retirement accounts instead a 529 or taxable accounts, will prevent my kids from being charged an extra $50k/year for their education because their parents have been savers. I was told that retirement accounts will be counted against me by the schools using the CSS Profile, so I don’t know what I’m talking about… and you folks can straighten me out.
So please, straighten me out. I genuinely want to understand this. I expect my kids education is going to be my largest expense in life by far and don’t want them charged more than necessary.
The amount that you have to pay depends mostly on:
INCOME…what is your income and what will it be when your kids go to college (this includes annual retirement contributions). Financial gymnastics with assets won’t change a high EFC based on income.
Schools’ ability to give aid…most schools do not have a lot of aid to give NO MATTER what your situation is, even if poor. So, even a poor family could be told that they have to pay $200k+ if they want their child to attend a school that doesn’t give much/great aid.
Assets…the schools that give the best aid may also look at home equity. Who knows what CSS Profile schools may decide to do in regards to retirement accts. I’ve seen some articles where some top schools say that they’re considering looking at retirement accts…probably if they think an excessive amount is there as a means to hide money.
Families are FIRST IN LINE to pay for college.
With a HHI of $200k, you’ll have a high EFC based on INCOME ALONE. EFC would likely be about $70k per year.
As @mom2collegekids says, your income will be a major part of your EFC. regardless of your assets. If you have an income of 200K and college bills of 70K, that would have to be paid from cash flow or from loans, unless you want to pay early withdrawal penalties on the retirement accounts.
There are a lot of unknowns, including 8 to 12 years of financial aid formula, college cost, and tax law changes. I think it would be prudent to have some money in education savings plans as well as in retirement. Having eggs in multiple baskets gives you more options.
The balances IN your real retirement accounts (IRA, TSA, etc) are not counted as assets for need based financial aid purposes.
BUT the amount you contributed to tax deferred accounts like these are added back in as income. So in 2018-2019 for example, you would be using the 2016 tax year. Any contributions to these tax deferred accounts in 2016 will be added back in as income.
There is also a limit on the dollar amount you can contribute to these annually.
Are you saying you have $200,000 income annually?? Or will? If so, your family contribution based on income only will,exceed the cost of attendance at MOST colleges. Regardless of how much is in retirement accounts…your kids won’t be getting need based aid at the very vast majority of colleges.
Did you really think you would be eligible for need based aid with an income in the $200,000 range?
Is this your net or gross income? At that income level, your family contribution will,be between $50,000 and $75,000 a year. At least.
Remember, the most generous colleges also will count some portion of your home equity in that paid off home.
Adding…like you, we maximized our retirement accounts. We did it because we want a secure financial retirement. It made no difference in terms of need based aid. At our income level…which was lower than yours…our kids were full pay…no need based aid. At. All.
The VAST MAJORITY of colleges do not guarantee to meet full need for all accepted students anyway. They just done. The ones that do are highly competitive for,admissions…and getting more and more competitive each year. Some of these colleges accept well less than 10% of applicants. This means 90% are denied admission…and there are plenty of well,qualified candidates who do NOT get accepted at these schools.
At your income level, you also want to look at merit aid opportunities WHEN THE TIME COMES. It sounds like you are researching this cost potential for kids who are about 10 years old. It’s nice to plan…but really…the landscape of college costs is a moving target, as are financial aid awarding policies.
This is very important for you. If $200k gets you no FA, and in most places it does not, then you are better if saving some if that in cash, otherwise you would need to borrow from your own trireme to acts or home equity. Maybe that is not a bad thing.
In my mind, it is better to put as much as you can in retirement, then as much as you can in college savings. You have to plan for yourself first.
But do understand that if you can only pay 50k, most schools don’t have $ to give you, even if that is your EFC. And those that do become more and more competitive to get into bc they become the only “affordable” options.
According to net price calculators at the four schools I went, my wife went, my brother went, and my parents went, my kids would get school grants to bring net prices out to the high-40s to mid-50s with a HHI of $200k TODAY. My oldest doesn’t start college for 7.5 years and my youngest doesn’t finish his bachelors degree for 16 years. I expect list prices to be significantly higher than $60k by then, therefore I do expect to get need based aid with a $200k HHI.
I’m hoping we will have $200k (gross) HHI annually while our kids are attending college. We are not there yet. I’m putting $5k/month in 401k/IRA/HSA/Spousal IRA today and spending down savings to cover living expenses right now. My goal is for us to be nearly “broke” starting in the middle of our youngest’s high school years. I thought with everything in retirement accounts, my kids are not penalized for my saving habit. I can then stop saving for retirement while the kids are attending college and cover $45k+/year of expenses out of pocket. If the net price will be in the $50ks, then loans or gifts to us from grandparents can easily cover the difference. If it will be significantly more than that because retirement account balances do count against us as Courtney indicated, then I’ll need to reconsider my plan.
College list prices have been doubling roughly every decade since WWII. Need based grants and loans have been increasing along with list prices. I expect that trend will slow, but continue. I’m betting on six figure annual list prices for my youngest.
So back to the question that brought me here. Is there any evidence that retirement account balances increase net-price?
“If it will be significantly more than that because retirement account balances do count against us as Courtney indicated”
Not actually something I claimed. What I pointed out on Reddit was that the CSS Profile asks about retirement assets. as @mom2collegekids said, its up to the colleges what they do with it. Some colleges have mentioned that they’re considering/do look at it. Some don’t.
Either way you seem to have this idea that your kids are going to get a discount because you’re moving your assets around, and they’re not. Not at your income level. Not with your assets (those contributions will count as income as @thumper1 pointed out).
I’m just saying, you’re going to a lot of effort for what I think will end up being no net benefit with regards to paying for college. And, with your current strategy (which on reddit you said has resulted in you using your savings to pay for day to day things), you’re not going to have enough assets in cash to actually pay the college bill.
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My goal is for us to be nearly “broke” starting in the middle of our youngest’s high school years.
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Lol…good luck with that when you’d have a $200k income at that point.
News Flash: no one considers someone with a $200k income as “broke” unless you’ve also got debt up to your eyeballs.
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According to net price calculators at the four schools I went, my wife went, my brother went, and my parents went, my kids would get school grants to bring net prices out to the high-40s to mid-50s with a HHI of $200k TODAY. My oldest doesn't start college for 7.5 years and my youngest doesn't finish his bachelors degree for 16 years. I
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Which schools are those? HYPS???
Seriously…which schools’ NPCs did you run?? And were you including your annual retirement contributions of $60k in those NPC calculations??
DId you include your home equity?
And did you indicate one child or two children in college when you ran those NPCs?
No one considers someone with 200K income as broke EVEN with debt up to your eyeballs unless it was for a liver transplant and the meds which keep you from rejecting your new organ.
You are seriously spending down your savings to cover your day to day living expenses? What happens in an emergency-- not in ten years for college, but in two months?
I believe if I understand the situation, I will save half a million dollars by having all of my savings in retirement accounts. Yes, I’ll need to come up with $50somethingK a year if we’re broke with a HHI of $200k. I’m not concerned about that. If you are correct and retirement accounts DO count and that is not reflected in net-price calculators, then I’ll need to come up with a extra $50-75k/year on top of that for eight years. That’s half a million dollars I can’t afford to spend.
If you have $200,000 in income, you will not be “broke” not even in 7 years.
I have to ask you @AmIMisinformed …do you really think you should,get need based aid with your income? Really? What’s wrong with looking for affordable colleges, saving in a 529, or actually paying? You are NOT low income…and even in 7 years, you won’t be low income…not with a fully paid for house, and $200,000 in income.
Yes…you are misinformed. Need based aid is for,students with NEED.
The net price calculators on the college websites are worthless for you with a kid starting college in SEVEN years.
The landscape of college aid and costs could change.
Your 10 and 6 year old might not end up being the star students they would need to be to get accepted at the most generous colleges out there that meet full need for all accepted students. Some of these schools might completely change their need based awarding policies.
You know…you have young kids. I’m not saying you shouldn’t plan ahead… but how about looking at them as elementary students?
There are a small relative number of colleges that meet full need for all students. Remember that.
If I could predict what President Trump will do tomorrow I’d be rich and famous today. Nobody can tell you what the financial aid formulas will look like in ten years. Do not do anything for the sake of financial aid in the future that doesn’t make solid sense right now from a cash flow, tax, estate planning, accrual, compound interest, fee perspective.
If it’s a dumb idea financially it will likely turn out to be a dumb idea in terms of aid. What that means in terms of the mechanics is anyone’s guess. But the folks who took their spare cash and stuffed it into long term care policies to “save it” from college’s rapacious appetites are now looking at worthless policies (some of the companies just pulled out of the long term care business; some have kept the policies but it will be so hard to collect a dime based on the restrictions that they are as good as worthless) and they’ve missed all the growth and appreciation they would have gotten by leaving those funds in a low cost index fund. And yeah- maybe an extra 5K in financial aid by losing 75K in premiums paid and appreciation. The math seems crazy to me- but yes- this was a “thing” when my kids were entering the college years.
Oh- and the insurance agents got their commissions. Don’t forget that.
It’s good to be thinking about college finances this far in advance. But you should also be thinking about other possible occurrences: losing your job; spouse losing his or her job; health problems (yours, your children’s, your parents’); getting sued; getting arrested; etc. Some of these adverse events would allow you to pull money from retirement accounts without penalty; others wouldn’t.
You are posting like attending a very high priced college is an essential. It is NOT. The public universities in your state will continue to provide college educations at a fraction of the cost of a private school or OOS public.
Your kid will NOT NEED to attend a $100,000 a year college…or whatever. If that is what you want…it will be your choice…and you will likely need to pay a large chunk of,change to make that happen.
Again, which schools’ NPCs did you get that $50k result from?
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then I’ll need to come up with a extra $50-75k/year on top of that for eight years. That’s half a million dollars I can’t afford to spend.
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Well, like many people in that situation, guess what? Your kids don’t have to attend schools where you have to pay that much per year. Going to those schools is a LUXURY. If you don’t want to pay for a Mercedes, then choose a Toyota
Not to mention that this strategy is completely morally bankrupt, but we can stick to talking about how it’s also not going to work. Just thought I’d mention it, because seriously, there are people out there who actually need the very limited aid colleges have to give out.
You should run the numbers at a lot more schools. Most schools will “gap” you, meaning if EFC is 50, cost is 70, they will offer you 10k grant and 40k in loans only…
But theoretically, if college’s don’t change to look at existing retirement, you are right, it would not change EFC. (Some do look at it, and many look at home equity). It is just that practically, you may end up with that EFC and the school gives no FA bc they don’t have enough.