I'm 50, and my kids are 2 and 6.
Starting in 2021, assuming that both kids attend 4-year colleges right after graduating from high school, I will need to come up with the cost of a year of college for eight consecutive years.
Assuming $50,000 (typical tuition, room, board, and fees for a private college), that means a total of $400,000. Where is this money going to come from?
Financial Aid? Student Loans? Fuggedaboudit.
Financial aid for college, including government-supported loans, is based on what is known as the EFC (expected family contribution). The short version of this is that the student's family is expected to pay 47% of its qualifying income each year toward the college expenses. The institution will typically provide aid, grants, and loans to cover the remainder of the expenses.
The qualifying income is calculated by taking all family income (including tax-sheltered income like 401(k) contributions) and subtracting an allowance sufficient to cover the basic cost of living and working. For a family with an income of around $100,000, the allowance is around $35,000. In addition, 12% of all family assets except for retirement plans (less an asset protection amount based on the older parent's age) are added to the income figure. For state colleges, home equity is not counted as an asset while for private institutions it is. And my little underachievers are definitely going to a private college.
So, taking the Hedonic Adjustment household, here's what the expected family contribution looks like:
Household income: $120,000
Income exclusion: -$37,500
Available income: $82,500
Savings and other assets: $100,000
Home equity: $650,000
Total assets: $750,000
Asset exclusion: -$65,000
Available assets: $685,000
12% of available assets: $82,200
EFC (47% of assets+income): $77,500
EFC (State Institution): $40,608
So clearly there will be no financial aid forthcoming. Even if our income is much lower -- as it might well be -- that boat anchor of home equity will continue to prevent us from getting any financial aid.
Pay As You Go
So why not just pay for college out of our current income? The house will be paid for, both Mr. and Mrs. Bluebird will be working, we should be able to cover most of the cost from our income.
The problem with this theory is age, mine specifically. The years from age 62 to 70 (when we need this money) are nobody's peak earning years. There's a good chance that even if I want to be working, I won't be able to find the kind of good-paying work that I have now, or that health issues will prevent me from working full time or at all.
Further, there is only a limited tax deduction ($4,000) for college tuition, so we would need to earn an extra $50,000 post-tax dollars a year.
Borrow Against the House
This is what I would do if my kids were going to college right now. I'd take out a mortgage today for the entire $400,000, then pay it back over the remainder of my working years. It would be tough, but it has some critical advantages, such as the tax-deductability of the interest.
But this strategy isn't going to work in 12 years, because I'm not going to have another 15 years of working life ahead of me; in short, I would have no way to pay that money back. I might consider taking out a lump-sump reverse mortgage, where I strip the equity out of the house with the proviso that the lender doesn't get the house until I die, but that doesn't leave me any home equity if I need to move into a smaller home or a retirement community.
Sell the House
I would like, given the choice, to stay in my house until I die. I like it here a lot. But if it comes down to college for the kids or hanging on to this place...
So I could sell it, and move into a smaller, cheaper place. That's one option. Losing the bulk of my home equity does make life more complicated if I need to move into a continuing care or retirement setting, however.
Roll the Dice on an Inheritance
Collectively, my parents and Mrs. Bluebird's parents probably hold around $2 million in assets. None of them is currently working, and they are all in pretty good health and can expect to live another 15 to 20 years. It's impossible to estimate how much of this money will remain in their estates (and how it might be distributed from the estates).
And it's deeply unseemly to plan on being bailed out by this money.
Use Your Retirement Savings
Even after the recent market mishegas, we still have around $650,000 in retirement savings. Assuming that I can continue to achieve real (post-inflation) returns in the 2% to 3% range, that money should be enough, if annuitized and combined with Social Security, to provide us with a post-retirement income of around $8,000 a month, as long as we don't start drawing on this money until age 67 or so.
Any attempt to extract large chunks of this money to pay college expenses creates two problems:
- A big tax hit.
- A reduction in the annuity income amount
Save Money Now
Right now, we have a total of $70,000 saved for college expenses. About $40,000 in a pair of 529 plans and $30,000 in various Roth IRA and Roth 401(k) accounts. (I prefer using the Roths to the 529 plans because they are more flexible -- 529 plans limit your ability to change your investment choices, because they can be withdrawn tax-free for any purpose once the holder is 59 1/2 years old, and because they do not count toward the EFC. We're currently adding $8,000 per year to a Roth 401(k) through payroll deductions, but we didn't make any Roth IRA contribution in 2008, and haven't yet in 2009.
If we were to save $20,000 per year for the next 12 years and we we're able to achieve a real (after inflation) return of 3.5%, that would get us to to our $400,000 target just as child #1 starts college.
Right now, we're saving $8,000 toward college an an additional $6,000 in a tax-deferred retirement account. If we could figure out a way to save an additional $6,000 to $12,000 per year, we might be able to simultaneously ride out both retirement and college at the same time.






