Archive for College Planning

Financial planning and college acceptance

If you have a senior in high school, this is an anxious time. College acceptances and rejections are rolling in, and it’s tough. It’s an emotional drain and the decision can have a huge impact on your finances well into retirement. So, some points to ponder:

Accept a college you can afford. Unless you have significant savings, current high income, or significant financial aid, a state school is going to be most people’s best financial option. The cost of attendance at private schools has become breathtaking—four years at Northwestern is going to cost around $300,000. Four years at the University of Illinois is probably going to be less than $200,000. Consider carefully whether an undergrad degree is really worth that extra $100K.

Think about graduate school when you think about college. The $100K difference between the above two schools can pay for a professional program at some grad schools, and make a pretty good dent in even an MBA or legal program. People rack up the big bills for graduate programs, so you probably don’t want the student to take out huge loans as an undergrad. Also, for many jobs the most important degree is the last degree, so getting into a big name graduate school may be better money invested.

Make a commitment to a finished degree in four years. You’re throwing money away if you don’t get that degree. Finishing with diploma in hand from a less-than-ivy-league school counts a lot more than a year or two at Brown or Yale. A lot of people can get an admission, but fizzle. A degree measures something of real importance—that you can finish what you start. Maybe it’s heresy, but I also don’t believe you have to keep switching to find the “perfect” major—just do it. You have the rest of your life to refine it, take more classes, and study. Switch majors only if it doesn’t add more time to getting your degree.

Make the best of it. If you can’t be at the school you love, love the one you’re with. No matter where you go, you can find a niche. And no matter where you go, your dorm will have some really obnoxious residents, the food will suck, some of the extra-curriculars will be great and some not so much, and there will be campus traditions you’ll either love or think are stupid. People will have really annoying politics.

I highly recommend parents get behind whatever school—buy the mug, the tshirt and the bumper sticker and follow the news about the campus. Your student needs your support, even if they scoff at it, and even if the school wasn’t what you might have hoped for. Once on campus, most students forget all about wherever else they theoretically could have gone—just get over it.

As a corollary—don’t listen too much to your student’s complaints. With what we were spending for college, Spartan mother that I am I handed my kid her shield and told her, with it or on it!  Finish in 4 years or don’t come home. Sure, there were plenty of problems at school, but nowhere near as many as she would have had by dropping out with $100K spent and no degree. It’s a great step toward adulthood to find out that everything isn’t perfect, everyone doesn’t think you’re a genius, and you’ll actually be judged on your work.

Is there a difference? Yeah, there’s a difference between a mediocre state college and one at the tippy top of the college ratings (I’ve graduated from both). The quality of your peers, and the education they come with, will likely be better on average (but not for everyone). A top college will have higher expectations for student success (and probably a much heavier workload). And most top schools have a higher completion rate, although the breakdown rate can be pretty significant.

But I’ll still maintain that it depends as much on who you are as where you go. I’ve seen clients with liberal arts majors from indifferent universities earning $200K 5 years out, and ivy grads as unpaid interns in video production.  A top school can be shorthand for smart, but so can writing a book, founding a company, or inventing a product or service. And, as an aside, for at least the past 44 years, no one has ever asked me what my grades were—so beyond getting into grad school, I don’t think that matters at all, except insofar as it helps measure what you actually got in the way of education for your money.

I also think it’s fine to major in whatever you want as an undergrad, but only if you have a plan as to how you’re going to be employed or get into a grad school. I don’t think a major or a college program should be exclusively a trade school training, but you should also come out with a marketable skill or two. Take a business, or computer, or health minor, or get a campus job managing something or doing web design–whatever makes sense, but with a strong eye to how you’ll use it to pitch an employer.

It’s a tough time, and for most students the reality is some rejection. But as a parent, don’t let too much emotion cloud the selection. Balance dreams against financial reality, and try to make reasonable choices.

 

Financial resolutions for 30 and 40 somethings

I’ll control the amount of money I spend on a house. What lenders will loan you is not necessarily what you should spend. Your housing decision drives the costs of many other things in your budget: upkeep, insurance, repair costs, and maybe status decisions such as where you send your kids to school and what car(s) you drive. Once you commit, it’s a fixed cost that isn’t easy to reduce. Keep your housing cost (mortgage+interest+taxes+homeowner’s insurance) to 28% or less of your gross and you’ll reduce stress and free up money for savings.

I’ll increase my retirement savings with every raise. Try to add at least half of every raise to your retirement savings. Aim for the maximum allowable contribution of $18,500 to your 401k/403b and fund a Roth if you can. In which order depends on your income, employer match, and investment options in the workplace plan.

I’ll start saving something for my children’s education as soon as they’re born. Just as with retirement savings, the earlier you start, the less you have to save later. No, they won’t earn their own way. No, they’re not so smart they’ll get a full-ride scholarship. Just. No. Save something—anything is better than nothing.

I’ll hold on to my bonuses and any inheritance. Too many people get used to depending on a bonus for their regular lifestyle, but a company can go south and the first thing eliminated is the bonus. Try to regard the bonus as bonus savings—for investment, emergencies, etc. What to do with an inheritance depends on the size, but consider no more than half of it available for spending, and make that spending a worthwhile purchase (such as real estate) that has some potential to grow. Windfalls don’t come that often in life, so don’t blow it.

I’ll do everything I can to become debt free. I don’t think I need to belabor the point about credit cards, but by your 40s it’s time to chip away school debt as well, before you have to start paying for your kids’ college.

I won’t cosign any loans. If the bank doesn’t think the person is creditworthy, why should you? And if were talking about guaranteeing a college loan, understand that if your child drops out, or becomes permanently disabled, or dies, you’ll probably still owe the money. You can always help the kid pay off the loan in the future if you can afford it—just don’t cosign it!

I’ll carefully consider the financial costs before deciding to stay at home with the kids. Deciding to quit employment to be with your children is, of course, not exclusively based on finances. I did it, and I’m glad I did. But there are costs—depending on how long, you can significantly impact your Social Security benefit, as well as your future employability, advancement, and re-entry salary. Most likely, you will have no disability insurance, and if you or the wage earner become ill or disabled, or you get divorced, it can be catastrophic. I urge most clients contemplating this to keep their professional networks alive, keep abreast of their field, and, if possible, get extra training or continue working at least part time.

I’ll expect my kids to contribute to household upkeep and earn money as soon as they’re able. Not only does this build life skills, but it conveys to the children that you respect them as being able to produce value and have worth. Any kind of outside job shows kids a world, life choices, and consequences beyond what they can learn in their family, and gives them the experience of being evaluated without the protection of a family or age cohort. Even the difficulty of finding one, and the perhaps soul-less experience of a really boring or difficult job can teach the kid a lot of motivation.

And, do take a look at my post for millenials–it’s still applicable to you.

Taxes: we’re not Europeans

We don’t want to pay as much tax as the Europeans do. How many times have you heard that? If less than 1,000 times, congratulations—you live without internet service. But, I still retain an old-fashioned interest in verifiable facts, not just what I’d like to be true. I hope one or two readers still feel the same way, so let’s take a look at some numbers on just who pays what taxes, and what those taxes pay for.

The moment you delve into comparing countries, you have to contend with currency conversions, buying power and the cost of necessities (what’s a middle class house in Chicago vs. Lyons vs. Haarlem?) so of course we can argue “not comparable” whenever. We work with what we have, and what I found was some very interesting data on the Forbes website. Forbes states all figures in Euros, but I’m going to use a handy dandy currency converter to put this all in U.S. dollars. (I wish these figures were newer–2009–but it isn’t easy finding facts that are up to date. I just don’t know where all those Freedom Caucus people can get their information.)

Let’s look at a couple earning $108,667 (100,000 euros) with two children. Here’s what Forbes says their after-tax income would be:

United States (overall—some states like Illinois have higher taxes) $84,760
France $78,029
United Kingdom $72,154
Germany $73,676
Netherlands $64,113

 

I could add more countries, but as you might expect, taxpayers in countries with small population bases (Netherlands, Norway, Denmark, etc.) keep less of their gross because there are fewer taxpayers to pay for services.

So, we ARE better off by at least $6,000 and maybe as much as $20,000? Wait a minute—you get what you pay for. And our mythical couple is going to have to pay for a lot more out of that after tax income—stuff that is already paid by government programs in these other countries. I’ll admit I don’t have the specifics on every policy in every other country (but would welcome input from anyone who does), but I do know a few expenses our model couple would need to cover out of pocket:

  • Yearly deductible for health care. Mine’s $3,500/family but employer plans can range anywhere from about $2,000 to $6,000. I’ll be conservative and use just $2,000. Let’s assume the parents’ employers cover all health care premiums—increasingly rare, but I’m trying to be conservative here.
  • Savings needed to cover $30,000 in college costs per year for each of two kids—I’ll again be conservative and assume the kids aren’t going to Harvard, and are 2 years old and newborn, so the amount needed will be on the low side. If the kids were older, more would need to be deducted. According to the SavingForCollege calculator, the parents would need to be saving $613/month for the 2 year old and $558/month for the newborn: a total of $14,052/year.
  • If these parents have such young children, they’re probably not very old themselves. Nevertheless, since in the US people are “free” to pay for their own long term care, and this is covered by many European health systems, let’s estimate a low $1,000/parent per year for long-term care insurance: $2,000. (forget saving for the actual cost of care—it would about double the amount needed if the parents are currently in their 30s and can save for 40 years).
  • I’m not including the value of the living allowance that is given to college students in some countries (Netherlands), the free student exchange programs that are routine, the excellent trades and vocational schools available to non-college Europeans (and which are hard to get at any price in the U.S.), the lump sum children’s benefit given to parents upon birth of a child, or the cost of co-pays and prescription drugs, since these vary and I wanted to look at just a few things we can agree on. So how does that math look now?

 

US $84,760
health care deductible (cost of insurance premiums not included) -2,000
college savings -14,052
long term care insurance -2,000
what you actually have left after being “free” to pay for those services yourself. $66,708

 

Another “but wait”—what if mom and dad are both working and need to obtain child care? In my neck of the woods that’s going to cost around $20-25,000 a year, but Europeans can pretty much depend on free or very low cost service from shortly after the child’s birth. So now, our model couple could easily be down to $46,708 after paying for the same services the European family would get for free (or greatly reduced costs). I’ll try not to go on about the paid-for health spas that are routine in Europe, the far-more-luxurious birth center experience, the well-child checkups and assistance, the earlier retirement age, the longer paid vacations, guaranteed paid maternity leave, the housing assistance for the elderly and low-income families…

Yeah, I’m glad we pay such low taxes. And that we get what we pay for.