washingtonpost.com
Color of Money Book Club

Michelle Singletary
Washington Post Columnist
Thursday, January 4, 2007 12:00 PM

Michelle Singletary hosted author Joseph Hurley for a discussion about December's Color of Money Book Club selection, The Best Way to Save for College: A Complete Guide to 529 Plans (Savingforcollege.com, $22.95).

Read Michelle's column about the book here: 529 Plans, By the Book (Dec. 3).

A transcript follows.

Read Michelle's past Color of Money columns.

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Michelle Singletary: Good afternoon and Happy New Year's. Too many questions for a long intro so let's get started.

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Chicago, Ill.: I wanted to know if its possible to set up and a 529 plan for a non relative. I would like to do it for my Godson and want to get the benefits (taxes) and be able to keep control of the funds. Is this possible? Thanks and have a great day!

Joseph Hurley: Yes, there is no requirement that the beneficiary be related to you, so it can make a great deal of sense for a Godchild or other non-relative. Just be aware that if you want to change the beneficiary later on, the new beneficiary must be a family member of the old beneficiary. In other words, you won't be able to change from your Godson to your own child or grandchild.

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Germantown, Md.: Hi Michelle,

My wife and I have been doing pretty well for ourselves by maxing out retirement, have a nice chunk of change in the bank as cash and some non-qualified savings.

Last year we started a college fund for an unborn child (we're both in our late 20's) to get the 6 percent tax credit through the Maryland 529 plan managed by T. Rowe Price.

While having a couple thousand in the account seems nice, it does seem miniscule when I think about the numbers we'll need 20 years from now. Should we bump up those savings from the maximum 2k (for tax relief) and just know that compounding will do it's job (or at least until we actually have a kid), or continue the 2k and just sock away more cash in non-529 accounts?

Thanks!

Joseph Hurley: Seeing how your child isn't even born yet, I would say you have a great jump on your college savings. You're taking advantage of a tax-deferred 529 investment and getting some immediate state tax savings to boot. I am assuming you plan to change the beneficiary to your child in the future. As you suspect, the 2K in annual contributions may not be enough to fund the entire cost of college - in fact, it may not be enough to keep up with the annual tuition inflation at some private colleges - but it will certainly help. In comparing your options, consider how much you are paying in taxes on your non-qualified savings. If it is a lot, then you can save a lot through the 529 plan. If your taxes on the non-qualified savings are not so high, then the benefit will be less.

Michelle Singletary: Just to be clear if you open a 529 plan for Maryland, the Maryland State income tax deduction on your contributions is up to $2,500 annually (per account or beneficiary depending on the plan you choose).

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Bethesda, Md.: I am managing a college savings fund for my niece, who lives in New Jersey, and I've been contemplating a 529 plan for a while. I have one question that has held me up from getting it started: My niece wants to become a nurse and is considering either the community college route or a hospital-sponsored program; if she picks the latter, would the money from her 529 plan be penalized because it's not going to a college? For reference, I am currently considering the 529 plans in New Jersey and Maryland, but I am open to others.

Joseph Hurley:529 withdrawals are tax-free only when used for qualified expenses at an eligible institution. An eligible institution includes universities, community colleges, graduate schools, and many vocational schools. It sounds like the hospital-sponsored program you are contemplating is not an eligible school. One way to check is to ask whether students in the program are eligible for federal financial aid. If they are, then the institution qualifies for 529 purposes. If you withdraw 529 funds without the beneficiary incurring qualified expenses, the earnings in the account will be subject to income tax and a 10% penalty tax.

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New York, N.Y.: Dear Michelle: I just read your column which said that I should have sent my boss a thank you note for the Christmas gift that he gave me. I have to admit that I didn't send him a note because I opened the gift in front of him and thanked him. It was a box containing four chocolates, and he told me to share them with the receptionist, which I did. I'm sorry that I was so rude that I didn't think that I should send a note, but now I know better. Should the receptionist send him a thank you note, too?

washingtonpost.com: If You Got a Gift From Your Boss, Take Note

Michelle Singletary: Since he made you share a gift, share a thank you note:)

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Arlington, Va.: I'd like to know which states offer socially responsible investing options. I understand that I will likely hurt my returns (by moving away from index-based investing & paying higher fees), but I want to live my values so I feel compelled to pursue this path. Thank you.

Joseph Hurley: I can think of three states off the top of my head that offer socially responsible investments among their options. They are California, Pennsylvania, and District of Columbia. The DC plan is available only through brokers unless you live in DC. We may see more states adding socially responsible funds in the future but I don't expect to see too many more.

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Oxon Hill, Md.: I have a 13 year old and I prefer that he goes to an out of state school but right now we don't know where that will be. How do I select a good savings plan that would be flexible as to location.

Joseph Hurley: You'll receive the same benefits from a 529 savings plan or Coverdell education savings account no matter which state your child chooses to attend school. The only time it makes a big difference is if you join your state's prepaid tuition plan (only a few states offer this option). The prepaid plans are usually designed for the student heading to an in-state public institution, although they all have transfer provisions for participating students going out of state.

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Chantilly, Va.: When should I start saving for a 529 plan. I just had a daughter last month. Is there a limit as to how much i can put into a 529 plan.

Joseph Hurley: If you have the ability to set funds aside, it's never too early to start. Of course, you'll want to make sure that you are first taking full advantage of any 401(k) matching offered by your employer. Most 529 plans have very low contribution minimums, often $25 and sometimes even lower, making it a relatively painless way to get started. There is no annual contribution limit although every 529 plan has an overall limit at which you can no longer make further contributions. But the maximum limit tends to be well over $200,000 per child.

Michelle Singletary: I so agree with Joe. My husband and I have three 529 plans for each of our children. We contribute enough to get the Maryland tax deduction ($2,500 per account) AND we are saving in an index fund (because we want unrestricted funds).

And still we are worried about having enough. But go online and try some of the college savings calculators. But don't let them scare you. Save what you can, even if it is only $25 a month.

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Southern Maryland: Why are parents paying for college in the first place? After a kid turns 18, the parents have no legal or financial responsibility for that kid. Make them work their way through college if they want to go. I left home at 19 to work and support myself. I worked 2 jobs, 7 days a week for six years to pay for night school tuition to a very expensive private college (American University here in DC). All the while paying all living expenses (rent, car, food, books, clothes) myself. I only got a 2-year degree because I didn't have the energy to work another 6 years to finish. So, if I can at least get a half degree, so can rich, spoiled yuppie kids. Make 'em work for it.

Joseph Hurley: This issue comes up frequently on message boards and I wish I had the perfect answer but I don't. In my experience, different families have different feelings on the subject, ranging from "It's my parental obligation to pay 100% of college costs for my child" to "I have no obligation to pay anything for my child's college." I see a lot of parents in the middle ground, saying that they will pay part of the expenses but also require that their child take out loans and commit some work earnings to help pay.

Michelle Singletary: Since this is my chat, here's my opinion on this.

I had the kids. I know what it takes to be successful in this world and I want to give my children the best possible start. That means helping them pay for college -- 100 percent! But that might mean they can only go to a state school. From the time they could talk, my husband and I have told them we will pay for college BUT only what we can afford. So if we only have enough for state school that is where you are going. You WILL NOT take on ANY debt.

Now if they get grown and want to do that, then they get nothing but that debt.

As far as working for it. So if I follow that theory no one should apply for scholarships, right? RAise them right and they will appreciate.

I think it's hogwash to say your kid won't appreciate college if they don't work their tail off while going to college. Look, this is the last time (for the most part) in their adult life they will be able to study, go to poetry readings, learn without the hassle of everyday life and bills. I want my kids to fully enjoy the college experience, including studying overseas. So I'm paying -- what I can for the school I can afford.

Now if you are living paycheck to paycheck and you can't save, don't beat yourself up. Try to save something. They may have to work during college to avoid debt but then that won't kill them either.

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Last year of high school: Hi. Daughter starts college next year. Applying to Ivy League and has the grades for it.

We have enough saved to cover state schools, but not enough to cover expensive private schools. She is eligible for merit aid but we do not know what kinds of aid she will be offered. She really wants to attend a private college.

What is the recommended maximum percentage of debt that would be practical for student loans? We hate the thought of her graduating college with a lot of debt, especially since she wants to attend graduate or professional school. Any advice is appreciated.

Joseph Hurley: Debt can be a real burden for college graduates looking to start a career and often a family. You should definitely look into any merit aid that the college can come up with. You will also find that Ivy League and many other private colleges can offer a significant amount of need-based aid based on your family financial circumstance, so it is certainly worth your effort to file the financial aid forms.

Michelle Singletary: Recommended level of debt?

NONE!

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Bethesda, Md.: I have a suggestion for another time--"Born to Buy". The author is Juliet Schor.

Read it, and then sock those funds away for the little critters, rather than fueling the frenzy for having stuff.

529's are really more of the same practical wisdom we all know, but often misapply. Fund it early, fund it often, hands OFF!

Michelle Singletary: Know the book and already recommended as part of the Color of Money Book Club. Look for my review on the archives page.

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Arlington, Va.: Regarding saving what you can, even if it's only $25 a month...

I opened my first mutual fund when I was 18. I would put $50 or $100 into it monthly, contributed to an IRA using money earned over the summers, and had a net worth of about $20000 when I got out of grad school at age 24. A booming market at the time helped and over the course of a childhood you have a lot of years to build up a college fund.

Joseph Hurley: You're a good example (but probably not typical of 18-year olds) of how a committed savings program can accumulate over time. Of course, no one knows how the stock market will perform in the future but by starting early you have time to ride out the cycles.

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Akron, Ohio: Michelle, I didn't get to read the book. I do have a question about saving for college though. Our first baby is due in May. I work at a university that gives full tuition waiver to employees and their dependants. Since DH and I are still working on increasing our own retirement savings (after working long and hard to pay off a ton of debt) we aren't planning to start any type of college savings plan for the baby. Friends think we are awful. Short of being let go, I have no plans to leave my job (and its benefits.) Are we being shortsighted? (BTW, we both put ourselves through college through working and loans and scholarships.)

Michelle Singletary: This is how I would approach this:

Plan A: I keep my job at the university and the kid goes there.

Plan B: I could lose my job. I could get sick and have to leave my job. My kid absolutely refuses to go to the school. Life happens. I save in addition to counting on Plan A.

I would still save what I could in case a Plan B is needed.

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Virginians: need to check the state college savings plan. You're crazy if you don't do it. Basically you can pay for your kid's 2027 education at 2007 prices.

Joseph Hurley: I assume you are referring to Virginia's prepaid tuition plan, and not to the 529 savings plan. A prepaid tuition plan offers you the opportunity to lock in future tuition by paying today, and in Virginia you also get a state tax deduction for a portion of your payments into the plan. Several other states, including Maryland, offer a similar deal. Public school tuitions in many states have been skyrocketing over the past few years, and plan participants have been protected from those increases. However, some prepaid plans have had to raise their contract prices by quite a bit to establish their own financial safety cushion. So be sure to measure the cost of the prepaid plan to the current tuition level at the state school you think your child will be attending.

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NOVA: So, if your child gets into a school they really want to go to, but it isn't in-state, you would not give them the money otherwise saved for the state school and let them work their way/get loans for the rest? What is the reasoning behind this (I'm trying to decide how to handle my child's education needs and make them aware of it from early in life).

thanks!

Michelle Singletary: We plan to pay for their school of choice if we have the money. It can be an in-state, out-of-state or private. Whatever the choice there will be no loans.

If between their working and our paying they can go to the school witout loans, they can go.

But nope, no loans. Nada. No.

My reasoning? I don't want them to start their life off in major debt.

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Washington, D.C.: RE: Southern Maryland's comments

Look, congratulations on the accomplishments that rightfully make you so proud, but is it really necessary to be so nasty about other people's choices? Have you considered that things may be a bit different for students now? The costs of living and schooling have risen dramatically and wages haven't. I'm not complaining, just saying that I'm glad you made it work, but no need to deride others for trying to help their kids or us "kids" for accepting the generosity of people who love us. It doesn't make us less than you. For me it was a combo of loans/scholarship/work and my parents still took some loans to help. We all worked hard and the whole TEAM is proud of what we accomplished together. My gratitude toward my parents has never been an issue.

Sorry to rant, but I get so tired of people dismissing each other out of hand with comments like "spoiled yuppies." Let's have a nice discussion, okay?

Michelle Singletary: Okay!

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Arlington, Va.: Do all the funds for a 529 account need to be withdrawn at one time? I ask because my family was thinking of setting up a 529 account for the younger kids in the family (age ranges from 2-16)which we all would contribute to and upon graduation, we'd provide each child with some money towards tuition. Can we do this or do we need separate accounts per child?

Also, we are setting up a family account where each month each household will make the same contributions. We want to use the funds for family reunions and family emergencies. What are the best accounts to place this money? We'd only dip in it 2X-3X a year.

Joseph Hurley: Each 529 account can have only one beneficiary. You do not have to withdraw funds all at one time. Withdraw the funds during the years when the beneficiary is going to college. Funds can be tranferred between 529 accounts set up for different family members, so there is quite a bit of flexibility.

Regarding your idea for a combined family fund, I would caution you against it. It becomes too complicated to decide who really owns the money and who pays taxes on any investment earnings. When there is a family reunion or emergency, put together a funding plan specific to that event or need. It keeps everying simpler.

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Stony Brook, N.Y.: Just wanted to make a note on those worried about graduate school debts - graduate school does NOT have to cost you a lot, or even anything. It depends on the field, but in many of the sciences (bio/chem/physics etc.) the schools will pay a small stipend, enough to cover living expenses if you're frugal, as well as paying your tuition. If you have the grades for a fellowship you may do even better. My husband and I will have roughly $20000 in savings by the time we finish our PhD's, both in science fields, and we will incur no additional debt - in fact, we're planning on having my undergrad loans paid off by then! Things are much tougher in the humanities, though.

Michelle Singletary: Another way to pay for graduate school is thu your job.

That's how I paid for my masters at Hopkins. Well actually my employers paid -- The Evening Sun and the Post.

And look at all the wonderful work I'm doing for them :)

So as you are accepting job offers ask about tutition reimbursement. Great perk.

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Gifts at work: I so disagree with giving employees holiday "gifts". You thank employees for their hard work by giving them raises and bonuses related not to the holiday but to their work. Often times, what a small holiday gift says to an employee is, "Thank you for working your butt off for basically nothing, but I'm enjoying my hefty raise and performance bonus." And before you point out this was a non-profit, I work in non-profits and often the Executive Director gets a 10 percent raise from the board while everyone else get 3 percent and coffee cup at Christmas. The whole "gift" issue is loaded with patriarchial overtones and should be removed from the workplace.

washingtonpost.com: Today's Color of Money Column: If You Got a Gift From Your Boss, Take Note

Michelle Singletary: I do agree this can be a tricky thing. But in some offices I don't see a problem.

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Manhattan, N.Y.: Getting a kick out of this discussion. One of my high-powered clients in an unguarded moment laughed at people like Southern Maryland (he thought we were like-minded). To paraphrase, he said, "Thank God people believe kids are responsible for paying for college. We need middle-class smart kids to enter the military, and high tuition does the trick. College benefits get smart people into the Army, some of those kids get killed off to reduce competition for my kid, and the money they bring in from the government for tuition only boosts tuition rates higher, so only people like me can pay full freight. And so it goes."

Michelle Singletary: Oh my, how sad and twisted!

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Washington, D.C.: My family is starting 529 plans for my two nieces but we received some information from our financial adviser that gave us pause, and I hope you can comment or clarify.

He told us that, for purposes of (federal?) financial aid eligibility, funds from a 529 plan count double compared to other assets, thus reducing the financial aid available. However, he said, it depends on the relationship of the plan creator to the beneficiary.

Do I have that right? If so, how would you weigh that in the scheme of things and what would you recommend?

Thanks!

Joseph Hurley: The federal financial aid treatment of a 529 plan depends on who is the account owner. Typically, a parent is the account owner (the student is the beneficiary) and the account value is picked up for financial aid purposes as a parental asset. Parental assets are assessed at a low rate, only 5.64%.

If the 529 account owner is the student (and the student is also the beneficiary) a recent change in the law makes the account non-reportable on the FAFSA application. This is a stunning turnaround over prior treatment when a student-owned 529 was picked up as a student asset assessed at a very high 35% rate.

Most parents would prefer to own their 529 accounts, and not hand ownership to the student for aid purposes, because the parents can continue to control the account.

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Alexandria, Va.: If you can stand one more Christmas question: my family tried the $100 christmas approach this year--it was great--token gifts like bars of fancy soap or handmade ornaments, with the balance in gifts to charity. Where we all had problems was the "gift event"--come to the office party, but bring a toys for tots donation, the book club party requires a gift card for the domestic violence shelter, and so forth. Worthy causes, but somewhat demanding. Short of shopping at toy sales throughout the year, what do you suggest to adress the "holiday handout" issue?

Michelle Singletary: Don't mind a question off topic.

This is how I handle the whole give to charity at work, toy drive etc. My husband and I have a budget for givng to charity, including our tithes (10 percent of pay). If we have exhusted the fund and get requests to contribute to other things we talk about it and decide then. If we have the money and believe in the cause we do. If we don't have the money, even if we believe in the cause we don't.

So give as you feel the need and if you aren't "feeling" the office or group gift card/toy drive, don't do it. If someone dare asks tell them you gave already. Period.

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Washington, D.C.: Hi Michelle, just wanted to share my experience with saving for college -- like you, my parents began saving for college for myself and my three younger sisters before we were born. We always knew growing up that we would be able to go to college and our parents would pay for it, but they could only contribute what they had, which was about equivalent to a four-year education at a state school. We could go anywhere we wanted, but anything over their budget had to be made up for with aid. No loans allowed. I was admantly opposed to a state school (I did not want to spend four years in a cornfield) and applied to a number of schools in DC. None offered me enough scholarship money, but one did offer me quite a bit. I wrote to the financial aid office and explained how much I wanted to go there but simply couldn't and they responded be giving me an extra $6,000 a year.

I graduated with everything I wanted -- an education paid for by my parents and myself, through scholarships, and without any debt. I love not having school loans to pay for.

Michelle Singletary: Ask and you shall receive.

You were blessed.

And I know lots of people disagee with me. But when it comes to a college education I think far too many parents and students have lost their mind. They are paying with other people's money so they aren't really thinking about the long-term debt they are taking on. That in turn doesn't make the colleges control spending. So it's become charge anything and they will pay -- with other people's money that will take them decades to pay back.

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VEST gift tax trigger: Joe,

If I contributed a sum greater than the 12k gift tax threshold to the VEST program in one year, would that trigger the gift tax or do they have an arrangement w/ the IRS similar to the VPEP where the amount is spread out over multiple years to avoid the tax?

Thanks.

Joseph Hurley: Your contributions to a 529 plan of either variety - prepaid or savings - is considered a gift from you to the beneficiary. You have an annual exclusion of $12,000 per donee before you have to report gifts to the government. So if you contribute more than $12,000 to a 529 plan for a child in a year, you must report the excess as a gift. To avoid gift tax consequences, you can elect to apply five years worth of exclusions, or $60,000, when you make large contributions to a 529 plan. This is called forward gifting or accelerated contributions, depending on who you are talking to, and it is only available for 529 contributions.

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Falls Church, Va.: Michelle,

I was wondering what your approach to paying off my student loan would be. As of now, I graduated in May with about $18k worth of consolidated debt at 4.75% APR. My salary is about $56k a year with about $600 a month going out for rent expenses. My question is, what rate should I pay off my student loan. I have been told by some to just pay off the minimum amount for 10 years ($192) . Though I have also been told to pay as much as possible to be rid of the debt ($600+). As of now, I am paying about $300 a month. Thanks for the input.

Joseph Hurley: I would not be too quick to pay off the debt. You've taken advantage of loan consolidation to lock in a low fixed rate of interest, and you probably qualify to deduct up to $2,500 of interest each year off your tax return. If you have the cash flow to enable quicker student loan payoff, it means that by making only the minimum payments you will have the cash available to start saving for retirement, setting up an emergency cash fund, etc. You won't be able to do that if you use all your available cash to pay off your student loan now.

Michelle Singletary: I have a similar take, except I say be rid of the debt ASAP.

As Joseph points out be sure as you pay off the debt to have a savings cushion and start your retirement savings.

BUT if you can don't take 10 years to get rid of this debt. I don't care if the interest rate was zero. Debt limits your choices. ALWAYS.

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Ketchikan, Alaska: Michelle, I'm shocked! your comment above that "I had the kids. I know what it takes to be successful in this world and I want to give my children the best possible start. That means helping them pay for college -- 100 percent!" takes me by surprise.

I teach at a University and see plenty of room for an opposing opinion.

To start, wasn't it you who once advised that we served our children better by preparing for our own retirement as a priority over providing for their college? That way we aren't tapping them for prescription cash when they are trying to raise their own kids.

As for paying 100%, many readers will be paying for 100% of a party year. I was faced with this with my oldest and I was inspired by a colleague who had to cut off his childs funds. Their solution? Let the kid figure out how to get into and finance college. Then if they get As, full payback. B's get some, and if the kid brings home C's, well, good luck with that.

I now have two kids in college, and both figured out how to pay for it themselves! (I'm not so sure about the third, but they are all different). The oldest decided that I was right, he was going to party away his time, so he joined the Air Force and now the GI Bill is paying for him. The second saved money working the cruise ship season here and pays his own way because he doesn't want to talk grades. I help with air fare and my wife slips them cash and I pretent not to notice, but by having them do this I think I am fulfilling what you see as the skills to be successful in life.

Happy new year to you.

Michelle Singletary: Happy New Year to you too!

And I'm very consistent. I've said if you can't do both --save for retirement and colleg-- save for retirment first.

But I've also said that means you and your child may have to make some different decisions. For example, they could go to community college and take the basic courses first and then transfer to a 4 year university. Yes, they can take out loans and do but I'm strongly advise against doing it and if you do, at least minimize the amount you have to borrow by choosing a lower cost college.

And I won't be paying for a party year either. With the money comes responsibility and a requiremen they keep their grades up. If they party. They have to come home, work, save and when they are ready go back to school.

I say this knowing full well at 18 they may consider themselves grown and out of my control. Can't do nothing about that. But my husband and I are spending a lot of time preaching and teaching our kids that if they do right they will have a college education paid.

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Rockville, Md.: I am a single adoptive parent who makes about $60,000 a year. That means that after mortgage, food and other expenses, including socking away 3 percent in an IRA to get a matching employer 3 percent, here's not much at all left over for college savings.

I am slowly building up a 529. Does it >sound like from our financial circumstances that we can count on some financial aid from schools as well?

Joseph Hurley: A lot of factors go into determining your child's eligibility for financial aid, not the least of which is the choice of school. A high priced school will often supply a lot of aid when a low priced school does not, and the net cost may end up being very close either way. The formula determines your "expected family contribution" based on your income, your non-retirement investments, the number of children in school at the same time, and a few other things. You will definitely want to apply for financial aid when the time comes to see how it all comes together.

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Arlington, Va.: I'm sorry, but going to U.Md. or worse yet UDC when you have the grades for Ivy League, just to avoid debt, is penny-wise and pound-foolish. A student in that situation is closing off a world of future opportunities (and lifetime higher income) for short-term, short-sighted reasons.

Michelle Singletary: Excuse me. I went to Md. Got a great education AND I now work for one of the world's best newspapers -- along side plenty of folks who went to IVY league.

And managed with my state univeristy education to catch a fine, smart man to boot.

I might also point out that one study showed that students who could get into an IVY league but choose to go to a second tier school (hate that term but using it anyway) actually earned as much if not more than their peers who went IVY.

So there!

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Michelle Singletary: I know I shouldn't have said "so there." So don't e-mail me.

I get a little carried away when folks argue that you can't do well in this world without an education that cost $100,000.

Not true.

Well, great discussion today. Lots of opinions, comments and good questions. I'm so sorry if we didn't get to yours. We tried to answer as many as we could. But Joseph Hurley has agreed to answer some more, which I'll publish in my column and/or in my weekly e-letter.

Take care and I wish for you a very financially fruitful New Year!

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