Online Banking Fail

Please excuse a rant about a first world problem, but I have to vent:

Our main (joint) checking account is with Chase and I also have several Chase credit cards. Chase’s online account access allows us to see activity for all of the accounts, make payments, etc. My wife recently got a Chase Amazon Prime card (5% back on all Amazon purchases and the same discount for Whole Foods). According to the Chase representative I spoke with last night, it isn’t possible to add that new card to the same online account as it’s in her name, even though both of our names on the checking account. I was told our only option was to create a second login under her name, which would allow access to the checking account and her Chase credit card(s), but not my cards. While this isn’t the end of the world, is there truly no way for a bank to allow a single online account for a joint checking account AND the credit cards of the two spouses who share that checking account?

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Test Driving the MyinTuition College Cost Estimator

As described in this Washington Post article, MyinTuition is a quick calculator that allows families to easily see their expected annual costs for 31 private colleges, a list that includes Amherst, Duke, Middlebury, Williams, etc.

It basically confirmed what I had already calculated based on this Forbes article I mentioned in a post from August: Schools expect families to contribute a LOT to the annual college costs of their children. Based on this calculator, if our daughter attended Northwestern, we’d be expected to contribute close to 30% of our annual gross income to pay for it. After accounting for taxes (federal, state, and FICA), that might approach 50% of our take-home pay. I ran the numbers for several other schools and got similar results. My guess is that most, if not of all of these schools are using the CSS profile instead or in addition to the FAFSA form, so your home equity also counts. I was able to confirm this by running scenarios that assumed zero home equity and our expected contribution did go down.

While I told a friend about the tool in an e-mail titled “confirmation of just how screwed we are,” I later realized I could have called it “confirmation of just how fortunate we are” to be deemed capable of funding a private college education based on our current family income and assets. But I don’t mean to rant about our own expected family contribution — it’s more that families with pretty much ANY level of middle class income will be expected fork over a very large percentage of it every year. It just seems insane to me, though maybe the very thought of sending your kids to a private college rather than a public university is equally insane.

In the Washington Post article, a school official is quoted saying that families can use the tool to “…see that this education actually is within reach — and it may be more affordable than the schools they are considering.” That might be true for some lower-income families, but I think most users of the tool will have the exact opposite reaction and they’ll be shocked to realize just how much a private college education will cost them.

Welcome to the 70% Club: Our College Tuition-Adjusted Marginal Tax Rate

As a good progressive liberal, I’ve always dismissed the conservative trope that high marginal tax rates create a disincentive for high-income workers, so much so that they refrain from seeking additional income due to how much it goes to taxes. (Though I have seen plenty of anecdotal claims within the reader comments on the White Coat Investor site.) And I hate to come off as the moderately well-off guy whining about my taxes and college costs. Or, even worse, sounding like “Susan” in this post from Chief Mom Officer.

Yet in my initial explorations about expected family contributions (EFC) for college tuition, I’ve been shocked by just how much parents are expected to pay each year, even at fairly modest income levels. Of course, the more you make, the more you’re expected to contribute. Hence, you can compute a marginal rate for your “tuition tax.” That is, for every dollar in additional family income, how much more are you expected to pay in college costs via your expected family contribution?

I did a quick calculation this morning of our marginal college contribution tax rate using the figures from the expected family contribution table in this Forbes article by Troy Onink.

With two dependent children, it appears that there’s an approximate marginal 31% tax for folks in our current income range. Every dollar increase in our adjusted gross income equates to an additional 31 cents in our expected family contribution toward college tuition.

And when you add that percentage to the other taxes we pay, we end with an eye-popping overall marginal tax rate. Assuming no changes in our federal and state income tax rates, we’ll have the following marginal tax rate starting in 2021, the tax year that will be used to determine our EFC for my daughter’s freshman year in college:

     31% — increase in expected family contribution
     28% — Federal income tax
     6.2% — FICA (Social Security)
     4.95% — Illinois income tax
     ——————————————–
     70.15%

In theory, you wouldn’t count FICA as part of the marginal rate in a single-earner family in our tax bracket, as you would have already hit the annual limit. But we only get to the 28% bracket due to having two earners in the family, so I’m including it here.

Beyond taxes, we have other costs associated with two full-time workers — such as paying for a dog walker to come on weekdays, commuting costs, etc. — which push the effective marginal rate on a second salary even higher.

Of course, as long as the marginal rate is less than 100%, we’re still better off financially with the second salary. Yet it’s starting to seem like a pretty poor financial trade-off in terms of time (both the work hours and the commute) and stress.

Summer Camp Tax Credit Inequity

Our kids, age 9 and 12, are going to sleepaway camp for the first time this summer. I had assumed the cost of camp would count as an expense toward the child and dependent care credit come tax time, as we’ve always claimed that credit for their various summer day camps. Plus, if they weren’t at sleepaway camp during that time, we’d be paying a sitter or having them attend a daytime program, as my wife and I both work full time.

But as it turns out, only day camp counts as an expense. From the IRS website:

I suppose that you could argue that some of the camp fee really shouldn’t count, as it pays for overnight care when the child would otherwise be at home. Still, it seems like at least a portion of the sleepaway camp fees should qualify, yet the IRS obviously doesn’t see it that way.

Maybe the logic here is that more-affluent families are more likely to pay for sleepaway camp, while day camp is considered a necessity for working parents. But it’s something of a quirk in the tax code.

UPDATE: A few days after publishing this post, I came across this NY Times article, which had me feeling a little guilty for grousing about a missed tax opportunity. It was a good reminder that while I spend a fair amount of time thinking about my family’s finances, we’re fortunate enough not to have this kind of economic anxiety:

Tolanda Barnette is hoping for “a miracle” for her 6-year-old son: The 41-year-old day care worker can’t afford to enroll him at the center where she works, and she’s just saved enough to move her family out of the shelter where they’ve been living for the past year into an apartment in Durham, N.C. There’s no money for even the least expensive camp.

Chicken or the Egg: Student Loans and Unintended Consequences

A recent WSJ story on trends in college tuition rates opened with this sentence: “U.S. college tuition is growing at the slowest pace in decades, following a nearly 400% rise over the past three decades that fueled middle class anxieties and a surge in student debt.”

It’s no doubt true that tuition increases in recent decades have led to a surge in student loan debt. But I can’t help wondering if the ready availability of those loans contributed to the insane rate of increase in college tuition. That is, if students and families didn’t have easy access to student loans, would colleges have been able to raise tuition at the rates shown in this graphic from the WSJ story?

I’m not suggesting that student loans should be eliminated. Without access to them, millions of students wouldn’t have been able to attend college. It would be a travesty to limit secondary education to students from families that can afford to fund it out entirely of pocket. But if loans weren’t readily available, would college costs have risen as much as they have? People complain about tuition, of course, but students and families continue to borrow the money to pay it, in many cases leading to ruinous results. Without student loans, perhaps college would have felt pressured to keep tuition increases in line with inflation, or at least closer to it.

On a related note, one thing I really liked about this NY Times story (which inspired my chicken or egg question, though I’m sure someone has asked it before) is how it thoroughly skewered the old “I worked my through college” trope that pops up in reader letters to the WSJ and elsewhere. While Notre Dame President Rev. John I. Jenkins paid for half of his tuition at the school from his summer job earnings, doing so would be physically impossible today:

“No such path is available to undergraduates now. It would take more than 4,000 hours (or 100 weeks of full-time work) at prevailing campus wages to pay for half of the annual rack rate at Notre Dame today. And while only 30 percent or so of the students pay the full price, even the ones with large financial aid packages work only a fraction of that amount. Loans loom large, as does the role of parental savings…”

Free Museum Admission

Back in the early 2000s, my girlfriend (now wife) had a job with an amazing perk: She worked for a Time-Life publication in Manhattan and could walk into virtually any museum in the New York City and show her work ID to receive free passes for herself and her companions. Evidently Time-Life was a major donor to the city’s museums so they extended this courtesy to its employees. (At least they did 15 years ago, I’m not sure if that’s still the case.)

I was recently reminded of this perk when checking the balance of a Bank of America checking account I maintain for some hobby income. I hadn’t noticed it before, but B of A has a “Museums on Us” benefit, where account holders can receive a free adult admission on the first weekend of each month to a large number of museums by showing a Bank of America or Merrill Lynch credit or debit card. In Chicago, for example, that includes the Art Institute, Shedd Aquarium, the Museum of Contemporary Art, and others:

While I haven’t checked lately, a few years back Bank of America had something of a reputation as being a fee-happy bank (for example, fees to visit a bank teller for some accounts) so I wouldn’t necessarily open a checking account to get this benefit. But if you already have an account (hopefully one that allows you to avoid monthly fees), it’s a freebie worth checking out. B of A also has a slew of no annual fee credit cards, so that’s another option.

Credit Scores and Credit Card Churning

I’m relatively new to the “points game,” but I’ve been trying amass hotel and airline points over the past couple of years. The concept deserves its own post, but assuming that one of your retirement goals is to travel more, traveling for free means you need less money to support your retirement lifestyle. How much less? Based on a 4% withdrawal rate, if you can use points for the equivalent of $8,000 in travel expenses each year, you’ve essentially reduced your required retirement nest egg by $200,000.

One of the best ways to crank up your point balances is via the sign-up bonuses for new credit cards. However, you often hear that opening too many cards results in frequent credit inquiries, which can hurt your credit score. I’m an anonymous blogger, not a credit expert, but I can offer at least one anecdotal example — my own credit score, courtesy of Capital One, which provides free credit scores to account holders.

After opening a number of accounts in the past year (including two Southwest cards in May), and closing a Chase Marriott account to avoid the annual fee, my current credit score is 827, based on the following components:

According to Capital One’s explanations, the three components in the top row have a big impact on your overall score, while the three in the bottom row (where I’m dinged for the number of new accounts), have a low impact.

So it appears that the two components that are most influenced by credit card churning — Recent Inquiries and New Accounts — apparently don’t have a huge impact on your overall score. It seems like if you always pay on time, keep your oldest card open, and don’t actually charge that much relative to your overall combined credit limit, you should be fine. With the caveat, of course, that this is single anecdotal example. As they like to say on the FlyerTalk Forums, your mileage may vary.

Welcome to the Drive to 55

Hello out there!

Inspired by Root of Good, Mr. Money Mustache, Physician on Fire, and others, I’m joining the club of FIRE (financial independence/retire early) bloggers. Although, given the number of excellent FIRE bloggers out there already, perhaps the world doesn’t need another.

Yet there is one area where I hope to add to the discussion: college savings and maximizing financial aid. If you have more than one child, paying for college might well end up being your largest financial commitment, aside from funding your retirement. But from my initial research, it appears that the standard advice of saving as much as you can in dedicated accounts for college funding, such as 529 plans, essentially penalizes families who do the “right” thing and diligently invest money on behalf of their children. (Consider two families with the exact same income, yet one lives paycheck to paycheck while the other saves for 18 years in a 529 plan. When it comes time to apply for financial aid, the spendthrift family is likely to be rewarded with a larger aid package than the frugal one.)

This area of exploration is one reason that I’m staying anonymous for now (and not revealing exact income and net worth amounts). When it comes time for us to apply for financial aid for our first child, I don’t want to be identified as someone advocating ways for families that might be considered affluent to increase their financial aid awards.

The goal of boosting financial aid also inspired this blog’s title, The Drive to 55, as I’ll turn 55 in the fall of 2020 and our daughter will enter college in the fall of 2023. That means we’ll be using our adjusted gross income from 2021 on her financial aid application for her freshman year. Hence, we have a huge incentive to minimize our income beginning with that tax year via retirement or moving from full-time to part-time employment.

I realize that, relative to others in this space (Mr. Money Mustache and Root of Good, for example), retiring at 55 isn’t that early. Still, I’d like to be in a position at that age to step back from full-time work or even retire completely, while also ensuring we can fund our children’s undergraduate education. So I’ll be posting here as I research our best options for positioning our assets and managing our income for both retirement and maximization of financial aid, as well as writing other more-general FIRE posts.