College Planning – Payinng Without Going Broke

It’s almost June. School is about to let out for the summer.

Whoo hoo! Vacation . . . . Free time . . . . Long summer nights of relaxation . . . . Spending more time with your family . . . . and then you remember that your child – who is now a young adult – will be leaving in the fall.

College.

And, Bamm! All those ‘Polly-Anna’ day dreams crash into the reality of paying for college. Paying for college can be daunting. In my case, I have two sons in college at the same time so the cost is double (the anxiety is quadruple).

Here is what you need to know:

1. If you believe college planning isn’t the same as financial planning, you’re wrong. Simple as that. Paying to put a child through college creates a cash demand of between one to five thousand dollars every month for a period of four to six years – per child. College planning IS financial planning. Treat it as such.
2. Calculate your Expected family Contribution (EFC). Know your EFC. This is the amount that the government believes a family (family means; both the parent(s) and the student) should pay toward college tuition- per child. How is it figured out? Take 25% of the parents combined Adjusted Gross Income, and 6% of their combined assets, (a few assets are excluded, but most count), add them up. This is your family EFC as parents. Then figure out the student’s EFC. A Student’s contribution will be 50% of his or her income and a whopping 25% of assets. So it will be important to keep assets out of your child’s name – especially if financial aid is a possibility.  Most families with combined incomes of around $150,000 per year will be expected to pay around $40,000 per year, per child in college tuition. If needs are over that, then help may be provided. If not, the family will bear the entire cost. EXTRA INFO –  debt load does not matter and won’t affect your EFC.
3. Paying for college will dramatically effect retirement income. How large that effect will be depends on the strategy implemented to save for retirement and fund college tuition – and how many children will attend college.
4. Understand the cost of your college choice. What is the tuition cost? How much will books, fees, room and board, transportation costs (will you have to move them?) Will your child need spending money? Will they work part time? Have they earned any scholarships? Have they received any grants? Know how much money will be needed beforehand. Costs may be well under the EFC – which is both good and bad. Good that the cost is lower, but Bad because your family will likely pay the entire cost.
5. Implement the best strategy to fund this expense.
   1. Option A: Pay cash. (Hint: This isn’t the best option – but it’s the most common.)
   2. Option B: Develop a strategy that maximizes your flexibility and ability to pay when the time comes and minimizes the risk of retirement fund cannibalization, inflation, taxes, etc. There are several ways to do this, but you will need the help of a professional. Typically, if you can combine savings and retirement dollars, letting retirement dollars help pay for college and vice versa – you’re better off. There are too many options to go into each one here.

Option A. Most families like to save money in a cyclical way. They save for an expense, then pay the expense, then they save money for the next expense – and pay for that. College saving is rarely done differently, What this pattern does is eliminate the potential that money saved over long periods of time ever gain the massive benefits of compound interest.

You’ve seen the compound interest curve before. It looks like this:

You put money in a financial product where you earn interest, leave the principal and the interest there to grow. Over time, the amount grows larger. Some call it compound interest. The true velocity occurs in the later years. However, those gains will never happen if money is withdrawn every few years. Every time money is removed, the compound curve starts from the beginning. The investor is back at “financial zero.” So if the true velocity of growth occurs at the far right side of the curve, and all the money goes in at the beginning, what are we left with? A curve that looks more like a set of steps than a curve. Always returning to the ground floor to begin again.

That means spendable retirement assets will consist of what ever has been earned after just a few years – the average being about 12 years. This strategy essentially cripples all the earning power you had over the entire previous 30 years!!

No rate of return will ever be good enough to overcome the crippling of the compound curve and the continuous return to financial zero.

The power of the compound curve is great. That is why people love it. So, use it to your advantage,

Here is a very typical financial strategy

a. save in a 401(k) plan for 20 years

b. save for college for 8 years

c. then save for retirement for 12 years – because now “income is freed up and we can really sock away some cash.”

After all that . . . a family that was used to earning about $150k annually can look forward to an,

d. estimated retirement income at age 65 is around $45k. You worked how long, how hard, for how much? It hardly seems fair, but hey, your child doesn’t have any student loans and neither do you, right? Too bad, because you may need one to pay your healthcare costs during retirement years.

There is a better way.

Plan B.

Combine your strategies and let college dollars help pay for retirement and retirement dollars pay for college.

If you have at least at least three years before college tuition needs to be paid, you have several options.

The one I like best can be implemented using the same dollars that are being directing toward retirement savings and college savings. Simply combine them and redirect them to a Permanent Life Insurance policy that earns dividends, cash value and increasing death benefits.

With this type of policy in place, you will be able to continue to put money away for retirement as well as take a collateralized loan out of the policy each year to pay tuition costs.

CAUTION: Do not attempt to implement this strategy without the help of a trusted and experienced Financial Planner familiar with this type of strategy. If you try it on your own or through some website on the internet, I am not responsible if your experience goes poorly.

This will eliminate the financial inefficiency that kills the gains created by compound interest curve. Your family will still retain all the gains of saving for college and retirement. The collateralized loan will ensure the power of the compound curve is retained through the beauty and simplicity of life insurance.

Stay in control of your money at all times.

Here are a few more pieces of ‘common sense’ advice.

Choose and In-State School

Have grandparents and others contribute to 529 plans. Not too much though. If you child decides not to go to college, gets a scholarship or joins the military – you may not be able to use all this.

Consider placing money in ABLE accounts

Apply for as many scholarships as are appropriate and available.

Apply for grants

Don’t undervalue a community College for the first two years of higher education. Many community colleges offer classes at a greatly reduced cost. The first two years are fundamentally the same. Get the basics out of the way at discount prices.

Don’t be afraid of Student Loans. If you have to be in debt, this is one of the best reasons for it. The benefits and earning potential gained through higher education are usually worth it.

Good luck! E-mail me with any of your questions and concerns.