More Efficient Way to Save for College

Most would universally agree education is important to obtaining success. When you really think about it, there’s only so much we know so staying open-minded and humble to continuous learning will give you the greatest opportunity to reach your life and financial goals.

Unfortunately with the cost education continuing to rise, student loan debt is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans.
There are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone. The average student in the Class of 2016 has $37,172 in student loan debt. This, combined with higher home prices and slower wage growth, has made it extremely difficult for many to save enough for a down payment on or home or save for retirement.

Another option others may take to fund college is to save money into vehicles such as a 529 plan with the promise of state tax deductions and then tax-free withdrawals when the money is used for qualified educational expenses. Yes, the tax benefits can be helpful, however your money will be tied up in an account which can only be used for educational expenses to avoid a penalty and is subject to market risk since the investments are typically tied to the stock market. In turbulent markets like today, having educational savings exposed to that type of risk could be disasterous.

Now, even if this approach works out, there will be significant opportunity costs incurred. For 40-year parents with kids who are 8 & 10 today, the true cost of college through age 65 could amount to well over $867k (vs actual tuition costs of $409k) representing over $61k in annual income lost during retirement years.

To watch a quick 6-minute that walks you through the true cost of funding education, click here: The True Cost of Education.



So what other options are there?

An alternative to these typical approaches requires a different way of thinking. Taking a cue from Richard Kiyosaki, one key to wealth building is to purchase assets. An asset is something that, in the future, can generate cash flow for you. Assets make money. Anything that takes money out of your pocket is a liability.

One strategy could be to purchase a multi-family rental property near campus in which your child lives and manages during the college years. Not only would the asset help fund college, but you’ll have an appreciated asset that can continue to generate income well into the future. Additionally, your child will gain some valuable experience with managing a property and learning vital business skills.

This is just one example but the key is to leverage other people’s money to create cash flow while ensuring your money continues to grow compounded with no interruption (ie. no taxes, loss, or use). See below for a simple example that illustrates this point of the need to build assets to generate cash flow.