- College tuition has been rising at five times the rate of inflation, with no signs of abating.
- Many successful families do a great job of saving for college, but overlook the jaw-dropping cost of graduate and professional school.
- Did you know there are alternatives to 529 plans or crippling student loans?
Most people agree that a college degree still gives you a leg up on achieving the American Dream. But the price of that diploma has been going up at 5-times the rate of inflation since 1980. Tuition, room and board is now over $70,000 a year at the prestigious private universities that many of you are considering. Further, just two in five undergrads (41%) graduate in four years or less, which means even more tuition payments than you may have planned on.
To make matters worse, many of you pay a penalty for being successful. Your high income and high home equity here in the Northeast substantially reduce your child’s ability to quality for need-based financial aid.
As financially responsible parents, we don’t want to saddle our kids with crushing student loans, which can dog them throughout their adult lives and limit their chance to become homeowners and build wealth.
So, we invest tons of money in 529 plans and other college savings vehicles. There are many great things about 529 plans, including tax-free growth and often state income tax deductions, but all the great work you did to save and invest for college is simply handed over to the university bursar’s office for their benefit once your student sets foot on campus. The asset you’ve built now will stop earning forever which creates a big “opportunity cost” at a time it was starting to gain momentum with compounding. Having your money retire early kills the compound curve for that portion of your wealth.
See more about the pros and cons of 529 plans.
I’ve also noticed that many successful families do a great job of saving for their student’s college education—but they neglect to save for graduate school. Tuition, room and board at top law schools is about $90,000 a year and the median cost of four years of medical school attendance was $250,222 at public institutions and $330,180 at private colleges, according to a fall 2020 report issued by the Association of American Medical Colleges. Top MBA programs are not that much less. Even many of our highest net worth clients don’t have that kind of money saved in their 529 plans.
Opportunity cost of college saving
Chances are you’re a responsible saver and you’ve been socking away cash in your child’s (or grandchild’s) 529 account since they were tiny. That will certainly make a dent in tuition, room and board (at least for their undergrad years), but that money’s been tied up for many years, which means it can’t grow for your retirement or be reinvested in your business or real estate opportunities. It also can’t be used to pay down the mortgage or other debt you carry. See my recent video about the true cost of higher education.
We all want to do what’s best for our kids, but is it worth delaying your retirement for 10 to 15 years so they can attend an elite private college? Suppose you could save for college without tying up your liquidity or depleting your retirement nest egg? Hint: There are.
One broad alternative is to use borrowed money from another source instead of your own assets. Your assets will grow and compound longer when you leverage someone else’s money. You can borrow from your HELOC, borrow from the bank or other lender, or one of my favorites is a high cash value whole life insurance policy.
- Borrow from HELOC: it can be good, however there is a case in which the banks could take away the line of credit. Make sure you understand the rules of the agreement. Also, you don’t control the terms of the loan so you could be placed in a tough spot if you lose a job and cannot pay it back. Also, the asset itself (house) could lose value depending on market conditions so you could end up owing more than the house is worth at some point.
- Borrow from the life insurance company with Cash Value as collateral: this could be a good option as you can control the terms of the loan since it’s built into the life insurance contract. There is flexibility with the loan as you can take months off of paying it back if something comes up requiring funds elsewhere. Also, the cash value inside the life insurance policy continues to grow uninterrupted tax-free since it was being used as collateral. As you pay back the loan, more money is freed up to used again.
Another good part is that if the insured were to die, a large tax-free death benefit could be used to help fund any remaining college cost as if the person was still alive and producing. Lastly, cash value is not counted when considering the financials of the children or parents for financial aid.
- Purchase an asset (e.g. rental property or private loan) that could create income to fund college. You could even have your child live in the same property and he/she could act as a landlord for other renters. It would give him/her some experience managing an asset and investing in Real Estate. The asset could continue to be rented out, sold or 1031 exchanged to another rental property after graduation while the cash flow helped fund college. College could be funded and the family can walk away with a valuable asset for years to come.
Study after study shows that people with college degrees significantly out-earn those who don’t have degrees over their lifetimes and enjoy more career satisfaction and flexibility. But there’s no reason to bankrupt yourself or delay retirement while helping a child or grandchild achieve their dreams. Why not purchase an asset that can live longer and continue to grow and compound (we know compound interest works in the long-run) while use it as collateral to use someone else money to fund college? This strategy can be applied to just about any large purchase/investment someone is considering.