Back To School: Planning and Paying for College

College is a HUGE expense - the second biggest expense for many families behind their home. How do we pay for college? But before we even think about paying for college its important to take a step back and figure out what we are buying with all of that money. What is the purpose of college? How much should we spend? What is the smart way for parents and grandparents to think about the economics of college? How do we make smart financial decisions about college as a family? In this episode we cover:

1) What is the right framework for assessing how much to spend on college?

2) Does it matter where we send our kids to college? Do elite private schools matter?

3) How do we talk about college as a family?

4) How do we pay for college? How much should we save for college?

5) How do we save for college expenses? Are 529 Plans a good idea? What about ESAs, Education Savings Accounts, Coverdell Plans, or IRAs for college saving?

Transcript:

Hello investors. Welcome to another episode of the six figure investor. We are excited to be back with you today after I don't know, a week or two hiatus, short hiatus, but it's back to school. And so it's back to the podcast, back to the podcast. And guess what we're talking about. College and how to pay for it, which makes sense.

Since it's back to school, since it's back to school. Awesome. Well, this is gonna be a really great episode. Brian just gave me the outline. And so in normal fashion, I read through the notes and I'm ready to dive in on tonight's subject matter. 12 pages of goodness in the outline. He's lying. He's lying to you guys right now.

He's lying to you guys right now. It's three pages. It's very robust. I think you'll be much more educated on college planning and college savings at the end of this episode. . Hi everyone. Brian, here in this episode, we're diving deep into the strategy for college financial planning.

If this episode sparks something in your own situation that you would like to discuss further, we're happy to help. We host financial planning workshops all the time with parents that are working through challenging decisions around college planning. So if you'd like more resources or professional guidance in this area, schedule an intro call using the link and the show notes.

And we'll be glad to discuss next steps with you. Okay. Back to the show.

All right. Welcome back guys. Let's dive in to college planning and saving to go to school. Yeah, I think this is a really important topic for a lot of reasons. For most families. College is the second most significant purchase for one child let alone two or three children as they go through their life.

And I think a lot of times. We spend more time talking about the next car we're gonna buy than we do talking about college. And so I, I think it's really important, that we build a strategy and that we think about it. And, and in this podcast I wanted to, to kind of take a step back from some of the nuts and bolts and the tax optimization strategies and all those kinds of things.

We'll get to some of that at the end. But it's really important that when we think about college, we talk about what it is that we're actually buying. What is the purpose of college for your children? And the answer might be different. If you have multiple children, it might be different for each one.

I think one of the things that's gonna be interesting about this conversation is maybe this isn't true for everyone, but I, I found in my own college seeking experience and having conversations with my parents about college, that we've gotten to a point. Probably for a lot of our listeners and investors, that college is a part of the expectation or the desire that they have for their children.

And there's not necessarily as much study or kind of nuanced research into colleges as a product themselves that you are buying. Yeah. But they are a product and an experience that you are buying and they provide an outcome which is measured in. Jobs and all kinds of different measures. And as a buyer of those products and experiences, you have the opportunity to look at the data, do the analysis find the best solution for you and your family?

And, and I think sometimes too often we just think of college as a life stage or something that we're committed to doing in order for our children to be set up for success. , I think, but there's a lot

more,

we apply a lot more rigor to our buying process when we go buy a house, I think, than we do college, like we go buy a house. We look at all the comp the comps, right. In a neighborhood.

Right. And you figure out how much you think the house is worth. And then you try to lowball the offer. And then you go through this negotiation process with your real estate agent, when your kids get ready to go to college. And you're gonna spend generally the equivalent of a small house on college.

It's not that small house, a $300,000 house, depending on where you're going school, an average house, right? Yeah. Maybe a $300,000 house and you just sort of get to your kid senior year and they're like, I wanna go here. And you're like, great. And then you sort of cry when you get the financial aid letter and then like, you're just like, okay.

Have fun. Here's $300,000, right. And I mean, I think that's where a lot of people are. And so I think, like I said, I think it's important to have conversation about, you know, one thing you alluded to though, that I think is important is college is about, I think for a lot of people, more than just spend money, go to school, get a job to, to develop return on investment for the dollars that we spend in college.

Before we dive into a little bit on like sort of this college worth and things like that. I think it is important to acknowledge that. And I actually think there's value in life in making friends and going to college and finding some of those things and learning about yourself when you move away from home.

And there's economic value in the networks that are established in college do. And so that college experience is about more than. The money that you pay to learn some skills to get a job. Right. I think it is broader than that. But, but I, again, I think for every specific student it's important that we think about how, how does the.

Sort of investment in dollars and the school that we're going to and the economic outcome that we want to achieve. And then those other life outcomes. How does all of that fit together in making a really smart college choice? As it put, like I said, as opposed to either just doing it by the seat of your pants or assuming that that particular math is the same for every person, right?

Because for every school yeah. Or, or every school. Right. I think the, the difference there's differences between different schools and, and people within your family. Right. So it's important. I think as a framework, it's important to think about the dollars that we're spend. The outcome that we think we might want from a career standpoint, on the other side of that, how did the school help get us from, from where we are today to where we're trying to go, and then how do all those other things like the experiential pieces of that and the networking and the friends, and how does all that fit into the puzzle and how do you make that whole picture work?

For a particular student is thinking about going to college and where we're gonna make that investment. How do we make all that stuff fit together? I think that's where we want to try to go. As we make a smart college decision with our kids

a hundred percent

So I think that's really well said, Brian, in this vein, there's a lot out in the media and in talk today amongst people that college isn't worth it, that it's no longer gonna be a part of the equation, you know, moving forward.

Yeah. Right.

We're just gonna, maybe

we should start with sources online when we're 19 and then we're gonna get a job and go on from there. Right. So maybe we should start there. If you think about college as an investment, is this an investment that's worth it?

So is college worth it. So college graduates still earn more on average than those without degrees. But I think there's a couple of caveats there. So anytime we talk about averages, I think it's important to just be aware of averages. You've gotta do the. To align where we are today, where we want to go from a career perspective where that school is in the middle, the investment that we have to spend to go to that school, to make the averages add up.

So for example, Brian and I both went to the exact same college a year, apart from each other. Brian studied business. That's correct. I studied art history, not quite pretty close.

I called it the, choose your own adventure major. That what I call, I studied interdisciplinary studies. Yes. Upon graduation. I would say you are probably making twice as much money. Close round numbers. Sure. I don't know. And that had nothing to do with, I mean, it, it may, maybe to an extent had to do with the school, but probably not the, school's probably a neutralized yeah.

Idea here, because we went to the same school and had way more to do with what was, what we studied and thus what we were qualified to do professionally after graduation. Correct. So I think what you're saying here is on average college graduates will make more than those who don't have. But what you study in college and what you do professionally after college matters in that equation.

So if you study engineering, math stats, some of these subjects where you're more likely to have a high income profession upon graduation than art history or interdisciplinary studies, where you might end up in the world where you might end up in the nonprofit world, for example, You're going to make more or less than that average.

Yeah. That that's a hundred percent, right. It, it really, I think what determines that postcollege outcome has a lot to do with your student, what they study, how they apply themselves much more than just they went to college. So therefore some outcome should happen. Right. And even which college they went to.

Yeah. Right. So let's, let's talk about, do elite colleges matter, does it matter if we go to Harvard or if we go to the most expensive private school we can find, or can we get by, in.

What does

the data say?

So, so what does the data say?. There are. Professions where school matters business. Some of the liberal arts majors that have a tendency maybe to study something like history and then go on to graduate school or to law school, something like that.

The prestige of the school has a have major impact on your future earnings, expectations, there's network benefits or things where it matters. But for other fields, Like science, technology, engineering, math, stem. It largely doesn't matter whether you go to a prestigious expensive school or a lower priced one the expected earnings over time, turn out to be the same.

So you may be wasting money chasing a really expensive diploma in some of those fields again. So what matters is thinking about what your student is gonna study and where they're gonna go and making sure that those two things match up. I think what's also really important here. It's not just about the quality of the school, but by the dedication of the student in that environment and whether they apply themselves and do well in their area of study, the sort of despite where they go to school 100%.

Yeah. I, I think the research, all the research shows that if your students apply themselves, when they go to school, a they'll do better on sort of some of the standardized testing and things that have been done, which makes sense. The harder you work, the more you learn. But they probably also get better grades.

They do things while they're in school to distinguish themselves. And then on the other side of that, when employers are looking at students and what their track record are their track, record's gonna maybe look better. And so they're gonna have a better result. I think the question that comes up for me here, Brian is so often though, for these 17 year olds, 16 year olds and 17 year olds were looking at college for.

They don't have a clue what they wanna do. Yeah. Or maybe they do, but in year two, they're gonna change their major because they suddenly realize they don't wanna be pre-med cause they hate biology. So how do you manage that dynamic? Yeah. I, I don't know that there's a perfect way to measure the unknown.

Right. Which is, Hey, what happens if my child changes direction? I think the best way is to maintain financial flexibility. We're thinking about school. And so if we don't borrow, you know, through the roof in order to go to school or we're not going to a school that is absolutely at the tip top of the budget that gives us the flexibility when something inevitably does change.

Whether whether it's changing a major staying for an extra year changing to a different school, right? If, if you're making a wise decision on the front end and you're not stressing the budget too much to just get to that school, then that gives you some flexibility, as you go through.

And I think that kind of wraps up this important theme for the content we've discussed thus far, which is different colleges are gonna be the right solution for different individuals and their. And there's nothing right or wrong about that. It's really more about that family getting together on what their goals are and what their goals are not.

Yeah. And identifying the product, the university or college that is best going to. You know, meet their needs and help them achieve the outcomes that they've stated. Yeah. I, I think in summary, what I would say is sending your child to the most expensive school. Isn't how you set them up for success.

Helping them find the right school for their particular future is how you set them up for success. Long term, both financially and

life

before we go a lot further. I think we should just do a quick aside about what about the student who maybe is having really serious conversations with their parents about not going to college? , I also recommend having a really serious conversation with your kids. If they say that they aren't planning on going to college about standard of living, how much does it cost to have your family's current standard of living that they've sort of grown accustomed to as they've grown up?

It might be time in those situations that get really real with them about numbers on, you know, especially in higher income households. What does that cost? Right. And how much do blue collar jobs pay in your area? The, the things that they think maybe they wanna do instead of going to college. And are they okay with the standard of living that that might provide? Again, I think going to college, making a smart decision about going to college is probably a better economic decision than not going to college.

The one thing that comes to mind that maybe is an exception to this is it feels today, like there are increasing careers and fields.

For example, coding comes to mind. Yeah, sure. Where. Having a college education doesn't necessarily matter in that industry and the, some of the most successful people in that industry don't have degrees. It's really about this experience of being a coder and the languages that you know, and those kinds of things.

Yeah. I, I, what I would suggest is be aware of statistics. You know, like everybody says, oh, well, you can maybe you'll drop outta Harvard and start Facebook. Right. And become mark Zuckerberg. That's really not the average. Right. And if that one thing that your student doesn't want to do, right. Say the coding thing doesn't work out.

Now they didn't go to college and what do they have to fall back on? And so, so maybe that's a situation where somebody takes a gap year and they try to pursue something and you see, are they really good at it? And can they really get paid to do and those kinds of things. And if not, maybe they go to college.

Right. So I think there are some ways maybe where you can, you can check to see if that might be the right path, where there's still some kind of guardrails in place. You know, before you just sort of

send 'em off to the.

Yeah. I know for us, for example before we went and got our MBAs, you came home Brian and said, you know, I think I wanna do this. And order to do that. Most of the people who do it, get an MBA and I wanna go get an MBA. Yep. And it was sort of following the same model of, I am at point a and I wanna be at point Z and the most commonly successful path yeah.

To get from a to Z is to get a master's in business. And I want to go do that, both for the education that I would get while I was there. And for the network benefit of being in that kind of environment, that's going to help set me up for the career opportunities that I would need to get in order to move in my career in this fashion.

if you have a child that doesn't, you know, is thinking they want to do something different besides school, you know, if they want to pursue coding, have them pursue coding for little talk to people that are in the industry where maybe they could. A job. Maybe they start doing that over the summer when they're a junior in high school or something.

Right. And sort of start to learn how that works. And, and if there's a, if there's something there that works and they talk to another people and they really understand how that industry works and they feel like they get ahold of it and they don't need to go to college, then you know, maybe they can do that.

But I think, the more research they do ahead of time, the better off they. So I think this brings us really to this dynamic around the family and having conversations earlier on about what it is that we're doing, what it is that we're investing in.

What is the outcome that we want? You talked about how. You know, investing in college is like buying a house a $300, $300,000 house, potentially at least. And you talk about that extensively with your spouse and members of your families, but we don't necessarily do that when it comes to college and university spending.

So how do you think about. You know, getting on the same page with your spouse, having the conversations with your kids. Let's talk about that next. Yeah. I think that the first question that I ask a lot of couples when they come and sit down and we start talking about long term planning, is, are you and your spouse on the same page about paying for college?

Oftentimes spouses aren't, you've got one spouse. Who's saying we're gonna pay for college in full and no matter what the bill is, we're gonna send 'em there. And then you've got another spouse. Who's like, no, our kids are working their way through school. Just like I. Right. And either of those answers is a bad answer.

But we've gotta be on the same page about it. So that we can make smart decisions. As we go over the long term, I think a lot of people spend, like I said earlier more time talking about their last car purchase than they do sending their kids to college, which is funny because it's, it's a, you know, multiple of the, of the spin level.

Yeah, I mean, I think if we look at our own family, we've got three kids and. They send them all to in-state public schools say that's 30,000 a year. . So if it's $30,000 per year, that's $120,000 in total times, three kids that's $360,000.

Yes. And that's, if our kids all go to Institute public schools, if they went to private schools, We could be talking upwards of $900,000. Yeah. So that's a, or something in, in the neighborhood there for sure. Yeah. It's a lot. Yeah. And, and so it's important that you, that you sit down and, and talk about it with your spouse and that you get on the same page about it.

And again, there's not a, a right or wrong answer. But it's important that you have the conversation. And, and I think as a family unit, it's important that you have that conversation in light of all of your other savings goals. Right? So maybe we do wanna send our kids wherever they want to go for college.

You know, at our expense, can we do that and still save for retirement and paid out debt and do all of the other things that we need to be doing as a, as a family to provide the kind of solid foundation that, that we need to have, right. If we send our kids to college and then we have no money left over for retirement afterwards, when we're living in our kids' basement.

I don't know that they're necessarily gonna be happy about that outcome. Right. So as a family unit, it's important that you guys talk and, and go on the same page. College planning and how that fits in with your larger set of financial goals that you're trying to accomplish. I think that's important, but I also think it puts, you know, some responsibility on the kid.

Yeah. You know, as they're going from middle school to high school, to preparing for college, to going to college, Whether they're gonna be paying or not paying, ensuring that they're investing their, you know, like sweat equity to the extent that you're investing your dollars yeah. In their education. So maybe we talk a little bit about how do we set the stage then with our kids when it comes to college and, and saving for college.

Yeah. I think it's really important that we're having this conversation with our kids earlier, maybe than we're necessarily predisposed to habit, which is like either never, or like around high school graduat. Um, There's a couple things that I think are important. So first I think the right time to have this conversation honestly, is in eighth or ninth grade.

And some people worry about introducing money and the concept of like socioeconomic status into our kids' lives too early on all the evidence. Those shows that by middle school, like most kids have sort of figured out. Where they stand in the world by themselves, if they're the most well off kid in school, they probably know that if they're on the lower end of the spectrum, they probably know that too.

And they want help be part of the family, not be a tax on the resources that you don't have. And so just avoiding the conversation, doesn't help. So I think it's important to have those conversations earlier, rather than, rather than later as we go through school. And then I, I think we can talk about things early on, like how sports and extracurriculars and grades.

Matter when we get to that college decision, that doesn't mean we have to put a ton of pressure on them. You know, when, when they're freshman in high school to make straight a, but I think making sure that they understand, Hey, the, the effort that I put in in high school is going to potentially impact the number of options I'm gonna have down the road.

When I get ready to go to school, I think is an important thing for them to know, as opposed to finding out again, when they're a senior and not being able to do anything about it and wishing they could go back to. You know, freshman year of high school would study a little bit more and probably all kids will have that happen a little bit.

But I think if you can have that conversation with them earlier, at least they can decide what they, you know, wanna do or not do. And, and, you know, just like we talked about college, they're gonna have to put the work in themselves to do it. We can't, you know, we can't push 'em all the way through the process.

Another thing that comes up frequently when I talk to people is we got parents that are on that end of the spectrum where they say, Hey, I wanna save for college and I'm gonna send my kid to the greatest school in the world. And then we start talking about their, their student. They're like, well, you know, they're kind of cutting class and they're not going to school all the time.

And so I'm sitting here saying, man, you've got aspirations to send your kids to some of the most selective schools in the world, but it doesn't seem like your kid is gonna get in to the most selective school in the world. And so there's like, we, we've gotta get this alignment between the kind of student that you have, the kind of effort they're gonna put in, in high school and subsequently in college and the dollars that you're saving and making sure that all those things are, are matching up.

And then lastly, about talking to your kids. I think just because you're having the conversation with them doesn't mean that you're giving up all the decision making power either when they get to be a junior or a senior in high school, it should be quite the opposite when they turn 16, they don't get to choose to spend all of your money on those sports cars so that they can go really fast, wreck it and be unsafe.

Right. And the same thing should happen when we think about spending a quarter of million dollars for college too. We want to have a lot of influence in that conversation and help them make a smart decision just because they feel like they want to go to a really expensive conservatory and study dance and borrow a ton of money to do it doesn't necessarily mean that it's the right.

Right. Yeah. It's kind of amazing because we're letting these students make such a huge financial decision for both their parents and themselves in many cases, because we know the majority of Americans are carrying an immense amount of student debt. And we're doing that with people who oftentimes haven't even managed their own money, let alone a households amount of money.

Yeah. I'm just starting 'em off on a really poor footing when it comes to. Kind of their economic, economic standing in the world. Yeah. And I, I think it's, it's okay to say sort of no, or what I like and really recommend is it's okay to say here's the amount of money that we've saved. Here's how much we can contribute on an annual basis out of our income.

Now as we talk about schools, you've gotta keep that in mind because just because you want to go somewhere, that's more expensive than that doesn't mean that we're gonna be able to help you do that. And we may also may not be comfortable. Co-signing on loans for you to borrow to the hilt to do that thing that you really wanna do that we don't think is a good idea either.

So you've gotta have a really important, sometimes challenging conversations, I think, with your. Both when they're earlier in high school. And then also when you get to that time junior, senior year around that, that college application and decision making process. And I think this really naturally ties to college aid.

Yeah, because I think there's so many families, Brian, that go in expecting they're gonna get more financial support, whether it's through academic scholarship, athletic scholarship, you know, government dollars, state funded dollars, like whatever the case may be. And I. That a lot of families may be surprisingly.

So find there's not as much financial support as they thought there was gonna be for these pretty hefty bills. Yeah. So let's just talk about athletics for just a minute. So 2% of high school athletes get some form of scholarship to college, and most of those are way less than a full ride. And I think another thing to think about is even if you get a 50% athletic scholarship for a school across the country, all you've probably really done is paid the difference between that school's out-of-state.

And the in-state tuition at a school where you didn't get an athletic scholarship. So you know, unless you have a really elite athlete in a particular sport, that's in demand. The odds are pretty small that you're gonna get an athletic scholarship. So I wouldn't necessarily plan around that. And Hey, if it happens, then it'll be really nice.

Right? The same thing is true. A little bit with need based aid. If you haven't been through the process of filling out this really complicated thing called the FAFSA You'll likely be surprised when you find out what your expected family contribution is. And it's gonna be way more than, than you think.

And the reason for that is. The government basically assumes that you need a very minimum level of assistance for your family. You can spend 5% of all your total assets on college every year. And after you've contributed 5% of your assets and you meet that basic level of subsistence for your family.

20 to 40% of everything else can be spent for college. And I don't know very many people who can redirect 30 or 40% of their monthly income to pay for their kid to go to school. And so if you're a sort of an upper middle to upper income parent, it's very likely that of expected family contribution's gonna be a lot higher than what you're actually prepared to come out of pocket for, which is why we need to save, you know, for many years to be able to afford college side note, Brian and I are extensive.

Knowers of the FAFSA of the, of the expected family contribution we met, we meet in the financial aid office. We met working, maybe not met. We both worked in the financial aid office at Barry college as undergrads. And it was one of the ways. That we met when we were in school. In fact, Brian was my boss.

We had an illicit relationship. I made 25 cents more an hour in that student work program, I think, than you made. So there go. That was the

beginning of our very

highly, our income gap disparity. It was 25 cents. We filed a lot of FSIS. Yeah. Yeah. And, and virtually, nobody came into the office and said, man, I'm so.

Amazed at the amount of money that the school is getting. Yeah. That, that conversation never, never happens. Right. Colleges are businesses as well. I think if you haven't figured that out yet, they are businesses, even though they're nonprofits. And so they've figured out how to price discriminate, just like every other business.

And so what that means is. They're gonna use the information that they have, the FAFSA and their sticker price and all the different things. They can do the grants, the scholarships to try to figure out how do I get the most students here at the highest price point possible. That's what they're trying to do on their end.

And so, you know, their, their job is not necessarily to help you go to school. Although they sort of will say that their job really is to maximize revenue college and they pretty much use grants and scholarships. As like a discounting process in the same way that there are different. Prices for seats on a flight.

Yeah, there, I mean the, the college is trying to entice the most competitive students to go to school there. And so they're gonna give grants and merit awards and academic scholarships to reduce the price to the most competitive students. And if you're more of an average applicant or maybe even a top third applicant, you're just in the pool with everybody else.

And if most of those people can afford to just write the check to pay the bill, then that's where you're gonna be. So what if you've gotten to that point, Brian, you're listening to the show. You already have teenagers and you haven't received. Yeah. So again, this goes back to that conversation of what is college for, what are we trying to accomplish by going to school?

And so. We just need to think about where we're gonna be able to go and how much we're gonna be able to spend through that lens. You might need to look at in-state public universities. Like we talked about earlier, you can still have an awesome career and do really amazing things going to a public school.

Maybe you've gotta work through school. A lot of people did that. I, I, I think it's a little bit challenging maybe to say I'm gonna work and totally put myself through school now, the way that it. Um, Back in the, you know, maybe the seventies or even the eighties. But I do think it's possible for students to work and earn part of their tuition, earn their room and board, things like that.

While they're going through school, obviously applying for scholarships is really, really important. You can put it on your student and say, Hey, here's what we can contribute. If you want to spend more than that, you need to, you know, you need to go find scholarships and write letters and do all the things you can to try to search for student aid.

There are loans and, and public loan forgiveness. And so if you have a student who is really confident about what they're going to go do, and again, you've gotta be the judge of, is this, you know, a fad for today, or do we really want to be a nurse, right. You know, or go into medicine or go into education.

Some of those places, you can take out loans and go to school, and then those are forgiven. If you're in a particular field over a long period of time going into the military is another great option as well. Right? The ROTC program. We'll pay for you to go to college, but you're making a commitment the day you walk into that program to serve in the military for eight years.

And if you're not willing to do that, you're gonna end up owning all of that money back and you're gonna owe it back really quickly. And so those are serious career commitments that you're making up in front of. But there are ways, that, that you can pay for college, maybe if, if that's the direction that you're gonna.

And then the last option I think, is taking out loans whether it's appropriate or not. I think again, depends on your student, the school that they're gonna go to and what their career aspirations are., it might make sense to borrow $50,000 to become a leading engineer and graduate from Cal tech.

It might. It might not make sense to borrow $50,000 to study art history. Right. You know, so that isn't good or bad, it's good or bad in specific situations. And you've gotta use your judgment and help your students use their own judgment that's being developed on whether that might make sense for makes sense for them.

One thing I think I would note here, I struggle personally to think that borrowing just to go to a higher range school Is is the right answer. If you can get the education that you want at a reputable school with a good track record. I, I think, I think the evidence would show you that simply studying the same thing at a school that's ranked higher and having to borrow a ton of money to do it is probably not gonna produce a good economic outcome.

All right, then let's talk about saving.

So I, I think if we've established that we're gonna make a smart decision about the kind of school that we need to go to and how much we're gonna spend to do it. The question then is if we've got some time between now and when college is, whether that's a decade or even three or five years, How much do we need to save to do this?

So I just ran some, some quick math earlier, and if you've got a, a newborn, right? So we've got 18 years between now and school, and they're gonna go to the least expensive schools. Those in-state schools that cost 20 to $30,000 a year, that's saving $250 a month every single month between now and when they turn 18 in order to be able to pay for.

All of their education. And that number goes up to $650 a month if you're gonna pay for all of their education at some of the most elite private schools in the country. And so that's kind of what you're looking at is somewhere between $250 a month to $650 a month every month for 18 years, in order to completely finance.

Somebody's education and, and probably saving for 100% of somebody's education is not maybe the best plan. And we'll talk about that a little bit more a minute, but I think it's just helpful to kind of set that framework of this is a lot of money that needs to be devoted to this consistently every single month in order to meet, you know, those in order to meet education goals.

And I'm guessing that you're gonna say that money should be saved in the 5 29 plan. How

yeah.

True or false. Yeah, that's true. For most people, I think the 5 29 plan is the best vehicle for college savings. There are other things that are out there you'll hear Coverdale or education savings accounts that have been around a little bit longer there's income limits on those.

And you know, unless you've got a unique situation around like K saving for K through 12 expenses or things like that, that's generally not as good as a 5 29 plan. I also hear folks. In an IRA or a Roth IRA because the contributions are tax deductible. Whereas in 5 29 plan, they're only tax deductible in at the state level.

And that only applies to certain states. The problem with a, with an IRA or Roth IRA is, is generally that there's income limits. So a lot of people can't use 'em to start with, and if you're also saving for retirement you know, the dollars that you can put in there are limited. And so it's, it, it seems to me to be very difficult to save.

For college and for your retirement inside of an IRA Over over the long term. So 5 29 plan is where most people are gonna start. What's interesting is according to Sally may only about a third of parents actually use a 5 29 plan when they save for college. So the government has created this vehicle for folks to use, but only a third of people are, are using it.

And so when you're, if you're wondering, if everybody else around you has saved exactly what they should for college on a 5 29 plan, they must have done this clearly, right? Because they're sending their kids to those really expensive private schools. The answer is two thirds of them have. So you're, if you haven't saved as much as you wanted you're actually in the majority and, and what we wanna do is start having those conversations and figuring out the right amount to be saving now not down the road.

What else can we say? About five 20 iPads. So 5 29 plans. The contributions are generally deductible on your state income taxes. That's true in Alabama and Georgia. In Tennessee, there's not a state income tax, so there's nothing for you to deduct from. But so there is a nice tax benefit.

You can open one for each of your kids. So we have three kids, so we have 3, 5 29 plans and everybody can contribute grandparents, friends. Anybody who wants to help send your kid to college or be part of this really small house of an education that you're gonna buy down the road. I actually recommend having 1, 5 29 plan in your family for each kid and then having grandparents or friends or anybody else contribute to that plan instead of.

Other folks having lots of 5, 29 plans out there. And there's, there's a couple reasons for that. One is those, those withdrawals can be treated differently when that child gets to college. If a grandparent or somebody else owns a 5 29 plan on their behalf from an income perspective. And we wanna minimize that.

And the secondly it's just really difficult to plan when you're not really sure how much is being saved for someone to go to college. And I've, I've heard this before, too say, Hey, I'm gonna, you know, I'm gonna tell Johnny. Going in high school graduation that I've been saving all this money for him to go to college.

Well, by the time he gets to high school graduation grandparents, this is for you. He's probably already decided where he is gonna go to college. And if you had $50,000 to give him, he probably would've liked to have known that like six or eight months ago. And so I, I think at least six or eight months.

Yeah. And, and it's, I mean, that sounds like kind of CRAs, I've seen that happen. Right. And so I think it's important. If you're saving, let people know that you're saving and, and if you can, I think consolidating 5 29 plans down anybody, like I said, anybody can contribute to a 5 29 plan.

And, the other benefit is if you have, you know, maybe one of your older children, doesn't go to college, you can roll that money between children. There's no tax penalty for doing that. And so there, there is some flexibility there you know, to move money from older kids to younger kids, if you need to.

So contribute to those plans, have one for each, each of your children, and then everybody can, can put money in there and that'll be a great vehicle for saving for college. I think that my parents may have done something like that, where mine was more fully funded. Then my then middle child was more fully funded than their last child.

And in the end it did give some flexibility, right? Because I got some scholarship money. So there was potentially some money left over in my 5 29 that they could then roll to a sibling. Talk a little bit about what is like the ideal target Brian for. You know what the percentage of the total bill is that you have saved when you start?

Yeah, so I, I actually, because there are penalties for withdrawing non-education money from 5 29 plans, we don't actually want to overfund them. So I think it's a really good idea to save maybe a hundred percent of what you expect for your oldest child to go to college. If we only have one, we can talk about that in a second.

And then maybe it's more like 60 or 70% for your younger children. Right? And then you can roll money down as kids go to college. And if you end up having to come out of pocket a little bit in their last couple years of school, I think that's an okay thing. We would rather that happen than have money left at the end in a 5 29 plan to pay a penalty on, or have children decide not to go to school.

And then we have all this money and the 5 29 plan that we can't use. So so I would, I would underfund it a little bit particularly for, for younger, younger. If you only have one child I think that's where it's more challenging. Maybe it's, maybe it's putting 60 or 75% in a 5 29 plan. And then saving the rest outside.

You know, like outside in a, just a standard brokerage account. So you're still saving, right? I think still really important to save, but maybe not putting all of it in a 5 29 plan is a good risk mitigation tool.. Awesome. So we've gone through a lot of content today.

Do you wanna kinda like wrap it up for our listeners and kind of bring together the most salient point or two? Yeah, so I think there's a couple things. I think the first thing. There's no right. College decision for everybody, whether you should go to an extens elite private school, or whether you should go to a less costly local state community college, something like that.

I think, what is important for everyone is to align, where their student is academically going into college, where they think they want to go using what we know about them and their history and all those kinds of. And the college decision that we're making and making sure that we're not making a bad economic decision for their particular goals.

And that might be different in your family for all of your different kids. The second thing I would say is you need to have conversations about college saving with your spouse, with your kids sooner, rather than later, make sure everybody's on the same page. We talked a lot about that. There's some good things in here that you can use to spark some of those conversations.

And then lastly, the answer is save. We know that college is really expensive. It's not gonna get cheaper. It's not probably gonna go away in this generation. And so the best thing you can do is start saving figure out what's comfortable for you that allows you to meet all of your financial goals and start saving every month in a discipline way so that you can afford those expenses when they happen.

Awesome.

Such a robust conversation on planning and saving for college. We think our listeners so much for tuning in to today's episode of six, figure ambassador as always, you can reach out to brian@thecapitalstewards.com. If you have additional questions or things you wanna talk through. And yeah, we, we do workshops for folks about college planning all the time.

So if you're interested in having a more detailed conversation about how much to save and how to maybe align college with all of your other financial goals, we're happy to have a, a conversation about that. Awesome. Thanks friends. See you again soon.