Is College Worth it? Saving and Paying for College in 2024

By: Brian Seay, CFA

Thinking about college for your children or grandchildren? Is it worth it? How do you guide kids to choose the right school?  Or no school at all? What’s the right strategy to save and pay for school once they enroll?

I think American needs a “great reset” on the value and purpose of college altogether. College can be immensely valuable, on both personal and economic fronts. However, to achieve that value, we need to guide our children to make smart choices about college. We start the latest episode by providing a framework to help you guide your student to make a decision that has a good shot at paying off, both financially and personally.

Then I dive into how to save and pay for college once your kids, or grandkids, get there. Should you use a 529 plan, a ROTH IRA or something else? Oh, and what if they don’t go to college? We will discuss that as well.  

Transcript:

Hello and welcome to the Capital Stewards Podcast. Today is all about college. How to guide your kids to choose the right school, or no school at all, and then how to pay for it once they get there. I think American needs a “great reset” on the value of college and the purpose of college altogether. I know – easy to say when you have a master’s degree and bunch of other education. But we will start with re-framing our perspective on our kids college choices. Once we have a framework for making smart decisions about college, I’ll dive into how to save and pay for college once your kids – or grandkids – get there. Oh – and what if they don’t go to college? We will talk about that too. So let’s dive in.

College is the second largest purchase for most families with for one child, let alone two or three. Four years of college now costs between $80,000 and $300,000 per child. Yet we spend more time talking about the next car we plan to buy than we do college. When we do get to the discussion, we skip straight to how much to save and the right tax strategy. However, it's important to take a step back and think about the product we're actually buying. Do each of our kids need to go to college? If they do, do they need the $80,000 version or the $300,000 version? What is the purpose of college? What do we get for that huge investment? The answers might surprise you and might be different for each of your children.

Is College Worth It?

The world is always changing, but college graduates still earn more on average than those without degrees. But anytime we use averages it's important to be aware that no one is really “average”. Some students will have above average results, others below average results. We need to help our students align the elements of the framework for them to achieve average, or even above average results. We will discuss specific schools in a minute, but what makes college “worth it?” Research shows the results are determined by 1) the subject a student studies and 2) their effort and engagement with the coursework. It’s clear from multiple research projects that some majors pay more than others. Paying more in tuition to earn more long-term may be a good economic trade-off. But paying more to study in a field with few economic opportunities is not a good idea. Additionally, and not surprisingly, students that apply themselves in college improve their critical thinking capabilities. So for college to be “worth it”, students need to choose the right major, at the right school, at the right cost and be engaged in their work.

Speaking of engagement – does you child even need to go to school. I know college is a dream for many families, but the average starting salary for a Plumber was $40,000 last year the average plumber made $61,500 and those with experience and that run their own businesses made well into the six figures. HVAC technicians have very similar metrics. So do aircraft mechanics. None of those jobs require a college degree. In fact, the mid-career stats are very similar to the results for college educated teachers and liberal arts majors. If your kids are going to take over a family business – the right choice for college might be one near home that is $60,000 instead of one across the country for $300,000.

I share all of that to say that college is only financially worthwhile if you have alignment between your kids desires, their major and post-graduation opportunities. College in and of itself does not produce high incomes. There are many people with “college” degrees working in the Starbucks drive thru. And there is nothing wrong with working at Starbucks, but the way, but if you spent $200k to go to college and then ended up at Starbucks, that may be an issue.

Do elite colleges matter? Does it matter if we send a child to Harvard or another expensive private school?

The answer is that it depends on the student and their intended profession. Research from the Wall Street Journal shows that school “rank” and status does matter in fields like business and some liberal arts majors that tend to send students on to graduate schools. In these cases, research shows that the prestige of the school has a major impact on future earnings. But for other fields, like science, technology, engineering, and math, it doesn't matter whether you go to a prestigious expensive school or a lower priced state school. The expected earnings over time, turn out to be the same. Again, what matters is aligning the student’s planned major with their choice in school. Study after study shows that your student will determine their own long-term economic success, not the name on their degree.

Is everyone in your family on the same page?

Investing in college is like buying a house. Potentially a $300,000 house. And you talk about that extensively with your spouse before you purchase a home, but not before making college decisions. We often ask parents when we sit down: Are you and your spouse on the same page about paying for college? Often times the answer is a blank stare and no. One says we're paying for college in full and the other plans for the children to work through school. There is no right or wrong answer, but it’s critical that you are on the same page as a family about paying for college AND about where that spending fits with your other savings goals.

It is also important to have this conversation with your kids sooner rather than later. Ron Lieber, in “The Price You Pay for College,” recommends talking to students about college long before it’s time to start visiting schools. Shelle Howard from College Ready Plan – and a prior guest on this Podcast – suggests the same thing. We recommend starting conversations with your kids in 8th or 9th grade. The early conversations do not need to be about specific dollars or about putting pressure on your kids to keep a 4.0 GPA. Discussing the process in general and what factors matter will help them make smart choices in high school. Discussing how sports, extracurriculars and grades all contribute to gaining admission and paying for school will help get everyone on the same page. I like to frame it simply in terms of options. The more effort your student puts in during high school, the more options they will have available when it comes time to choose a college. Simple and straightforward.

Alight – so hopefully by now you are thinking about whether college makes sense. Again, I think the right framework for college is to first identify whether college is a good fit for your student – and if it is – then identify options that are at the center of the right price point, the right major and the right school. So now let’s talk about saving and paying for college.

Paying for College:

Often families are surprised at the lack of financial support they receive when it comes time to send kids to college. Let’s start with athletics. According to the NCAA, only 2% of high school athletes receive some form of scholarship to college, and most of those are less than a full ride. So, this is not an option for the vast majority of families. Parents are also surprised at how little “merit” and “need based aid” they receive. You will likely be surprised by your “Expected Family Contribution” when going through the financial aid process. While you may be able to lower business income in certain years to help, financial aid offices are keen to spot many tricks. So, it’s unlikely that you will successfully beat the system. College is a business, and it is attempting to entice the most competitive students to attend school. They use discounts and “awards” to entice students. If your student isn’t in the top tier of admission candidates for a school, the school will likely not feel the need to discount the price to entice them to attend (i.e. provide scholarships).

That means school funding is likely to come from 1) savings, 2) current income and 3) loans and 4) some scholarships. Some families may be able to write the check each semester out of their current income, that makes the process simple. For most, paying for college requires long-term saving and potentially taking out loans to foot the bill.

So where do we start saving?

Just to give some context, if you have a newborn and desire to fully fund college at a very low-cost public school, you should be saving at least $250 each month for 18 years. That number increases to $650 or more each month for elite private schools. If you start later, then the number will be higher. So the short answer is start now and start big.

For most families, I think a combination of 529 plans other accounts, like taxable accounts or ROTH IRAs make the most sense we put together a full plan for college saving. Especially if you have multiple children.

529 plan contributions are generally deductible from your state income taxes. That's true in Alabama and Georgia. In Tennessee, there is no state income tax, so there's nothing for you to deduct from. 529 plan earnings grow and can be withdrawn tax-free to pay for educational expenses. I often get questions about saving for college in a ROTH IRA, well a 529 plan is essentially a ROTH IRA specifically designed for college.

I recommend opening one account for each child in your family. Grandparents and friends can also make contributions, regardless of who owns the account. In fact, direct parental ownership of the account will help in the financial aid process. When others like grandparents or friends own 529 plans on your kids’ behalf, their financial aid may be reduced more than if the 529 was owned directly by you as their parent. So have Grandma and Grandpa contribute to the 529 plans you own on your kids’ behalf instead of opening their own accounts

529 plans have the flexibility to transfer funds between children. So, if one child earns a full scholarship or decides not to go to school, the funds can be used by their younger siblings. There is some risk that an only child doesn’t attend school or that accounts are overfunded. We recommend not quite fully funding 529 accounts, especially for younger children, to ensure the savings are optimized without the risk of tax penalties after everyone completes school.

If everyone attends school, the funding deficit in a 529 plan can be made-up from by savings in a ROTH or in another account.

Other options exist, like Educational Savings Accounts (Coverdell Accounts), or even retirement accounts like IRAs or ROTHs. Education Savings Accounts have income and contribution limits that make them less practical. The same applies to IRAs and ROTH IRAs. While the tax deductions may feel good, many families have too much income to contribute. Even if you can contribute to an IRA, savers usually cannot fully fund college and their own retirement within the contribution limits. That’s why I like to use 529 plans as the core savings vehicle and supplement with assets from ROTHS or IRA. The one exception might be for parents that will be over 59 ½ when your student goes to college (or shortly thereafter. If you are over 59, you can take money out of a ROTH for anything, including college. So if you will be over age 591/2 when you kids are in college, ROTH contributions or ROTH conversions might be a more flexible strategy to use than a 529 plan. ROTHs have income limits on contributions, so the most likely funding mechanism will be to make after-tax 401k contributions and then convert the funds into a ROTH over time. That money needs to sit for 5 years, so it’s important to plan out this kind of strategy ahead of time.

Additionally, I have several clients with what I call “good start funds” they have established for their kids. These are simply taxable brokerage accounts that will grow over time. The funds can be used for college, or to start a business, buy real estate or anything else. By not holding the assets in a dedicated 529 plan, parents have flexibility to use the assets in the best way for each of their children. Like I mentioned earlier, especially if you have multiple children, a mix of 529 assets to pay for college, and other assets to cover non-college expenses is a great long-term planning strategy. You get the tax benefits for college saving, but you aren’t committed to college or bust with each child.

There was a change in the law last year that now allows unused 529 dollars to roll into a ROTH IRA. The catch is that you can only move money up to the contribution limits each year, which is likely $7,000 for you, and there is a life-time $35,000 maximum. So this provides great flexibility after your kids finish college if you have a little bit of money left over in a 529 plan, but it’s not going to enable a massive amount of savings through 529 plans for other purposes.

So now that we have saved, what about the FAFSA and paying for college when it’s time to enroll.

The FAFSA is the federal application for student aid. It’s free and fairly easy to fill out. As I mentioned earlier, it’s hard to beat the system and appear less well off than you are. College aid officers have been at this a long time, and they have seen all the tricks. But there are a few things you can do strategically to maximize the amount of aid you qualify for from a school.

The first is to control your income in the 2 years prior to enrollment. The FAFSA looks back, so the years immediately prior to and up to the beginning of your child’s junior year of college are the most important for determining your income. If you can minimize business or partnership income or delay IRA withdrawals, that will help maximize your chances of receiving aid.

Second, assets owned directly by students are “taxed” the most from a financial aid standpoint. So instead of gifting them assets to own, consider leaving those assets in your name as opposed to putting it in theirs. Now this can conflict with estate planning strategies, so make sure you aren’t derailing your estate plan over college funding. Your financial planner can help make sure all the pieces work optimally together.

Lastly, file early. Colleges, like other businesses, have a budget for student aid. Once it’s gone, it’s gone. So, the later you file, the less money they have to give out.

I’ll close with a word on student loans. If you kids are taking out loans simply to go to a more expensive or prestigious school, I would think long and hard about whether that decision will pay off. Do they really need to go to the more expensive school or will one that you can afford without debt be a better bet long-term. Loans can be useful, however. I mentioned the age limit on ROTH distributions. Perhaps you will turn 59 and ½ while your kid is in school. Perhaps you borrow for a year or two and then pay off the debt when you turn 59 and 1/2 .

I also think having skin in the game always matters as we teach our kids to make good stewardship decisions. So perhaps they take out some loans to help pay for school, so they are incented to make smart financial decisions around school. If they graduate with a few thousand dollars of debt and make smart decisions along the way, they may be better for it in the long run. Just make sure it’s not so much debt that it derails their own long-term financial situation.

Ok, so we’ve covered where college is and is not valuable, how to save for college and how to pay for school when the time comes – if college is even the right choice for your child. If you have questions or would like to discuss your specific college funding situation, I’m happy to engage directly anytime. You can find a link to schedule a call in the notes of this episode and on the top of our website. We will see you next time on the Capital Stewards Podcast.