One of the main reasons I read so many books is to learn from people who have been there before.and after reading the price you pay for collegeI’ve realized one of my biggest blind spots is that I don’t have to save that much for college anymore!
If you’re a parent concerned about rising college costs, this post may give you some comfort.
So far very focused on saving for college
In my constant desire to save and plan for the future, I have focused each year on donating “as much as possible” to the 529 plans I have for my children.
First, in 2017, I superfunded my son’s account, and then in 2019, I superfunded my daughter’s account. After that, she received 529 donations from her parents.
Finally, we assumed a worst-case cost scenario where the children attend private colleges and are not smart enough to get enough financial aid (grant, scholarship).
We estimate that our son’s total college costs will be about $700,000 in 2036 and about $800,000 in 2039 for our daughter. If it takes her five years for each child to graduate, the cost will be 25% higher for her.
Given the future financial burden of $1,500,000 of this kind, we couldn’t help but regularly donate maximum amounts to the 529 Plan. In my case, the maximum contribution amount is the gift tax deduction threshold, currently $17,000 in 2023.
Why assume a worst-case college cost scenario?
When it comes to financial planning, it’s usually a good idea to be more conservative with your assumptions. When it comes to retirement, it’s better to have more money than less when you stop working.
Therefore, it’s a good idea to assume the worst-case college-cost scenario for your family as well. Here’s my guess as to why paying for college for her one child, starting in 2036, will cost about $700,000 over four years.
- Given that my wife and I are of average intelligence, my children will likely be of average intelligence.
- Given what we’ve learned about how Harvard and other private universities value Asian Americans, my kids probably have below average personalities. Despite their work ethic, friendliness, and generally peaceful nature, Asians are not the favored minority (6% of the US population) for college admissions.
- Despite the university’s desire for diversity and inclusion, Pacific Islanders still seem to be lumped together with Asians despite their vastly different cultures. Therefore, my children of Hawaiian blood are unlikely to benefit from promoting diversity, even if only Hawaiians/Pacific Islanders are to blame. 0.4% of the US population.
- My children are unlikely to win sports scholarships.
- Our income is not high, but we have been tremendous savers and investors since 1999, so our assets are above average. Therefore, the Free Application for Federal Student Aid (FAFSA) has a higher Expected Parent Contribution (EPC) amount.
Different ways to pay for college
Instead of having my parents pay for the entire cost of college, which was my default assumption to remain conservative, as financial aid expert Mark Kantrowitz recommends in Ron Lieber’s book, There are alternative ways to pay for college.
- Parents pay a quarter of tuition from college savings, like the 529 plan
- Parents pay 1/4 of the tuition fees from their current income for 4 years of college.
- Students owe a quarter of their tuition fees from the federal government or through work studies.
- Parents borrow the rest from home equity or through federal plus loans or private lenders.
Do you know which bullet points I hadn’t thought of until reading this book? Parents are paying for college from their earnings while their kids are in college!
It seems obvious, but is it? Blind spots are blind spots for a reason.
It was not clear to me why my parents paid for college with their own income.
If parents have positive cash flow from their daily jobs while their kids are in college, why not use some of their savings for college expenses? Easy, right?
The reason I never thought about paying for college while working was because I never thought about working when my kids went to college.
It’s been 11 years since I started working as a day laborer. Oh my god, I don’t even have the energy to work right now! After three years of the pandemic, I’m back in early retirement mode. So why would you want to work 12 to 15 years from now?
As an aging parent with enough money to live comfortably, the thought of still having to work to pay for college when I approached the traditional retirement age never crossed my mind. Working until my children graduate from college is a big goal. But in my 20s and 30s, I did everything I could, and I wanted to do it.
Moreover, I don’t think my wife will ever go back to her traditional job. She is too happy to be her mother, and financially she is her COO and her CFO of Samurai Co., Ltd.
Not working a day job since 2012 has completely changed my perspective on how to earn both active and passive income. Ideally, you earn enough passive income to cover your living expenses and do a job you love.
Recalculate how much money you have to save for college
Based on the college payment proposal above, you can reduce your planned savings ($1,500,000) by a quarter. Since you don’t have to save $375,000, you can donate a quarter of every 529 savings accounts or accept a lower return.
Conversely, this also means that you will have to pay $375,000 from your active or passive income while your two children attend college. So you’d have to calculate an average of $53,571 a year after taxes for seven years to pay for college while your kids were in school.
$53,571 a year sounds like a lot, but it’s doable because it’s future money. $53,571 a year over 12 years, compounded at 4% a year inflation, would put him closer to $30,000 in today’s dollars.
If my family continues to generate more passive investment income and we live on less than 80% of our total passive income after tax, our passive income will be 4% of our children’s college expenses in the future. You should be able to pay for a minute.
So I probably won’t need to get a day job when my kids go to college. You don’t want to be forced to sell assets to pay something when the market is down.
we are not going to borrow for college
If you also borrowed to pay for a quarter of your college costs ($375,000), you could cut the amount you have to save in half ($750,000). However, I’m not going to borrow for college because I’m in my late 50s and don’t want to go into debt.I want to be debt free by 60.
Additionally, about 40% of college entrants do not graduate. Borrowing college fees without graduating from college is one of the biggest reasons for the huge student loan problem today. I don’t want to burden the government with student loan relief.
We all think we’re not going to be one of the 50% who never get divorced. Also, I don’t think we’ll be one of the 40% who don’t finish college. But it is very likely. Accepting reality will help you make better decisions in the future.
Borrowing money without getting anything in return is a bad idea. Being in my late 50s and even borrowing money to buy more property, my favorite asset class, doesn’t work for me. That’s what I most want to avoid.
So many unknowns for paying for college in the future
Some people think that saving too much for college is a mistake. This reduces your chances of getting a grant or scholarship.
Also, government intervention, declining enrollment, and the growth of online learning have increased the belief that more colleges will become more affordable or free. You run the risk of wasting energy savings.
Thankfully, we are now able to roll over the remaining funds to the Roth IRA. 529 plans can be assigned different beneficiaries. But the goal remains. Ideally, we save just enough so that college can feel at ease without overdoing it in the process.
After I uncovered my blind spots, I became less stressed about paying for college. He no longer needs to save about $1.5 million in 12-15 years for college.
How much to save for each child’s college
My current goal is to save $320,000 per child. This is the current total cost of attending her four years at the most expensive private university today. In the future, when I reach this inflation-adjusted level, I will no longer contribute to my children’s 529 plan.
If you think your child can get a scholarship, we encourage you to save the full cost of four years of attending public college. If they choose to attend a more expensive college, the difference can be made up by job studies, loans, and/or your own income.
You don’t have to pay the full cost of your child’s college education. When the time comes, you can play by ear.
Oh, I’m glad I cut my college savings goal by $860,000! I feel more comfortable saving $720,000 for college for my two kids than saving $1,500,000.
Let’s hope their 529 plans rise by an average of 5% or more per year. Otherwise, shortages will occur.
Reader Questions and Suggestions
What other ways are there to pay for college? Did you always plan to pay for college with your own income while your child was in college? If you have children in college or already out of college, how did your family pay?
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