Nearly three years ago, I wrote, College Planning is Impossible (But Do It Anyway!). At the time My kids were just 2 and 3. The idea behind the article is that college costs vary so much, that there’s no easy way to plan for them.
If you want to be aggressive you could save a ton of money in a 529 Plan. That’s assuming you have a ton of money… which most people don’t. The downside to that (other than the lack of a ton of money) is that if you put too much in, you have to deal with penalties or other creative uses for 529 plans. Perhaps the best thing to do is just let the kids have the remainder for their kids… or maybe some schooling down the line.
Essentially, if you overshoot the 529 savings, your money is trapped. That’s not a terrible problem to have, but it’s less than optimal. You may even think that you are planning it well, but what if Jack/Jane gets a scholarship/grant or goes to a public school making the costs very different than what you planned?
College has just too many variables and you can’t plan for them…
… except we did. And I swear it was completely by accident.
Before I get to that I’d like to cover some ways to cover college expenses. Not all will be applicable to all families or students. There’s a lot of tools in the tool box and we hope utilize them all.
Covering College Costs
I focused on 529 plans above, because that’s the traditional savings vehicle for 529 plans. Sorry Mr. Coverdell… I have you, but you are mostly obsolete. Like Smelly Cat, it is not your fault. One of the reasons I got a Coverdell was that it could cover private school costs before college, but 529 Plans can do that now, thanks to the recent changes in the tax law.
How could one cover college expenses? Here are a few ideas:
- 529 Plans – That’s obvious one. It’s a great vehicle to saving money
- Schoralships/Grants – It would be nice to get these. Some schools may give more than others, so our plan is probably to apply to a lot of schools?
- Pay off adminssions – Just making sure you are paying attention. This certainly wouldn’t save you money. You might end up in the news… and not in a good way.
- Student Loans – The old standby. It’s a big problem nowadays, so hopefully we can keep this down.
- GI Bill – My wife’s military service gives benefits that we can split between the kids. I realize that not many people may have this option.
- AP credit – If you can test out of a few classes, you can get some credit without having to pay for it.
- Community College – Most community colleges are cheaper than traditional public and private universities. It may be possible to take some basic pre-requisits for cheaply and then transfer.
I feel that it is like having multiple income streams. The hope is that through some combination of the above (with minimal loans) paying for college won’t be impossible.
But we have one secret weapon that’s not listed above. We have rental properties. The mortgages will be paid off around the time the kids start college.
This means that we’ll likely have some $35,000 or so (after expenses) each year. Is it enough to cover college costs in 11-12 years? Who knows, but it will certainly help. The benefit of this accidental plan is that we don’t have to think about whether we are saving enough or too much in a 529 plan. If there’s extra money left over, that’s just living expenses.
So how might you be able to plan this more intentionally? Unfortunately, you’d need have the money for a good downpayment around when the children are born. Then with a 15-year mortgage, the timing should be right. Of course, it’s not great being a landlord while raising newborns. OF course if you have the money for a downpayment, you put it in a 529 plan and mabye expect it to quadruple (assuming 8% annual returns) by the time the child is in college. I think prefer the real estate plan, because it is more flexible.
I’m not saying you can do it too. Like my 6 year old’s new catchphrase, “Nope, not at all.” However, it is something that you may want to explore.
I have 3 young adult children who are out of college- 2 of my children had taken 10-12 AP classes each. The only thing the AP Credit did was allow the boys to skip a prerequisite in a few subjects. Still paid for 4 years of college .
But here is some good advice if you have very bright children. Instead of having them attend “the best college they can get into “ which might be a top 20 school, let them also apply to some middle rung colleges- these schools will want your child and throw money at them . The top colleges don’t typically offer merit money because the entire student body would qualify- the applicants are all brainiacs- a slightly lower rated college that is still decent will be the school that makes merit scholarship offers.
Ellie is correct in her comment. My three millennial kids were bright but mostly they were taught to love to learn by a great mom. By building good study habits and applying to the state university they got free rides for their four year degrees. Even room and board was covered. We had intended to cash flow college costs but ended up padding our retirement instead. They all graduated with nearly straight A’s in engineering and business and all are gainfully employed in great jobs now. They all got graduate degrees but we never offered to help with those. The best investment you can make for college costs is by building seriously dedicated students that enjoy academic challenges. That may not work for every kid but I think it will work for a lot of them and those state schools are indeed desperate for top quality students and have lots of scholarship money to throw at them.
Elise @ Financial Fitness Fanatic says
I so appreciate your Smelly Cat reference.
That’s great you have the option to funnel that real estate income directly to your children’s college education. It’s something to consider, although, living in LA, we are avoiding real estate investing entirely right now. Housing prices are just way too steep.
My stepdaughter is entering her senior year now. We were really pushing for a military academy, but alas, she went to West Point and the Naval Academy military camps this summer and hated them. So, back to the drawing board. The good thing is that teaching her about the cost benefit of military school has helped her become more aware of the financial strategy that goes into choosing a college. Our deal with her now is that she will get a certain amount every year for tuition. If she chooses to go to a school cheaper than that, then she gets to pocket it. If she chooses to go to a more expensive school, she’ll have to earn herself a scholarship or take out a loan. So far it’s working … she’s definitely getting more excited about those state schools and UCs!
I think the rental plan is really good if you can handle it. My friend got a rental for each of his 2 kids. He can sell it or use the income to help pay for college when the time is right. It could be a lot of work, though.
For us, we went with the 529 plan. It’s flexible enough for us.
Lazy Man says
Yeah, we kind of accidentally have twin rental condos in the same complex. It has been work, but not like real work, usually just a few days a year. They are a little far from where we live now, so I’d love to consolidate with a local multi-family, but I haven’t found one I like yet.