Lazy Man and Money

One Solution to Planning College Expenses?

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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.

What If Advanced Degrees Were a Tenth the Cost?

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Everyone wants their children to have the best education possible, right? I saw an article about advanced degrees and it got me thinking about my 2 and 4 year old. (I look a lot further forward than most people.) The education of our 2 and 4 year old has been rolling around in my mind for the last several months. That’s why I’m writing about optimizing the FAFSA lately.

To get the best education, some people move to better school systems. Other people are crazy enough to consider private school. (Hello mirror, nice to see you!)

In the old days, the question was largely about if a child would go to college. Nowadays, that seems like a foregone conclusion (at least in my bubble). The biggest concern has turned to the cost of college. Again, since I look further ahead than most people, the idea of the potential cost of an advanced degree is rolling around in the back of my head.

This sounds the ultimate example of a first world problem, like a baseball team have 7 ace starting pitchers. We should be so lucky if our children (or ourselves) are in a situation where we can advance after college to get more education. And if you said, “Hey the cost of that advanced degree is up to the child”, I wouldn’t spend a second arguing with you.

I feel that many of us that don’t have master’s degrees probably could get them. I considered it for a long time, but it always failed my cost/benefit analysis. It amounted to losing a year of income earning, while paying a year of income… sometimes more.

So when I read this NY Times article about a $7,000 Master’s Degree, it really got my attention.

Yes, it’s an online degree. Stick with me because it is far from a typical one.

A $7,000 master’s degree flips the cost/benefit analysis. It is a fraction of a year of income. You might have the flexibility to work while you earn it. (I have to look into the details more.)

I know what you are thinking around now… online master’s programs are common and anti-prestigious. No one considers a masters at the University of Phoenix to be the same as one from Harvard Business School. One has to consider the value of the degree as well.

What if the $7,000 online degree was from a top school? That would change your mind, wouldn’t it? The $7,000 master’s degree is in Computer Science from Georgia Tech, a very good computer science school. You get prestige at a fraction of the price. Other universities make you pay full price (or near it) for the prestige.

According the NY Times article, the students are more engaged online. They ask more questions. They work together more. This makes a lot of sense to me. When I was in college, I didn’t take advantage of office hours very often, but whenever I tried to, the professor wasn’t around. It suppose it was because it was so rare of people to show up they just gave up.

Many of the students in Georgia Tech’s online program are Gen Xers who can’t uproot their family or income situation for a master’s degree. (Hmmmm… sounds like me.) It’s serving a very different audience. I’ve seen a lot of business school degrees, but I’m not sure they were nearly as reputable or as cheap.

What Does This Mean for the Future?

Back in 2006, Intel’s Andy Grove had a saying, “A fundamental rule in technology says that whatever can be done will be done.” Georgia Tech has paved the way and proven, “Yes! We can deliver great education online at a fraction of the cost.”

Today, we’re seeing more and more trusted and respected universities turning to online offerings. Schools are realizing the rapidly changing demands of today’s working world and the importance of affordable and accessible education for higher-level positions and career growth. Not everyone can afford a traditional college education and older students (often those with a family) need access to higher education in a way that they can still work full-time and support a family. Take Maryville University, for example. They’re a traditional college that has been around for over 150 years, but in recent years they’re turned their attention to online offerings. Recently, Maryville University’s online programs placed in the top top 15% in the nation for “economic value.” I think this is just the tip of the iceberg for colleges and the cost could be driven down even further.

I think the cost could even go down from there. There’s no reason to think that Georgia Tech’s curriculum wouldn’t work elsewhere. Another fundamental rule of technology is “once the software is written, distribution is cheap (or free).” It costs a lot for Microsoft and Google to write the first version of their software, but very cheap to copy it or run the servers. A third rule of technology is that “You generally get more value and/or the cost goes down over time.” Think about the power of your cell phone over the years. I’d say that Amazon’s $50 tablet is at least as good Apple’s original $500 iPad. (Though that would be a fun debate.)

Meanwhile, the costs of on-campus universities will probably still go up. They may only go up with the costs of inflation to repair buildings. Still, I believe prices online go down while offline will go up.

This is why I think an advanced degree can be 1/10th the cost… it’s almost there. It can extend to all areas of education, including undergrad, but I went with advanced degrees in this article to fit with the proof of it working.

I wonder if it will be common to see Doogie Howsers enter the workforce. I’m envisioning people who completed high school level in middle school and who then went to compress online bachelor’s and master’s degrees during the high school years.

I’m not suggesting that’s ideal or the right path. There’s a lot more to life and growing up than education.

I simply think some students have the mental capacity, and perhaps more than ever, they’ll have the means. Maybe “whatever can be done, will be done” is a fundamental rule of people too.

Let’s Discuss Obama’s 529 Taxation Plan

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I’ve been reading a number of articles on President Barack Obama’s proposal for 529 plans. Some of the articles I’ve read include: The Slate, Vox, and Market Watch.

I watched the State of Union in part to hear from the horse’s mouth what this was all about. Unfortunately, the address was so general covering so many topics that it wasn’t specifically addressed.

The proposal, as best I can tell, is the following:

Currently, savings for college in 529 plans are not taxed when they are withdrawn. The proposal is to tax 529 plan withdrawals as income as using that money to provide free community college. I understand that this taxation was the way it used to be in the past. In that respect, I can’t say it is a new tax. However, it feels new to me, because I was too young to know or care about it the first time around.

The Slate article thinks this is a great idea. The reasoning was that the “47 percent of families that had [these college savings plans] earned more than $150,000 per year.” The author concludes, “I generally don’t think that our higher education policy should be geared toward helping families that earned $150,000 or more send their kid to the most expensive possible school.”

I thought that was an interesting way to spin it. There’s nothing anywhere in 529 Plans that discuss the most expensive possible school. I’m not sure that anyone would use that logic in choosing a school. I would imagine that people who make $150,000 or more are fairly intelligent and would put more thought into college education than just, “What is the most expensive possible school? That’s where junior is going!”

So let’s look at this logically for a minute.

Studies show that 36% of Americans have less than $1000 in savings. Let’s presume that they aren’t socking money away for college. These people for whatever reason (either hardship or just their own spending habits) don’t appear to be savers.

Next up you have the people maxing out their retirement accounts. Personal finance experts correctly point out that you can’t get a loan for retirement, so it wisest to always save money there first. Student loans will be an option for children. Presumably a large number of people make the smart choice here and funnel money towards retirement.

So who are the 529 Plan savers going to be? They are most likely to be the educated people who have already maxed out their retirement tax benefits. That’s likely to people who have higher incomes. I point this out, because it shouldn’t be a surprise that many of the people saving in these plans have more income. It’s the nature of the beast when it comes to saving for college.

Here’s the thing that really irks me though… the change to tax withdrawals at ordinary income sends the message to people, “Don’t save money for college.” It would kill 529 Plans. Why would anyone put after tax money into an account that is subject to withdrawal penalties and taxation at ordinary income in withdrawal? I could open an account with any brokerage and put after tax money into a balanced fund and withdraw it at a (very likely) cheaper long-term capital gains rate.

A 529 Plan would offer worse taxation and the potential of penalties. Some states have tax incentives, but most of them are very minor and certainly wouldn’t match with the negatives.

The other thing that irks me is that it feels like a penalty to those who do right thing and live within their means, plan ahead, and utilize a tax-benefit that can help them give their children something they didn’t have. It might take away the chance for those blue collar workers to send their kid to Princeton. Meanwhile, the high income people are going to have no problem affording it. Thus the rich get richer by being able to send them to the best schools and the lower class loses an avenue to rise up.

I don’t think the 529 Plan is the biggest tax break in the world. It essentially puts saving for college on same footing as the Roth IRA when it comes to saving retirement. Changing the 529 Plan taxation to fund community college for all feels like changing the Roth IRA taxation to fund Social Security. I’m not against community college for all or Social Security. I’m for incentivizing people to save money for college and retirement.

I’m not one to just complain, so I’ll take a crack at a solution. How about a Free Federal Accredited Online College (FFAOC)? Why can’t the government make a University of Phoenix Online and offer classes and curriculum to everyone free of charge? Instead of trying to come up with the money to physically send tens of millions of kids to thousands and thousands of different college for two years, do what scales. Build and maintain one system that can support tens of millions students.

Please don’t give any Obamacare technology jokes, hundreds, maybe thousands of companies in Silicon Valley scale at this level. The most question I can think of is whether companies would take the FFAOC degree. That can easily be answered by having a grading system to go with the degree, just like we have now with graduating Harvard Cum Laude. The classes could be as easy as any community college or as difficult as Stanford depending on how the government designs the curriculum. Personally, I’d like to see people have all options.

Is this a perfect solution? Of course not. People shouldn’t spend all time learning in front of a computer. It clearly wouldn’t duplicate the experience of an on-campus university. However, let’s remember that this is a free option. It’s a way for anyone with a computer and an internet connection to get a college-level degree in their spare time. If you want to go to community college, you can still pay for it. If you want to go public or private 4-year schools you can pay for that too.

If the government did create a FFAOC, I think many might prefer that over traditional colleges. When I was in high school, I was given the opportunity to take a class for real credit at a local university. I jumped on the opportunity. I would hope that if my sons have the same option to take some free college classes online and get credit they jump all over it as well. It would be a really interesting way to solve the student debt problem in the country. A majority of students might find that the FFAOC fulfills all their needs. Others might find that the FFAOC can give them some credits so that they can get a degree from MIT in 2 or 3 years.

So let’s create a system that scales and boosts the education for every American who wants to do the work… and let’s keep incentives in place for those who want to save money to pay for premium education.

Free $25 for Signing up for a 529 College Savings Plan

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Two years ago, I decided I wanted to give my newly-born nephew a little extra cash for schooling when he gets older. My research lead me to the 529 plan, a tax-advantaged investment to help with future higher education (typically college). Unfortunately California isn’t a state where I get a tax break for putting money in. I had to look at the plans in the rest of the country and find the one with the lowest fees and expenses, but with good investment options. The process led me to write an article on choosing a 529 plan. I settled on the Ohio’s CollegeAdvantage 529 Plan as it had a perfect mix of everything that I was looking for. It’s still a great choice… and Business Week recently agreed.

If it’s one thing I love, it’s a great product offering a great deal. Until May 31st when you open up a CollegeAdvantage account they’ll give you a free $25 (I will too, which I’ll greatly appreciate). It’s very rare that someone will pay you money to make a sound financial move for yourself with no downside. The process took me only a few minutes (I had my driver’s license and checkbook handy). Here’s how it works:

  • Go to Ohio’s CollegeAdvantage and open an account
  • When asked for a referral code use 2481398 to receive the bonus
  • Deposit $25 or more to qualify for the bonus
  • You should receive your bonus in in 7-10 business days

Though we have no children now, it’s never too early to start saving. I simply made myself the beneficiary. I can change it to my child or nephew or niece in the future. Or I can use it later on in life for myself.

Of course once you sign up, you can go tell friends and family to join with your own referral code. For instance, I have to see if this will work, but I might refer my wife. If it’s not against the rules, she’ll get $25 and I’ll get $25. If you can refer 5 or 10 friends, you’ll start off with a good $100 or $200. That could be a good $350 to $750 in 18 years (assuming a 7% return). Ten or fifteen minutes on a computer today may be worth 10 to 20 working hours for you in 18 years. That sounds like a good trade to me, how about you?