I recently wrote that college planning is impossible (but that you should do it anyway). The impossibility comes from having a 2 and a (newly) 4 year old boy. It’s so far away, the best we can do is put aside a significant amount of money and adjust our plans over time.
One of the comments on that article said it best: The decision tree is enormous.
The College Funding Decision Tree
College may be free if some politicians have their way. College tuition could continue to climb at unreasonable rates forcing people to make hard-decisions about whether it’s worth it. Our children may get into some schools and not others. They could be public or private. They could be on a 3-year plan with AP credit and credits from our local college. They could be on a 5-year plan if they switch majors or find it too difficult. All this, and I’m not acknowledging community college or trade schools.
Anything and everything is in play, leading the cost to be literally as low as $0 to as high as $250,000. It seems to make sense to budget for somewhere around $125,000 for each child and let the remaining gap be filled with grants, loans, scholarships, work-study, etc. As another commenter mentioned, many feel it is important for the child to fund part of their own college. I firmly believe in them having some skin in the game.
Financial Independence Makes it A Little Complicated
Regular readers know I am a big believer in the FIRE movement. FIRE is an acronym for Financial Independence/Retire Early. That means you have money freedom before typical retirement age. Money freedom simply means that you’ve achieved Hakuna Matata… you have no worries about money.
When I started this blog ten years ago, I didn’t know such terms existed, but I did know I wanted to get to that place. Years of maxing out retirement accounts, my wife’s military pension, and our real estate have fortunately put us in a good position to achieve that.
It’s so close that the biggest obstacle is the uncertainty of college costs.
Among all the uncertainty, there’s one beacon that represents some stability: The Free Application for Federal Student Aid (FAFSA).
FAFSA and Real Estate
The Free Application for Federal Student Aid (FAFSA) is exactly what it sounds like. It has clear formulas and rules around a family’s income and assets. While those rules may change over time, I would expect the changes to be minor ones.
In other words, it’s something that can be planned around.
For example, retirement assets don’t count. So this person with a hundred million IRA may be in decent shape if he were to fill out the FAFSA. (He’s really not.) To an obviously lesser extent, we would be in better shape as well from years of nearly maxing out all our retirement accounts.
Many people who are financially independent get there by discovering that they can live a fulfilling life and be very happy on a smaller income. It’s easier than trying to save $10 million dollars. We live that frugal lifestyle as well. Having a small income is a big part of the FAFSA application.
It’s like all the pieces are falling into place… except for one… real estate.
One of the legs that supports our financial independence push is real estate. We didn’t plan it that way, but my wife separately bought condos in 2002 and 2005 near the top of the market. When we moved so that my wife could serve in San Francisco in 2006 the properties were well under water. Even today, they are valued at between 25-33% less than what we paid for them.
Fortunately, we were able to rent them and over time the mortgages have started to get paid off. We got a double HARP to refinance them both to 15-year fixed mortgages. Despite all that, we lose a little money each month on them (and a lot when repairs are necessary) while we build equity. In about 10 years, before our children are ready for college, we’ll have significant real estate assets.
[If you are curious you can read a little more about our real estate “empire” here. (There’s a reason why empire is quotes.)]Overall, I love real estate. I’m not second guessing the decision to keep the properties. The forced savings have really contributed to our net worth.
However, as you may have guessed by now, the FAFSA formula doesn’t work well for those with significant real estate assets. If had taken the money we lost each month and truly maxed out our retirement options (there’s a lot of small business stuff I can do with SEP-IRAs, solo 401Ks) we’d have “protected” assets from the FAFSA. If we created another business, it’s value would also be “protected” from the FAFSA. (And it seems you can’t throw the properties in an LLC and call it a business.)
At the most recent FinCon convention, I talked with a number of bloggers. Some were financial independent bloggers. Others were real estate bloggers. I don’t think I found one person who fit in all the categories of financial independence, real estate owners, and having children… but I’m sure there are many people out there who fit this profile.
I tried to explain my situation to a few people, but it was difficult. It’s taken nearly a thousand words just to paint the picture for you.
I think the correct answer is just to forget about the FAFSA. I have difficulty with that as I like to optimize things in the future. This is the best way for me to look to optimize things.
The other part of me thinks that it might be worthwhile to refinance the 15-year fixed mortgages to 30-year fixed mortgages. Then we’d actually be making money on the properties and we could use it to fund our living expenses which would free me to max out the small business retirement account options. We’d be earning less principle which would make the assets worth less.
Then I stop myself and ask “Is all that worth it for a better FAFSA formula?”
I don’t have any answers here. Maybe you do? If so, please let me know in the comments. Thanks!