How much should I be saving for college?<\/h2>\n
Right now, the stock market may up… but economic worries still linger. Is that really<\/em> the best avenue for your kid’s savings? Especially because college costs are skyrocketing. The Visual Capitalist charted<\/a> the increase in college tuition across the U.S.\u2014and found that costs have increased 1,200% since 1980. Inflation has only increased 236%.<\/p>\n But there is some good post-pandemic news: the average four-year tuition and fees for in-state schools only increased by 1.1% between the 2019\u20132020 and the 2020\u20132021 school year. Private schools saw a 2.1% increase, according to CNBC<\/a>.<\/p>\n Related: <\/strong>Teenagers: It\u2019s Never Too Early to Start Investing<\/a> Unfortunately, that means you’ve still got a lot<\/em> to save. Before we dive into alternative college savings methods, let’s determine how much cash you’ll want on-hand. Because let’s face it\u2014college is expensive, and that cost contains a number of moving parts. Ask yourself:<\/p>\n Based on the answers to those questions, you can quantify both the estimated total savings you need.<\/p>\n Let\u2019s say you\u2019re in your late 30s and you\u2019re trying to fund four years of tuition, books, and room and board at the University of Colorado, Boulder, a public, in-state college, for your two-year-old daughter. Using a free online tool like Vanguard College Cost Projector<\/a>, we can estimate the future cost to be $216,687, assuming a 4% year-over-year cost increase.<\/p>\n Now you can start saving for college.<\/p>\n On the surface, a traditional 529 plan is the easiest, simplest way to start saving for college. While we still believe these plans aren’t best-suited for smart investors, there are some advantages to going with this time-tested option\u2014and a number of disadvantages.<\/p>\n With this strategy, you acquire a property and earmark it specifically for the purpose of funding college tuition. This property is part of your real estate portfolio, but it doesn\u2019t contribute to any other financial goals except funding college tuition.<\/p>\n First, use its positive cash flow and other savings from your disposable income to pay off the mortgage by the time your child starts college. Then, liquidate the property your child’s freshman year. If done correctly, you can fund all four years of college at that time.<\/p>\n Let\u2019s walk through the numbers. Your daughter will attend college in 16 years, at which point you will need $216,687 to cover four years of tuition, books, and room and board. (We’ll round down to $215,000 to make the numbers easier.) If we\u2019re going to purchase, pay off, and liquidate an asset to cover those costs, you must net $215,000 after-tax from the sale of the property.<\/p>\n Let\u2019s assume that you will owe 20% to capital gains and depreciation recapture taxes and 7% to sales and closing costs. In order to net $215,000 after-tax, the sales price of the property 16 years from now should be $268,750. If we assume a conservative average property appreciation rate of 2%\u2014less than the rate of inflation\u2014that would mean that we need to acquire a property today for about $200,000.<\/p>\n Related:<\/strong> Leasing a Rental to Your College Kid: Smart Financial Move or Potential Disaster?<\/a><\/em><\/p>\n Now that you know our target purchase price, you can acquire the property with 25% down and a 30-year, 5% APR mortgage. That makes your initial investment about $50,000.<\/p>\n Next, in order to get this property free and clear in 16 years, you will need to make $365 in extra principal-only payments in addition to your regular mortgage of $805. Let\u2019s assume that the property conservatively produces $165 per month in positive cash flow. That means you would need to contribute $200 per month to get this property free and clear by the time your daughter attends college.<\/p>\n Now let\u2019s look at the 10,000 ft view. When you acquired the property, you invested $50,000 into the deal, and then contributed $200 per month for 16 years\u2014another $38,400. Ultimately, you invested $88,400 to fund $215,000 worth of tuition cost, without exposing yourself to the bipolar whims and sequence of return risk of the stock market.<\/p>\n If you don\u2019t want to earmark a property specifically for saving for college and<\/em> you plan to build a substantial real estate portfolio, try this strategy, which involves funding college tuition from your balance sheet. Here, you look at tuition cost as an annual expense funded from your income statement.<\/p>\n For instance, the cost of tuition for Year 1 is $46,124, Year 2 is $48,430, Year 3 is $50,851, and Year 4 is $53,394. You build a portfolio that produces the required income to cover the tuition expense in each of the four college years. The principal difference between this and option two? After you fund college, you still own the assets. Let’s start with that average cost per year\u2014$49,500. Assuming a free-and-clear 6% yield and a conservative 2% property appreciation rate, we need to acquire a portfolio worth $600,000 now and pay it off in 16 years. By the first year of college, it should be worth approximately $825,000. Again, assuming a 25% down payment on those purchases, we\u2019re looking at around $150,000 in capital required to build this portfolio and deploy this strategy.<\/p>\n This scenario doesn’t just solve college tuition\u2014but your whole financial picture. If we can build a real estate portfolio that can fund $50,000 a year for tuition, we also create $50,000 in passive real estate income toward your retirement income goals.<\/p>\n Behold the\u00a0better college savings plan for you\u00a0and<\/em>\u00a0your child: hire your kids.<\/p>\n You can deduct payments to folks you employ. And who says those folks can’t be your kids\u2014and they can’t start saving for college super<\/em> early? When you hire your child in your business, you get to pay them for services rendered and subsequently deduct those payments on the federal and state tax levels.<\/p>\n Again, each dollar we pay our child qualifies for a federal and state tax deduction. That’s already a better start than a 529 plan.<\/p>\n Does your kid have to file a tax return? Not if you pay them less than $12,400! You see, everyone\u2014yes, everyone\u2014gets a standard deduction of $12,400 (as of 2020). If anyone earns less than their standard deduction, they don\u2019t have to file a tax return. So, your child literally receives tax-free money that you received a federal and state tax deduction for.<\/p>\n Let’s put some numbers behind this: You pay little Sam $6,000 for services they provided to your rental portfolio for the year. Your federal tax rate is 33%, and your state tax rate is 8%, so your total tax savings on this $6,000 is $2,460\u2014or $6,000 times 0.41. Your child receives the entire $6,000 tax-free.<\/p>\n OK, so we\u2019ve paid our child. What\u2019s next? We open a Roth IRA in the name of the child. Since you are the fiduciary of the child\u2019s bank account and the Roth IRA, you will direct a $5,500 contribution into their Roth IRA. The cool thing about Roth IRAs: You can always withdraw the contributions tax- and penalty-free. When your child turns 18 and goes to college, they will have a large amount of Roth IRA contributions to pay for their college experience\u2014even if those expenses aren’t “qualified.”<\/p>\n There are also likely to be earnings in the Roth IRA by the time the child goes to college, which can’t be withdrawn without penalties\u00a0unless they are a qualified distribution<\/a>. However, a first time home buyer can withdraw $10,000 and not pay taxes or penalties.<\/p>\n If this method results in a passive loss, you may lose the tax benefits. But that loss will become suspended, so you will be able to take advantage of the tax savings at some point in the future.<\/p>\n You also need to develop a job description for your child and make the case that you were either going to perform the child\u2019s work tasks yourself or hire another person to do it. (We recommend working with an advisor on this.)<\/p>\n The money that you pay your child must actually hit their bank account and stay in their bank or retirement account. You can’t use that money personally or move it to your bank account. This is called tax evasion, which means fraud.<\/p>\n You also likely can\u2019t pay your one-year-old for rendering services to your rental portfolio… but maybe you\u00a0can<\/em> pay your one-year-old for modeling. When the HGTV stars bring their young children on the shows, do you really think their children aren\u2019t being paid for their modeling services? If the HGTV stars have a smart accountant, you can darn well guarantee they are using this method.<\/p>\n Looking for additional brilliant college tuition ideas? Try these suggestions before Junior enrolls.<\/p>\n Related: <\/strong>How You Can Pay for College (And So Much More) with Note Investing<\/a><\/em><\/p>\n Yes, we’ve said that 529 plans aren’t the best solution for savvy investors. But maybe you appreciate the simplicity of saving for college with a dedicated account for each child. Here are 529 plan tips and tricks you may not be aware of:<\/p>\n While we\u2019re talking tax benefits, this is a big one\u2014and can definitely help if you didn’t start saving for college early.<\/p>\n The\u00a0American Opportunity Tax Credit<\/a> offers parents up to $2,500 per year\u2014per student!\u2014in tax credits. Remember, tax credits come directly off of your tax bill, as opposed to tax deductions which only come off of your taxable income.<\/p>\n Rental properties aren’t the only way\u00a0real estate can help pay for college. Consider this more conservative approach: “Put extra money towards your mortgage, so that it is completely paid off by the time your children start school,” explains Certified Financial Planner Matt Becker of\u00a0Mom and Dad Money<\/a>. “You get a guaranteed return at the\u00a0interest\u00a0rate of your mortgage, and paying it off frees up significant cash flow that can be used towards college expenses or any other savings needs you have at the time.”<\/p>\n Instead of writing the check to your mortgage\u00a0lender\u00a0every month, you can write it to Junior’s college. That may not have you leaping into a spontaneous celebration dance, but it’s better than choking down the cost of both, right?<\/p>\n Everyone is familiar with academic and athletic scholarships doled out by colleges. But the bucks don\u2019t stop there.<\/p>\n Grants are generally need-based aid provided by either federal, state, or local governments\u2014or even by the college itself. Read more here about state standards for need-based grants<\/a>.<\/p>\n Private scholarships are a different animal. Most often, they are offered by private entities, such as foundations, nonprofits, and for-profit companies. These are usually merit-based rather than need-based.<\/p>\n But here\u2019s the thing: There are thousands of them, and they can be quite niched and obscure. So, even if the college doesn\u2019t offer a scholarship to your handstand hopscotch champion, the Hand-Walking Hopscotch Association of America might. These can be fabulous complements to what you’ve been saving for college. However, the trick is finding the right scholarship. Get some help from NextGenVest<\/a>, which offers free mentoring and help with finding scholarships, and try out\u00a0Scholly<\/a>\u00a0as well.<\/p>\n Everything in life is negotiable, right? If your child isn\u2019t offered the keys to the campus with a huge scholarship, challenge the college on it.<\/p>\n Remember, the FAFSA application doesn\u2019t include all of your expenses. Additionally, colleges look at last<\/em> year\u2019s tax return, which may not reflect your current finances. Sit down with your child to write a formal appeal letter<\/a> (from your student), making a compelling case that the college should reconsider offering aid.<\/p>\n It never hurts to talk about how good a fit your child is for the college\u2014and vice versa\u2014and why they want to go there despite generous offers of aid from other schools. Also go over how your financial situation is not reflected in your official FAFSA application.<\/p>\n![\"\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/college-increase-1024x1024.jpg\" "\\"\\"")
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Option 1: Traditional 529 plans<\/h2>\n
529 plan pros<\/h3>\n
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529 plan cons<\/h3>\n
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Option 2: The earmarked asset strategy<\/h2>\n
Earmarked asset: College savings case study<\/h3>\n
Option 3: The “cash flow as you go” strategy<\/h2>\n
\n<\/em><\/p>\nOption 4: Hire your kids<\/h2>\n
Drawbacks and cautions<\/h3>\n
Other clever college tuition hacks<\/h2>\n
1. Take a deeper look at 529 plans<\/h3>\n
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2. Take advantage of the $2,500 tax credit<\/h3>\n
3. Go mortgage-free<\/h3>\n
4. Research grants and private scholarships<\/h3>\n
5. Negotiate with the college<\/h3>\n
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