“A man who has never gone to school may steal from a freight car, but if he has a university education he may steal the whole railroad.”
Theodore Roosevelt
To pay for your child’s college education you have to know the options and plan like hell.
We’re living in unprecedented times as annual college tuition rises at historic rates. In the past 20 years alone, tuition and fees at private colleges have increased 144%. In-state public college tuition fees rose even faster at 211%. Public college was once considered the “cheaper” option, but that idea is quickly dying.
But, before we begin:
Giving your kid the opportunity to earn a college degree is a must. Some fathers see it as an option – “my special kid can choose to go to school or not.” This is not totally correct and can be a very dangerous game to play. They might drop out and start a billion dollar company. They might. But, the vast majority of kids will not. 99.99999% of kids will not be the next Zuck or Jobs. So, giving your kid the chance to attend college and get a diploma is a must to ensure financial success in their future world.
Based on a FREOPP study, the median bachelor’s degree has a net ROI of $306,000. That’s just the median, so if your kid graduates on time with a degree in a field like engineering, they could see an ROI over $1 million across their lifetime. This type of return all but ensures their future personal financial success.
Looking at it another way: Your kid has far more control with a degree than an investment in the market. The majority of college degrees ROI will outpace the S&P 500. Your kid’s annual salary will account for most of their income. It will increase over their career because of their degree, hard work and, more likely than not, some luck. Still, they can choose whether or not to hustle and sacrifice and work hard for their success. This is a choice they couldn’t make for themselves if they were to simply invest in the stock market.
Don’t be mad. This is the game. You need to play it well, so your kid can play it even better.
A college degree may not beat the market on its own, but coupled with hard work, your return on investment has unlimited potential.
Investopedia
Ok, let’s get into six ways to pay for college.
1.) The Prepaid 529 Plan
The good old 529 is a savings plan, but it has a pre-payment plan cousin: the “prepaid” tuition plan. This is a hedge against tuition inflation. You’re saving for tuition at today’s rate for a particular community, state or private college. You purchase a credit or voucher, which is invested, and later paid directly to the pre-selected institution.
College tuition inflation is “significantly outpacing” inflation. Plan for a hedge and find an advantage, so you’re better prepared when your kid goes to college.
The pros of a prepaid 529 plan:
You’re locking in today’s tuition rates and avoiding all but certain increases down the road.
Anyone can contribute as much as they want. Mom, Dad, StepDad, Grandma and Grandpa, and cousin Rodney, too. It’s a contribution free-for-all!
(Just remember to stay under $16,000 to avoid the gift tax.)
Your contributions grow tax-free, like the original 529 plan.
529 funds are typically permitted to move from one family member to another, if necessary.
What are the cons of a prepaid 529 plan?
Funds can only be used for tuition at the pre-selected school. If your kid goes to a different school, you may have to pay the difference between the new tuition and the 529 balance. In some cases, you may not retain any of your investment gains.
You cannot use the funds for expenses like books, computers or room & board. You are restricted to tuition only.
These plans are state-sponsored, and not all states offer prepaid tuition plans.
You lose control of the investment choices. Make sure you know who is managing investments for your state’s 529 prepaid plan!
Any amount taken out that isn’t used for college tuition gets hit with a 10% penalty and taxed as income.
Find more info on your state’s 529 plan here.
Of course, there are options if you don’t like what you see in the world of 529s.
2. UTMA or UGMA
The UTMA (Uniform Transfer to Minors Act) or UGMA (Uniform Gifts to Minors Act) let parents invest for future educational expenses. The account remains in your control until your kid reaches a certain age (typically 18 years old). At the authorized age, your kid can use the money however they’d like. In essence, you reduced your tax burden as the money accrued. However, it’s like Pandora’s box when your kiddo hits the state legal limit.
Very important to remember: The money can’t be conveyed to one of your other kids.
So, if your first little one gets a scholarship and makes serious crypto on Mars upon graduation, they can still use the UTMA or UGMA as they please.
Read more about UTMA, UGMA, and 529s in our Money Moves to Make For Your Kids post.
3. Paying with Bitcoin
Laden with crypto currency? You can pay for your kids tuition in crypto currency at Wharton and King’s College. King’s College takes Bitcoin (BTC). Wharton accepts BTC, Ethereum (ETH), or USD Coin (USDC) aka stablecoin. So, yep, there are options to pay for your kids college education using crypto. I expect to see many more of these in the future.
4. Scholarships and Grants
Search high and low for scholarship and grant opportunities. Start by looking at the scholarships your state offers. Then, reach out to local businesses and organizations. Look at your place of worship. Talk to your kid’s high school and financial aid office. Talk to your job and your partner’s job. Look everywhere for a scholarship, because they are out there.
If you’re self-employed, your kids can take advantage of the popular, government-backed Pell Grant. The award amount of Pell Grants fluctuates; the max award is $6,895 for 2022–23 year.
There are so many scholarships beyond academics and athletics. Scholarships are offered by religious organizations, minority-led organizations and, potentially, by your state, to name a few. Your child could get a scholarship if they are stellar in the arts, offbeat activities, or just being awesome.
Here are some very real and very badass scholarship opportunities for your badass college student:
- Tiffany Green Operator Scholarship for women pursuing a career in live event production
- Live Mas Scholarship from Taco Bell for students to pursue their passions
- TCI Foundation Scholarship for graduating high school girls over 5′ 10″ tall, and boys over 6′ 2″
- The Evans Scholarship for high-achieving, golf caddies
- Chick and Sophie Major Memorial Duck Calling Contest gives scholarships to young duck-callers
Important to remember:
- Scholarships are typically merit-based, while Grants are based on need
- Neither need to be paid back
- Some might be taxable if the funds are not used explicitly for educational expenses
- For your kid to qualify for a scholarship or grant, they need to understand and buy into the process. If that’s athletics, they need to want to be in the gym. Your kid needs to hit the books without you or their teacher telling them if they want an academic scholarship. If it’s duck calling, they need to be up at the crack of dawn practicing on their own.
5. Student Loans
This is the hot-button, loan facilitation empire. It’s labeled as too big to fail (until it does) and for good reason. Based on student loan data, more than 43 Million people – about half the number of US citizens with a college degree – carry an average of $37,000 in student loans. That amounts to a dumbfounding $1.6 TRILLION dollars in student debt.
Start with the basics of Federal student loans, which come from the Department of Education (from the FDIC):
- Direct Subsidized Loans: For eligible students who demonstrate a financial need to help cover the costs of school.
- Direct Unsubsidized Loans: Made for eligible students regardless of their financial need.
- PLUS Loans: For graduate and professional students. Also for parents of dependent undergraduate students to assist with paying for costs not covered by other financial aid.
- Direct Consolidation Loans: Allows students to combine eligible federal student loans into one loan with one loan servicer.
Many consumer protection laws apply to student loans (via the FDIC). For example:
- Lenders must show student loan borrowers the cost of credit as a dollar amount and an annual percentage rate (APR). They also must also disclose terms in a meaningful and uniform manner.
- Debt collectors may not use abusive, unfair, or deceptive practices to collect on student loans.
- Lenders, servicers, or debt collectors must provide accurate information to credit reporting agencies. Credit reporting agencies must also report accurate information to you.
- Lenders may not discriminate in any aspect of a credit transaction
- Schools must allow borrowers to choose how they want to receive any financial aid that is over and above tuition and fees paid directly to the school. This may include federal student loans.
Still, there are student loan options that won’t hang a yolk of indebtedness in perpetuity.
- Teacher Loan Forgiveness: Available for Direct Loans and FFEL Program loans. You may get as much as $17,500 forgiven from your loan after teaching full-time for five complete and consecutive academic years in a low-income school.
- Public Service Loan Forgiveness: Available for Direct Loans. You may have the balance of your loan forgiven under the Public Service Loan Forgiveness (PSLF) program if you’re employed by a government or not-for-profit organization, and have made 120 qualifying monthly payments (yep, 10 years aka one whole decade of payments) under a qualifying repayment plan while working full-time for a qualifying employer.
- Income Driven Repayment: You could make reduced payments based on your income. The Department of Education’s Repayment Estimator can help determine eligibility.
No matter what, you gotta look for two key loan characteristics and avoid the traps, or they’ll leave you just that: trapped.
- Check the interest rate: Like your credit card, the interest on a student loan can bury you alive. Know the nominal and real rates.Use tools to determine what you can afford, like the NerdWallet Student Loan Calculator.
- Fees: These are all red flags: Origination fee, late fee, prepayment penalty, loan disbursement fee, administrative fee. Dead them all.
6. Take a year or two at Community College
Sometimes, your special little buddy just needs to figure it out. Community college can be the place to do this, especially if they need to boost their grades and save some coin.
For public community colleges, the average tuition is approximately $4,989 per year for in-state students and $8,712 for out-of-state students (per Community College Review). Four-year public college averages $27,330 and private colleges average $54,800 per year. That means community college costs about 33% of full time school.
About 30% of community college students successfully transfer to a four year university. In the 24 months prior, your kid could have saved as much as $30,000, and earned a level of appreciation for higher academia that others may never begin to grasp.
And that, Dad, is priceless.
