The Different Ways To Pay For College: My Surprising Blind Spot

One of the main reasons why I read lots of books is to learn from people who’ve been there before. And after reading The Price You Pay For College, one of my biggest blind spots I realized is that I don’t have to save so much for college anymore!

If you are a parent who’s been fretting about the growing cost of college, this post may provide you some comfort. It certainly has for me.

Tremendous Focus On Saving For College So Far

In my constant desire to save and plan for the future, I’ve been focused on contributing the “maximum” I can each year to the 529 plans I have for each of my children.

First, I superfunded my son’s account in 2017. Then I superfunded my daughter’s account in 2019. Then I accepted 529 contributions from my parents.

Finally, I assumed the worst-case cost scenario of both my kids attending private universities and not being smart enough to get good financial aid (grants, scholarships).

I estimated the total cost of college for my son will be about $700,000 in 2036 and $800,000 in 2039 for my daughter. If each kid takes five years to graduate, then the cost will be 25% higher.

With this type of upcoming $1,500,000 financial burden, there was no way I could afford not to regularly contribute the maximum to a 529 plan. In my case, the maximum contribution is the gift tax exemption threshold, which is now $17,000 in 2023.

Why Assume The Worst-Case College Cost Scenario?

When it comes to financial planning, it’s usually better to be more conservative with your assumptions. For retirement, it’s better to end up with more money than less when you no longer want to work. For college, the same logic may hold true as well.

Hence, I suggest you assume the worst-case college cost scenario for your family as well. Here are my assumptions as to why paying for college for one kid starting in 2036 will cost us around $700,000 for four years.

  • My children will likely be of average intelligence given my wife and me are of average intelligence. Therefore, the likelihood of merit-based scholarships will be slim-to-none.
  • My children will likely have below-average personalities given what we learned how Harvard and potentially other private universities grade Asian Americans. Despite our work ethic, friendliness, generally peaceful nature, Asians are not a preferred minority (6% of U.S. population) for college admissions.
  • Despite the desire for diversity and inclusion by colleges, Pacific Islanders seem to still be lumped together with Asians, despite the cultures being completely different. Hence, my children with Hawaiian blood, will unlikely benefit from the diversity push, even though Hawaiians/Pacific Islanders only account for 0.4% of America’s population.
  • My children will unlikely win sports scholarships.
  • Although our incomes are not high, our assets are above-average because we’ve been prodigious savers and investors since 1999. Therefore, the Free Application For Federal Student Aid (FAFSA) will generate a high Expected Parental Contribution (EPC) amount.

The Different Ways To Pay For College

Instead of having parents pay for the entire cost of college, which was my default assumption to stay conservative, here is another way to pay for college as recommended by financial aid expert Mark Kantrowitz in Ron Lieber’s book:

  • Parents pay one-quarter of tuition from college savings like a 529 plan
  • Parents pay one-quarter of tuition from their current income during the four years of college
  • Student borrows one-quarter of tuition from the federal government or through work study
  • Parents borrow the rest from home equity or through a federal PLUS Loan or private lender

Do you know which bullet point I had never thought about until I read the book? Parents paying for college from their income while their children are attending college!

It seems so obvious, but is it? Blind spots are blind spots for a reason.

Why Parents Paying For College From Their Income Wasn’t Obvious To Me

If a parent has positive cash flow from their day job while their kid is in college, why not use some of the savings for college expenses? No brainer, right?

The reason why I never thought about paying for college while working is that I never thought about working when my kids finally attend college.

It’s been 11 years since I had a day job. Heck, I’m not even motivated to work now! After three years of the pandemic, I’m back in early retirement mode. So why on Earth would I want to be working 12-15 years from now? I won’t.

As an older parent who has enough money to feel comfortable, the thought of still having to work to pay for college expenses near traditional retirement age never occurred to me. Working until the kids graduate college is a great goal. But I already gave all I could and wanted to give at a job in my 20s and 30s.

Further, I don’t expect my wife to go back to a traditional job anymore. She’s too satisfied being a mother and being the COO and CFO of Financial Samurai Inc.

Not having a day job since 2012 has permanently changed how I view earning both active income and passive income. Ideally, we earn enough passive income to pay for our living expenses and do work that we love, regardless if it pays us or not.

Recalculating How Much We Have To Save For College

Based on the paying for college proposal above, I can reduce the amount I planned to save ($1,500,000) by one-quarter. By not having to save $375,000, I can either contribute one-quarter less to each 529 savings account or accept lower returns.

On the flip side, that also means I’ve got to pay $375,000 from my active or passive income while my two kids are attending college. Hence, I’ll have to come up with an average of $53,571 a year after taxes for seven years to pay for college while my kids are in school.

$53,571 a year sounds like a lot, but it’s doable, because it is in future dollars. $53,571 a year in twelve years is more like $30,000 in today’s dollars if inflation compounds at four percent a year.

If my family keeps generating more passive investment income and lives on less than 80 percent of our after-tax passive income total, then our passive income should be able to pay one-quarter of our children’s college expenses in the future no problem.

Therefore, perhaps getting a day job when my kids start college won’t be necessary. Although, having active income when my kids are in college can help buffer any bear market returns. When the market is down, you don’t want to be forced to sell assets to pay for anything.

We Aren’t Going To Borrow For College

If we also borrowed to pay for one-quarter of college expenses ($375,000), we could reduce the amount we have to save by one-half ($750,000). However, we aren’t going to borrow for college because we don’t want to take on debt in our late 50s. We want to be debt-free by 60.

Further, roughly 40 percent of college matriculants never graduate. Borrowing to pay for college and not graduating is one of the biggest reasons why there’s a massive student loan problem today. We don’t want to burden the government with student loan relief.

All of us like to think we won’t be one of the 50 percent who don’t get divorced. Nor do we believe we’ll be one of the 40 percent who don’t graduate college. But the odds are high that we will. Accepting reality will help us make more optimal decisions in the future.

Borrowing money to get nothing in return is a bad idea. Even borrowing money to buy more property, my favorite asset class, in my late 50s doesn’t sit well with me. The last thing I want to do is saddle my heirs with more debt if I die prematurely.

So Many Unknowns For Paying For College In The Future

Some believe saving too much for college is a mistake. If you do, you will reduce your chances of getting grants and scholarships.

There’s also a growing belief that more colleges will become more affordable or free due to government intervention, a decline in enrollment, and the growth of online learning. Therefore, there’s a risk of wasting time and energy saving for college if you save too much.

Thankfully, we can now roll over leftover funds to a Roth IRA. We can also assign a different beneficiary for our 529 plans. But the goal remains. We ideally save just enough for college to feel secure without overworking ourselves in the process.

After uncovering my blind spot, I feel less stressed paying for college now. There’s no longer a need to save roughly $1,500,000 for college in 12-15 years.

How Much To Save For College For Each Child

My goal now is to save $320,000 for each kid, the current full cost of attending the most expensive private university for four years today. Once this inflation-adjusted level is reached in the future, I will no longer contribute to my children’s 529 plans.

If you think your kid will be able to get scholarships, then you may want to save for the full cost of attending a public university for four years today. If they choose to attend a more expensive university, then the difference can be made up through work study, loans, and/or your own income.

Remember, we don’t have to pay for the entire cost of our children’s college education. We can play it by ear once the time comes.

Ah, it’s nice to know I reduced my college savings target by $860,000! Saving “only” $720,000 for college for two kids feels more palatable than saving $1,500,000.

Let’s just hope their 529 plans appreciate by more than 5% a year on average. Otherwise, we will have a shortfall.

Reader Questions And Suggestions

What are some other different ways to pay for college? Have you always planned to pay for college with your income while your kids are in college? How does your family plan to pay for college? If you have children in college or children who’ve already graduated college, how did your family pay?

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