Paying for College

On the first of August, we received our first college tuition bill. Thankfully, much of the cost was covered by my Post 9/11 GI Bill which I transferred to our children. But there was still a sizeable chunk left to pay…due by the 31^st of August! Last fall as I helped our son complete his college applications, I blogged about college 2022 and the associated sticker shock. I simply can’t understand why higher learning costs so much. Paying for college is one of the biggest outlays Americans face these days.

I graduated college before 529s were a thing. More accurately put, the 80’s were really a pre- saving for things like college era. I believe most Gen X folks from similar backgrounds can relate. If you didn’t earn a scholarship or qualify for financial aid, then you better get a job to pay for school! I’ve shared previously how paying for college was one of the primary reasons I joined the military.

We’ve made a lot of bone head financial moves in our 20 plus years as a family, but one that I believe we got right was starting 529 investment plans for both of our kids the year they were born. As media reports of student loan debt relief swirl about and we make our first draw on a 529 for our son’s college tuition, I can’t help but feel relieved!  

If unfamiliar with a 529 college savings plan, I’ll provide a quick overview. Plans vary by state and the options for investment products are numerous, but the basic premise remains the same. Contributions to 529 plans are “after tax” dollars, meaning after receiving a paycheck from an employer, some of those proceeds can be invested into a 529 account.

Like other investment accounts, there are a lot of different options. A financial advisor can help navigate the search for the best plan. Beyond watching the growth of the investment over 18+ years, the absolute best part of a 529 is the tax benefit. Interest, dividends and capital gains on the account are never taxed as long as the withdrawals are used for specific educational expenses for the beneficiary. Tax free growth and withdrawals!  

Another great advantage of a 529 plan is anyone can contribute to these accounts on behalf of the child. Grandparents can contribute to a 529 plan instead of a quickly forgotten toy! Additionally, account owners can transfer funds between offspring’s accounts with no penalties.

On a positive note, recent statistics indicate there are about 15 million people in the U.S. investing in 529 accounts. Not bad considering there are just over 19 million college students nationwide. However, there are probably still some folks out there whose college financial plan is to push their children to excel academically or athletically in order to earn scholarships.

I’m obviously biased towards 529 plans, but I couldn’t disagree more with this line of thought. Our son is incredibly intelligent and played a high school sport, but we knew the odds to win a full scholarship, especially to a Tier 1 school, were very low. 529 plans don’t care what your GPA is or where you go to school! Could be any school to include a trade or professional school as long as they are accepted.

However, let’s say the child does earn a scholarship (or any financial aid for that matter), then there are certain exceptions where 529 funds may be withdrawn without penalty, for uses other than education. Although the withdraws would be taxed, the 529 essentially becomes like a traditional IRA except no penalties for withdrawing under age 59.5!   

Other folks may be banking on federal aid or student loans. As I learned last year upon completing the FAFSA, grants and subsidized student loans are rightfully limited to those with demonstrated need. Bottom line, if parents have a decent job, own their own home, have some retirement savings and other investments, there is a decent chance their child may not qualify for needs-based aid.

And on the topic of student debt, I’ll hold my comments other than to say I think it’s a shame so many students have to go deep in debt to pay for school. While student loans may be “good” debt; debt which earns a return on investment, vice “bad” debt such as revolving credit, it’s still best to avoid if possible. Our goal is to get our kids through their undergraduate degree without having to tap any student loans.  

Between the GI Bill, 529 plans and a few smaller scholarships, we should have our kid’s college covered. We started small, $50 a month, gradually increasing to $500 per month before high school graduation. Thankfully, their plans experienced tremendous growth over the years and thus far, have weathered the current economic downturn.

We prioritized putting money into 529s almost equally as we did for our own retirement savings. Some might say we are crazy, but we are happy with the decision. At the end of the day our children are our legacy, not the possessions or quality of life we enjoy in retirement. I’m very proud we’ve sacrificed to provide our children with an opportunity my wife and I didn’t have.  

Interested in rental property investing? Look for “Collect Rent, Don’t Pay It: A Beginner’s Guide to Rental Property Investing” on Amazon to learn how our family turned rental property investing into a successful side hustle!

Looking for a good how-to on wealth building? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truth’s to Build Wealth on sale now at Amazon!

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