The objective here is to provide some helpful observations on an important planning topic. What about future college expenses? Should we save for these? If so, when should we start? What is the best way? Are there tax benefits?
People feel differently about this challenge. Some parents tackle it from the get-go, regularly socking away and investing modest sums that over time, ultimately grow into a capital base that gives their kid a huge wake-up in a world where the gap between the haves and the have not’s is forever widened. Other parents choose not to sweat the future challenges that will pop up after their child’s minority status comes to an end. They just bet that their kid perhaps with a little help will figure things out when the challenges of adulthood surface.
Along the way, we’re going to look at how each of those challenges impact John and Sue Rogers. They’re both in their mid 30s. They’ve been married 5 years. John is rising as a civil engineer employed by a reputable firm. Sue sells luxury homes and loves to dabble in real estate. They have a 2-year-old daughter, Audrey, and are expecting their second child, a boy to be name Judd who is due to arrive in 6 weeks.
Should parents who want their kids to go to college be concerned about future college costs? Absolutely. In fact, the word “concerned” is too weak for many. Fear may be a more appropriate term. Unless you have money to burn, the numbers can be downright scary. Over the past 25 years, average tuition hikes have outpaced by more than 3 times the growth in median family incomes, and all indicators suggest that the pace of future increases are just going to get worse.
Average and state tuition at public schools topped $7,000 last year, up 6.5% from the previous year. Average out-of-state public tuition was about $18,500 a year, up 6.2% from the prior year. And average private school tuition costs was about $26,000; that was an increase of 4.4% over the prior year. When room, board, and incidental are thrown in, a four-year in-state ride today can easily top $60,000 and private college price tags are often north of $130,000. And that’s today. For a real scare, just go online and Google future college costs. Select one of the many college cost calculators that are online then punch in your kid’s age the present cost of the school you would like your kid to attend and a growth range of 5% to 8% depending on how gung-ho you are about the future. Then sit back, watch, and hold your hand, big 6-figure numbers likely will pop up for each of your children. So to start saving very early usually is very wise. For nearly all parents, their cost can’t possibly be squeezed out of their incomes during the actual college years. Their incomes just start barging off.
How about loans that are paid off after the schooling ends? They’re an option, but who can really tell what will be available at the time when your kid’s ready to go to school and what those loans will cost, plus those loans may end up crippling retirement dreams for the parents and getting started dreams for the kids. There’s simply no denying that early planning can help everyone big time on this one. Early planning makes time a big ally, not the enemy.
John and Sue, for example, estimate that at today’s rates, the cost of their 2-year-old’s 4-year college education, that’s Audrey’s education, would be about $60,000 based on the type of school they would like Audrey to attend. If that total cost escalates, at an annual clip of about 5% which is a reasonably conservative assumption, the price tag of Audrey’s education would exceed $130,000, spread out over 4 years by the time Audrey enters her freshman year 16 years out. If John and Sue begin an investment program for Audrey now, at a monthly savings rate of $200, increase that savings rate by 5% each year and earned an annual 7% yield on the investment capital, they would save enough to fully cover Audrey’s $130,000 4-year education. All bills would be fully paid off by the time Audrey accepts her diploma.
A smart plan funded over a long time can do wonders. John and Sue are determined to implement a program now. To start salting away and investing money for their kid’s education and a periodically increase the monthly amount as their incomes grow. Plus, because they are passionate about their real estate investing activities, they hope to build some serious wealth over time through their real estate investments and would like to share any of that growing equity wealth with their kids through family-limited partnerships. John and Sue were on both general partner units and the limited partner units, and as the general partners, they would always be in control.
But periodically, they would transfer limited partnership units to trusts for their kids as the value of the real estate investments grow and the partnership, the partnership units owned by the parents will grow in value as will the limited partnership units own by the kid’s trusts. If all plays out as hoped, the kid’s trusts will end up with some serious capital that beyond college funding needs may help the kids with first home purchases and other getting-started challenges. It’s ambitious planning, but many have made it happen.
To accomplish these goals, John and Sue would need to structure a smart vehicle for each child that will do the job that will clearly show that the kid’s funds really are separate from the other family assets and that will encourage grandparents, uncles, aunts, and others to perhaps join in. To this end, John and Sue intend to suggest to other family members that they spend less on plastic toys and other stuff, and birthdays and holidays, and instead, kick the difference into the kid’s college funds.