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5 Smart Ways to Pay for Your Kid’s College

Most of my friends, coaching clients, or anyone that e-mails me on a financially related topic has questions about how and how much to save to pay for their kid’s college tuition.

There are a ton of different ways to do it. And the important thing really is that you have a plan to do it. And that you come up with that plan early in your kid’s life. Less important is how you do it.

To prove that point and to help those struggling with the “how” of paying for college, I’m going to go through 5 legit ways to pay for college. I’m also gonna share me and Selenid’s strategy for paying for our 2 (so far) kids’ tuitions.

But first, a not legit way to pay for college…

I’m being a bit facetious here but not really. The not legit way to pay for your kid’s college tuition is with loans. That’s what I did. I took out loans to pay for all of my college and medical school costs. I had a few small scholarships but minimal financial aid because my parent’s made above financial aid limits but had no college savings for me.

The result is me paying off over $400k of student loans currently. It is what it is. But if it can be avoided, that’s ideal.

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As a side note, however, I am so glad that my parents did not prioritize paying for my college over saving for their retirement and taking care of their financial future. In the end, I was able to finance my education with loans. They can not finance their retirement with loans. So they did the tough but right thing. However, I honestly wish they had done both…at least a little bit. But I digress…

5 ways to pay for your kid’s college

pay for college

Ok, on to the more palatable options for parents looking to pay for their kids’ education.

1. The save and invest method

This is the most traditional option.

You can obviously save and invest for your kids’ college in a taxable brokerage account. But each state offers a 529 college savings account for family members to save for a future education. These have huge tax advantages because the money goes in tax free and comes out tax free as long as it is used for qualified education expenses, like tuition, etc.

Related Post:
A Quick and Dirty Guide to All Types of Investment Accounts: Where Should You Put Your Money?

But the question then becomes, how much do you save and invest in this account. The reason this is important is because if you overfund the account, you have to take a penalty and pay taxes to use the money on anything other than educational expenses. You could also transfer to account to another child or relative if desired. But speaking strictly by numbers, it’s a pretty big hit to overfund these accounts.

So how much?

The average cost of a private college tuition (including fees) for 2020-2021 was ~$35,000. This is the highest price tag obviously so let’s stick with this for the purpose of our examples. Over 4 years, the total cost then comes to $140,000. So this is how much you need to save up per kid per college education.

For the purpose of these examples, we will also say that you start saving when your kid is 5 years old and the average age upon entering college is 18 years. So a 13 year investing window.

Using the future value function on Excel (see here for instructions on how to use this function), if you save $9,000/year with an expected rate of return (including inflation) of 5% for 13 years, you will have $143,254. This will cover the average tuition cost of one college education at a private college.

So, the answer is to save $9,000/year/kid if you plan to pay for their college using this strategy. This comes out to saving $750/month. Certainly very feasible…

2. The primary job cash flow method

As I mentioned above, the average yearly tuition for a private college in 2020-2021 dollars was $35,000. This comes to $2917/month for 4 years.

You could pay for the college expenses purely from your monthly income once your kid(s) reaches college. This obviously becomes more difficult as you have more kids in college at the same time.

But this is a real option. Especially for high income earner.

The question is, would you like to save $750/month for 13 years ($117,000 total) or $2917/month for 4 years ($143,254 total).

I know where my preference lies…

3. The investment cash flow method

Ah, but here is the rub.

Let’s say that you don’t save and invest any money for college in 529 or taxable accounts. And you don’t make enough or want to use your primary income to pay for college.

You could use the money that you would have put into a 529 account to buy cash-flowing assets. Like rental real estate properties.

If these properties make at least a net income of income $2917/month, you can use this income t pay for one child’s college education.

How feasible is this?

Selenid and I started investing in cash flowing rental real estate properties less than a year ago. Our 2 properties (soon to be 3) net us about $2500/month. So we are already close very early in our journey. This is very doable…

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4. The mortgage method

How many of your have a mortgage on your primary home? Most of you I would bet. I do too. And, because you are my audience, I bet it is not a small mortgage. Chance are good that it is near or greater than $3000/month.

So, this means that if you pay off your mortgage before your kid gets to be college age, you can just use that payment that would normally go to mortgage to pay for college.

As an added bonus, after those 4 years of college, that money just becomes extra cash flow for you!

Again, it is very feasible to pay off even a 30 year mortgage early over 13 years with extra payments.

How? Create a budget and spend intentionally.

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5. The odds & ends method

Admittedly, this may not always be a manner to pay for all of one or many kids’ educations. But it can help dramatically.

What are these odds and ends?

  • Financial aid
    • Unlikely for someone at a physician’s income level.
  • Work study
    • I worked at our college gym swiping cards)
  • Education scholarships
    • There are tons of private scholarships out there beyond those offered by the college themselves, look for them! In fact, Selenid had all of her education paid for by education scholarships.
  • Sports scholarships
    • Less common but out there.
  • Going to a state college
    • Ok. I know this is a touchy subject. And maybe it’s not even an “odd” or an “end.” But, there are probably just a. handful of colleges out there worth such a high price tag. And unless you are paying for one of them, a consideration may be to just guide your kid to opting for a state university with a lower price tag.

How Selenid and I plan to pay for our kids’ college education

This will come as little surprise to readers of this blog, but we plan to use a hybrid method to pay for our kids’ college. (For reference, we, so far, have 2 young boys.)

Related Post:
10 Reasons a Hybrid Investing Approach is Best

And by hybrid method, I mean that we plan to use a bit of methods #1, 2, 3, 4, & 5 above

We opened 529 accounts for each kid when they were born. Right away, we automated our accounts so we contribute $150/month to each kid. We also but birthday checks, etc in there. But for now, we will just consider to $150.

This amount invest each month for 18 years until they reach college at an inflation-adjusted expected return of 5% will yield about $51,000 for each of them (#1. Save and invest method).

Thus, we still have to cover about $92,000 for each kid over their 4 years education. And remember, both of our kids will be in college at the same time. So, each kid will have a monthly college cost of ~$2,000 for a total of $4,000 for the both of them.

We expect to be more than able to cover this based on our rental real estate income (#3. Investment cash flow method). We also plan to pay off our mortgage aggressively after our my student loans are paid off (#4. Mortgage method).

And who knows if we will still be working then or in what capacity, but if we are, we certainly will have some day job money to contribute to their education if we decide to (#2. Primary cash flow method).

Lastly, we don’t expect to qualify for financial aid. However, we do expect our children to work in college via work study. Both Selenid and I did this and felt it taught us important lessons. They will also be encouraged to apply for any and all scholarships they can find to help fund their own education (#5. Odds & ends method).

As always, you can view our actual written financial plan including plans for paying for college right here:
My Written Financial Plan Update: New Financial Goals and Priorities

Learn more about my flagship online course!

What about graduate school?

They are on their own for graduate school.

Seriously.

That’s what I think at least. Selenid disagrees with me. But I think that having some responsibility towards your educational costs if desired after college is important. It keeps you motivated and keeps your eye on the prize. It certainly did for me.

What do you think? How are you saving for your kids’ college education? Are you savings, investing, cash-flowing? Some or all of them? Let us know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

    6 thoughts on “5 Smart Ways to Pay for Your Kid’s College”

    1. Hey dude, I was thinking the rate of inflation might put the cost of a private college in 13 years for my 5 year old in the realm of $450,000 per year, using an 8% inflation rate for college tuition as per about 8% per year according to:

      Tuition inflation – Saving for College – FinAidhttps://finaid.org › Saving for College

      your $140K number would only cover 2 years of college for my alma mater Princeton at 75K per year. the average cost of private college by googling is around 50K per year currently. So I think by the time our oldest kids get to college in 13 years, 140k is only going to cover one year of college.

      Sucks to be us! I am rethinking about whether to really fully fund a private college education for them! but let me know if you think my estimates are wrong- I am hoping you are right!

      Reply
      • Hey Rikki, I this this is a fair critique of my analysis and one that another reader messaged me about. I didn’t weigh the inflation of a college tuition really at all. And it’s true that it’s going to increase most likely. How much is really the question. I’m hopeful it’s much less than 8% as has been. I think market forces will prevail as the value of a college education overall May in fact be decreasing. There may also be governmental intervention but who really knows. It’s definitely better to overestimate.

        I do think this is another reason I’m favor of using real estate cash flow to pay for college as this income certainly can and should rise with general inflation at the very least!

        Reply
    2. Another option to consider is foreign schools. I got married right after my step son graduated high school, so I obviously hadn’t been saving for years for his college. He ended up going to a great (like top 20 world-wide) university, whose tuition was the same or less than our flagship state university. He didn’t get to come home much, but that’s a different story.

      Reply
    3. Great summary of options for financing college tuition.
      I also want to encourage you to revise the statement that the “average cost” of private US colleges in 2020-2021 is $35,000. This may be an average across all students when need based financial aid is factored in.

      Sticker price at most top 50 US colleges currently exceeds $75,000 per year and exceeds $80,000 at many.

      Many physicians, and certainly productive specialists, have income at a level where they will not receive any financial aid (“need based”) for one student in college. Top colleges do not award “merit aid” or academic based aid. In other words, they will be expected to pay the full $80,000 sticker price.

      “Need” is calculated by the colleges and based largely on a couple of formulas (FAFSA, and CSS) that are mostly based on yearly income. Assets (yours and the student’s) do factor in. The number of students from your family in college does factor in as well.

      There is a lot more depth to explore with respect to planning your asset portfolio for college financial aid time.

      Reply

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