College tuition has never been higher. Start saving now so that you’ll have choices when the time comes.
In a few weeks thousands of freshman will enter college, and many parents—including you—may be footing the ever snowballing bill. Like retirement planning, I’ve met many EPs that vastly underestimate what it takes to send their kids to college. Their “plan” is to pay for college through future cash flow. But with physician income stagnant, the math just doesn’t work out especially if you send your kids to a private university.
Let’s take an example. If you live in Georgia and send your kid to the University of Georgia (a fine public university) the published 2015-2016 total cost is $25,134.1 Instead if you send your kid to Yale you’ll shell out $65,7252—a whopping $40,000 difference.
An EP making $300,000 in annual income would be left with about $210,000 in after tax income. Assuming you want some sort of decent lifestyle and you spend $10,000 per month ($120,000 annually), that only leaves you with $90,000 to pay for college and fund your retirement.
How’s that private university looking now? How many extra shifts are you willing to work to make it happen?
But wait, there’s more.
That cost is only for one child. Suppose you have two kids that are four years apart. You’ll now have almost a decade long commitment of tuition payments, and this will happen when you’re around 45-50 years old. Either that or you’ll mire your kids in a mountain of debt.
Here are the estimated four year total college costs for a newborn child if he goes to the above institutions assuming that the annual college inflation rate is 5% (see graphic).
I’m not suggesting that you don’t send your kids to college, nor am I questioning the value of a college education (OK, maybe I am). The point I’m making is that just like funding your future retirement, if one of your goals is to pick up your kids’ college tab, then relying on your future income isn’t going to cut it. You’ll have to plan far ahead for that obligation and coordinate your own retirement and current lifestyle into a well thought out financial plan.
Three Simple Education Savings Strategies
- Set up a taxable education account. This is an overlooked strategy but gives you the most flexibility. You open a taxable brokerage account and invest after-tax money into it. You’ll pay some taxes along on the way but there are no penalties and no limits. If you don’t use the money for college, simply use it for your personal retirement.
- Contribute to a 529 college savings plan. In this state sponsored education plan, you also contribute after tax dollars, but the gains grow tax free as long as you pay for education expenses. You might also get a state income tax deduction and asset protection, but watch out for penalties and taxes if you don’t use up the money for education expenses.
- Buy into a prepaid tuition plan. Only a few states offer these, but it may be a good deal if you’re worried about the rising cost of college. The idea is that you pay the current college costs now in exchange for not having to pay future college costs. Many of these plans don’t cover room and board. Also find out if your state has a guarantee.
Photo by Tony Webster