Slaying the Higher Education Dragon – Practical Methods to Fight Rising Costs

Financial Independence:  Simple Options to Cover College Education Costs

Rising college education costs are seemingly out of control in our country.  If not, that’s the perception which many of us hold.  Indeed, squaring away how to cover future college education costs was a huge part of my planning prior to reaching financial independence at 38.  Today, I’m sharing a few practical options to address the cost of a college education.  Given this topic’s breadth, I can’t possibly cover every method for mitigating college education costs.  Having plenty of options to do so is a good problem!  I won’t be diving into financial aid or student loans in this article, either.  Regardless, even if I help just one of you, this endeavor is worthy!

Note:  I’m not a tax or financial expert, and this article is for entertainment purposes only.  Consult with a professional on your specific situation if/as necessary.

Current and Future Parents Educating Themselves

It’s on us as current and future parents to educate ourselves on college education costs.  The various cost structures involved in a college education have grown increasingly convoluted since I went to college.  In my opinion, colleges have stacked the cards against parents and prospective students, AKA customers.  No doubt about it, college is another form of Big Business.  An unprepared college customer is no different from an easy mark at the used car lot or time share presentation, in my mind.  So why not enlighten ourselves early on to avoid rising college education cost pitfalls?

A bit of self analysis helps here, as well.  What were your experiences paying (or not paying) for college?  What would you have done differently?  How can you apply those lessons learned for your children?  Also, talk with family and friends you trust on the topic, and learn from their experiences.  We can learn from both their mistakes and victories.

Another easy option is reading up!  Many reliable resources exist, but arecent favorite of mine is Ron Lieber’s The Price You Pay For College.  He calls college the “biggest financial decision your family will ever make.”  That may come off a bit extreme, but I can’t disagree.  Lieber’s research breaks down how the system works and how it plays on our emotions, insecurities, and ignorance.  I’ll be referencing this book up to and throughout my children’s college educations.

Saving and Investing

Captain Obvious is here to tell you to save more in order to pay for college.  Many will respond with “I know, I know.”  But how many will loyally stick to saving early and often throughout their children’s growth?  In my view, this is a routine task anyone preparing for college costs must reckon with, even daily.  Just saving and investing when it’s convenient for you most likely won’t be sufficient.  Yes, I took it to the extreme and incorporated the savings aspect into most every transaction.  Big picture, anything you can do to increase your savings and investment habits is a step in the right direction.  Investment strategies vary, but we’ve primarily saved and invested for future college education costs via two methods:  529 plans and Roth IRAs.

529 Plans – Our Primary College Savings Method

A 529 plan is a tax-advantaged investment vehicle designed to encourage saving for the future higher education expenses of a designated beneficiary.  We liked that our annual contributions were tax deductible up to several thousand dollars on our state income taxes.  Many other tax advantages exist, though.  Here’s more good stuff.

Contributions to 529 college savings plans are made with after-tax dollars. Once money is invested in the account, it grows tax-free, and withdrawals from the plans are not taxed when the money is used for qualified educational expenses.

Types

529 Plans come in two forms – prepaid plans and savings plans:

• With prepaid plans, your contributions are basically purchasing tuition credits at today’s rates for use in the future.  In other words, the performance of this investment vehicle is based on tuition inflation.  Prepaid plans are only offered in ten states currently.  These states are: Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington.
• 529 savings plans differ in that all growth is based on market performance of the underlying investments.  Thes investments usually consist of mutual funds.  The vast majority of these plans entail a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college age.  Many of you are probably familiar with target date mutual funds with retirement.  These plans are basically the college savings version.

For what it’s worth, we chose savings plans for our two children rather than prepaid plans.  But everyone’s situation is different, so carefully consider your options.  We started out saving the exact amount in these plans that matched the state tax deductions.  We gradually increased our annual savings in future years.

For those wanting to get ahead of the game and save in a 529 plan before your child is born, you can!  The catch is an unborn child cannot be the beneficiary.  Instead, future parents can simply open the 529 in their own name, list themselves as beneficiary, then change the beneficiary to the child after the birth.

Roth IRAs – Our Backup College Savings Method

Many of you love investing in Roth IRAs – the wife and myself included!  We’ve contributed to Roth IRAs primarily for retirement savings and investments, but they will also be handy for college costs, if necessary.  A Roth IRA is an individual retirement account (IRA) that is generally not taxed upon distribution, provided certain conditions are met.  Roth IRAs are more flexible than 529 plans in that they aren’t limited to investment for education expenses.  However, annual contribution limits hit earlier.  Currently, individuals 49 and younger can contribute up to $6k annually.  Anyone age 50 and older can contribute up to $7k per year.  Roth contributions are after-tax dollars, but everything grows tax-free once these contributions are made.  Here are a few other Roth IRA highlights:

• Withdrawals are tax-free if the account owner is at least 59½ years old.
• Direct contributions to a Roth IRA (principal) may be withdrawn tax and penalty-free at any time.
• Earnings may be withdrawn tax and penalty-free after 5 years if the condition of age 59½ (or other qualifying condition) is also met.
• Rollover, converted (before age 59½) contributions held in a Roth IRA may be withdrawn tax and penalty-free after 5 years.
• Distributions from a Roth IRA do not increase Adjusted Gross Income.

Should You Prioritize a 529 Plan or Roth IRA for College Education Costs?

For education expenses, our Roth IRAs our solely a backup plan.  We will rely on our Roth IRA investments to cover college education costs only if we completely withdraw our children’s 529 funds.  We had our kids relatively late in our lives, so we’ll be reaching the age requirement by the time we would need these funds for education expenses, if at all.  But that won’t matter regardless.  Since reaching FI, we’ve been actively conducting Roth IRA conversions anyway, allowing tax and penalty-free access to our retirement accounts earlier.  While many have written about this, Money Metagame wrote an excellent post on this about five years ago.

So should you prioritize 529 plans or Roth IRAs for future college educations costs?  The answer varies depending on one’s situation, so crunch the numbers and talk to a professional if you need to.  Mark has opted to fund future education costs with his Roth IRA.

A Child’s Involvement

I’ve explained how I was blessed to have parents that taught financial management and savings principles to me from an early age.  One aspect was their insistence that I must financially contribute to my own college education.  I was required to save half of everything I received, including:

• Allowance
• Income from Odd Jobs
• Gifts
• Paychecks from Part-Time Work

I won’t sugar coat it – as a child, not being able to spend this money felt super lame.  Looking back, though, what I learned was invaluable.  My parents built my awareness of planning and taking (some) financial responsibility for my college years.  Simultaneously, I became more of a stakeholder in my college education.  In addition to wanting to obtain a degree to progress in life, I desired to efficiently do so to prevent wasting my own money!

An Open Mind

In looking to fund a college education, an increasingly open mind is useful – both from parents and children.  In my view, the social norm and pressure of going to a traditional four-year school for a bachelor’s degree is worth challenging.  Of course, it makes sense for many, but I don’t think it’s the panacea we should all accept.  So many alternative means exist to obtain degrees, and some may not need certain degrees to gain truly fulfilling employment.  The pandemic has made it even more obvious so much can be done to efficiently obtain degrees in an online environment.  Costs and benefits (not necessarily financial) exist with every option, so thoughtfully consider each.

Another option for children is to take time off from school to work full time.  After enrolling in my university’s co-op department, interviewing, and obtaining employment, I took a few semesters off during college.  By doing so, I earned at a much higher pay rate than I would have working in my college town.  Consequently, I saved much more.  I built rapport and established connections which could contribute to future work opportunities after college graduation.  Sure, I got a few hours of college credit, too, but that was miniscule compared to the professional networking and savings benefits.

Finally on this topic, I highly recommend you read Mr. Money Mustache’s take on obtaining what he refers to as a “fancy education.”

The Points Angle for Covering College Education Costs

Sure, we talk about personal finance on Miles to Memories, but isn’t it primarily a travel and points site?  Now, it’s time to bring points into the conversation.  I think points enthusiasts need to incorporate their cash rewards options more into their earning and redemption activities.  I feel the points and miles community is primarily interested in excess – using points and miles to fund behavior that is egregiously beyond our means.  In fairness, I have contributed to this, primarily from a Disney World perspective.  But I’m predominantly interested in writing about responsibly earning and redeeming points and miles, focusing on goals, and incorporating cashout values and opportunity costs into any redemption.

Mr. Money Mustache described how to neutralize college education costs by simply kicking an expensive coffee habit.  I’ll try a micro-version of that here with points.

Let’s say a Citi ThankYou Points enthusiast earns 100k points annually.  This individual earns points through normal activities such as welcome offer(s) and ongoing but sensible spending on Citi cards.  All those points could be used to fund a more extravagant vacation, or the individual could decide to cash out 50k points for $500 and use the other 50k points for a more modest trip.  For 18 years, the points enthusiast annually contributes that additional $500 to a 529.  Like Mr. Money Mustache, let’s presume a 7% compounded growth rate.  What’s all that worth after 18 years?  The Citi enthusiast would have an additional $18,148 saved for college education costs – all because the individual is okay with a lower-end but perfectly enjoyable vacation.  (Of course, this doesn’t include any potential point devaluations, but it also doesn’t include tax benefits of 529 contributions, either.)

An Inconvenient Truth

So, dear reader, why are we burning points currencies on opulent vacations when they could more wisely be used on a moderate vacation and savings?  I figure many will say, “that opulent vacation is free on points.”  When I present the opportunity cost above, I suggest that many can’t afford those luxurious points vacations, anyway!  Whether we know it or not, our points decisions directly impact our financial futures.  

College Education Costs – Conclusion

I know that many readers have different strategies and opinions on higher education and how to pay for it.  Everyone’s situation is different.  I feel that many can adopt a bit of above to improve their abilities to cover college education costs.  As the higher education landscape continues to adjust, I know that I’ll need to continue learning, as well.  Which of these methods have you applied to college education costs?  What others have you implemented?

Disclosure: Miles to Memories has partnered with CardRatings for our coverage of credit card products. Miles to Memories and CardRatings may receive a commission from card issuers.

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