With college costs exploding, it doesn’t matter if your child is graduating from high school, middle school, elementary school, or Kindergarten — it’s impossible not to imagine the heavy burden that student loans may eventually put on your kids.
So what can you do to help your child deal with the high costs of college?
The 529 plan? A Coverdell Education Savings Account?
Maybe. But we have 3 better options for you to consider — including one that’s not too late to start even if your child is heading off to college this Fall.
Let’s take a look at the facts…
The cost of higher education continues to soar. The 2016-2017 College Board survey puts the average cost of private college education at $33,480 per year. After fees, books, transportation, plus room and board, the average cost reaches $49,320 per year.
That’s nearly $200,000 for a college education!
Out-of-state public colleges aren’t as expensive yet, but they’re hot on the heels of spendy private colleges.
And while in-state public colleges are the most “affordable,” they still cost a significant bit of change.
So what do you do?
Not everyone plans to help their kids pay for college (in fact, one of Garrett’s good friends, Rich Christiansen, expects his 5 kids to pay for their own education — and he’s prepared them to do so by teaching them about money and entrepreneurship all their lives).
But if you do plan to help pay for your kids’ higher education — or even to pay for it outright — you’ll want a solid plan in place. Because it is a significant investment no matter what your situation.
Fortunately, if done properly, saving for your child’s education doesn’t mean sacrificing your own abundance.
Most parents have heard of the government’s 529 plan for saving for college. But what they may not hear are the risks and fees involved.
A 529 plan is structured a lot like a Roth IRA. There’s no tax advantage when putting money in, but you’re not taxed on your earnings when taking the money out.
So if the investments inside your 529 go up in value, you get the profits tax-free as long as the money is used for college. And the account is transferrable, so if one child decides not to go to college, you can simply transfer the money to another child — or even to yourself if you’re going back to school.
So far it doesn’t sound so bad, but there are downsides.
Garrett Gunderson, our Chief Wealth Architect, wrote the NY Times best seller, Killing Sacred Cows. In the book, Garrett heavily criticized 401(k)s, IRAs and other qualified plans for many reasons.
And each of his criticisms apply to 529 plans — often to a higher degree.
There are fees upon fees within 401(k)s, IRAs and the mutual funds they invest in. And the fees for 529 plans are ever higher — notoriously so.
529 plans have limited investment options, even more limited than with 401(k)s and other IRAs.
And if it’s your only plan for college savings, then you’re entirely dependant on the markets.
Garrett also likes to say, “A 529 is not mine,” because just like with a 401(k), you are merely a custodian or beneficiary of the plan and not the actual owner. This makes it easier for the government to change the rules of the plan on you, and there’s nothing you can do.
Finally, once the money is used, it’s gone. There are other ways to save for college, as you’ll see below, where that’s not the case.
Another popular option besides the 529 is a Coverdell Education Savings Account, named after the late Senator Paul Coverdell who championed it.
Coverdell accounts have less restrictions on where you can invest — and they allow you to spend the money on elementary and secondary education in addition to college.
But your contributions are limited to $2,000 per year, significantly lowering their value. And just like with 401(k)s and 529s, you don’t own the account and the rules can change on you.
So while 529s and Coverdells are options for college savings, we find them lacking.
Where’s the Opportunity…
Instead of taking money out of your life and putting it into an account that’s off limits and comes with fees, risks and regulations…
…why not save for your children’s college education in a way that’s good for you, good for them, and maximizes every dollar.
Here are 3 better ways to save for your kids’ college education that do just that.
#1 Pay For College With a Loan From Cash Flow Insurance
Instead of diverting money into a 529 and hoping to get a return, stick to the plan and continue to fully fund your Cash Flow Insurance policies (we teach this in our Cash Flow Banking course.)
This way your money will continue to earn a guaranteed 4-5% per year, and when it comes time to pay for your kids to go to college or pay down student loans, you can lend them money from your Cash Flow Insurance policy to help them out.
When your child is ready, they can pay the loan back to you — and now your family’s central financial instrument, your Cash Flow Bank, will recapture the interest instead of the government’s student loan programs.
That recaptured interest will then stay in the family to further your financial legacy for your kids and all future generations.
Another way is to set up the policy in your child’s name when they’re a toddler, and then make monthly or yearly contributions to the policy — which builds up the value as they grow older.
Then, when it’s time, your child can borrow from the policy to pay for college. And the policy is now theirs. They can either pay back the loan and/or continue the premiums — it’s completely up to them.
(There are many ways to take advantage of Cash Flow Insurance to pay for college. Our team, The Accredited Network, can work with you to find the best option for your unique situation. See below.)
#2 Start a Trust Early For Your Child
We’ve mentioned the tax benefits of hiring your children before. In short, you can hire your children to do work in your business and pay each child up to $6,350 without triggering any income taxes. Plus, it’s a business deduction for you.
You can then have your children deposit that $6,350 into a trust that you’ve set up for them — and with specific instructions stating that the money is to be used for college, or starting a business, or whatever else you deem important.
This way you’ve put away $6,350 per year for your kids tax free. And in the meantime, you can invest it however you want (following your unique Investor DNA) and continue to grow the balance of the trust until it’s time to pay for college.
#3 Invest in College Real Estate
When Garrett was in college, he bought the townhouse where he lived and rented out the other rooms to his friends. The positive cash flow from this investment paid for the townhouse and ultimately helped pay for college.
You can use a similar strategy for your children:
Purchase a house or townhouse for your child to live in while at college and hire them to be the manager and find roommates.
Because they are almost surely in a lower tax bracket, this will save your family on taxes.
It will also give your child cash flow to pay for college expenses.
And you’ll have a cash flow asset that can be used to pay down student loans long after your child has graduated college. Or, if the opportunity presents itself, you can sell the property and use the equity to pay off the student loans.
What To Do Next
As you can see, you don’t have to sacrifice your own abundance to provide higher education for your children.
There are many ways to save for your children’s college education without diverting money away from your financial plan — and these are just three.
Our Wealth Factory team, The Accredited Network, helps you find the best strategy for your unique situation.
To learn more about working with The Accredited Network and applying these strategies, including setting up a trust to pay for your kids’ education, tell us more about yourself right here.
Also, to dive deeper into this topic, Garrett previously recorded a private conference call that you can find at the link below:
And now would also be a smart time to look at setting up your own Cash Flow Banking system so that you can recapture the interest from student loans (by being the bank yourself).
Build the life you love,
The Builders at Wealth Factory
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