The four-legged chair of college funding

chairBack in the day, the sources for retirement income were sometimes referred to as the three-legged stool. You had Social Security, a company pension, and your own savings or investments.

Applying the same analogy to college funding, I would sadly say the current reality is debt, scholarships/grants, and savings or investments. Student loan debt has exploded in this country and is frankly out of control.

Personally, we believe that one of the results of the 2008-2009 great recession is the massive student loan debt that the Millennial and Generation Y demographics are saddled with. They are loaded down with student loans and credit cards approaching $1.5 trillion in America. It is so large, it has now eclipsed credit card debt.

Adam Carroll, founder of Money Savvy Kids and creator of Broke, Busted and Disgusted, a documentary highlighting the explosion of student loan debt states, “According to The Institute For College Affordability and Access’ student loan debt survey in 2014, the average debt load carried by an undergraduate was just shy of $30,000.  Yet, when seemingly “average” recent graduates were asked, their debt loads were at least 1.5 times that if not more.  (And that’s before taking into consideration the credit card debt many are carrying…).”

So, in looking at funding college in an uncommon way and having your child or grandchild in an uncommon position to thrive not just in college but beyond, we need to create more than a three-legged stool. We need a four-legged chair. So, what are those four legs?

First, without a doubt is Scholarships and Grants. There is so much money out there for kids in college that goes unclaimed every year. You have seen people appearing on the hit show Shark Tank telling their story of getting paid over a million dollars to go to school as they took advantage of the scholarships and grants available.

This is personal to me and my story with scholarships. I remember being accepted to Creighton University in early 1999 and I quickly applied for some scholarships that my high school made me aware of and some other resources through the university. I earned some funds and my parents used the money they had been investing for college and I took out loans to pay the rest. After that summer leading up to my freshman year, I stopped applying for scholarships and loans.

Fast forward to my senior year and I had racked up student loans and credit card debt even though I worked all through college. My parents said the college money they saved was gone and I was on my own for my last semester. I was $3,000 short. I didn’t want to take out another loan and didn’t want to put it on the credit card, so my college counselor recommended I apply for scholarships.

I quickly submitted six applications and was awarded one for exactly the $3,000 that I was short. I thought to myself, why did I ever stop applying for these?

Adam Carroll at Money Savvy has a great resource that shows families and students how to treat the scholarship and grant process like a part-time job, applying for scholarships and grants for 40 hours a semester from their freshman year of high school until they have their degree in hand. It starts to teach you about “OPM” (other people’s money) and thinking in uncommon ways.

One of the things we are working with our families on is reducing the amount of money you may initially want to just give your child for college. Doing this creates a culture within your family that says we are not paying for college with our own money. We are going to hustle and leverage other ways to finance college.

The second leg is the good old fashioned four-letter-word, WORK. Working in college at new and different jobs is a great way for your student to try their hand at multiple things and see what they like and don’t like. The odds that they will work at the same place all through college are slim. Working also forces your college student to keep a schedule, be on time and start learning about business and opportunities.

The third leg is still savings and investment. We are not big fans of the 529 program although it can serve its place, but it is typically limited to some canned mutual funds. It only allows you to use the money for higher education and you can only have one beneficiary per year. They do offer tax savings, if your state allows that, tax-deferred growth and the upside to the market.

So if not a 529, what vehicle would we use? We like indexing and maybe picking dividend-paying stocks. Exchange Traded Funds (ETF) typically have lower fees than mutual funds and are more transparent about what you are investing in. Furthermore, your end goal is time freedom, not retirement. In another article, we talk about the three numbers driving retirement planning. Why restrict kids with all these government rules and burdens and catches. Why not teach them that these companies and investments pay dividends and if they save aggressively, work hard and understand their financial IQ they can live off these dividends before they even go to college.

Many people put money in 529 programs and then spend it all for education wiping out the principal. Now the parent and the student have to start over and save from zero but, if you can teach your child to live off the interest, that principal can stay intact and keep paying dividends and interest.

In our banking articles, we talk about the power of cash-value life insurance on a child where you borrow against cash-values and the money still continues to earn interest. We think 529 programs provide the least amount of control and transparency, but the tax-deferral and tax deduction must be weighed for sure.

So, what is the fourth leg? Well, uncommon results require uncommon ideas. One of the most popular things that we have helped folks with is purchasing a rental property in the city their child is going to attend university.

Many don’t realize that the US Tax Code is set up for business owners since business owners create jobs, tax risks and create new industries, opportunities, and tax revenue. So, by purchasing a rental property you can organize it as a business and potentially take advantage or leverage the tax code to offset more of the costs of attending college. Deductions may include, mileage home and back to check on your property, cell phone bills to call your child checking on the property, meals, appliances, taxes, and insurance.

Further, it puts your child in a direct position to learn about ownership, about attracting other students to rent, about leadership, about taking care of your property and possessions as well as cash-flow, taxes and business structure.

One of the things we want our children to start doing is building credit. We partnered with Fidelity Bank here in Des Moines which specialized in what we call a “Kiddie Loan.” This allows you to put the child on the mortgage loan and start building their credit. Since it is their primary residence it can qualify for lower mortgage rates.

When the student is done with college, siblings, cousins or neighbors could keep renting or living there and the asset could continue to produce rent. Or, you can sell the asset, recoup equity and just move on and hopefully, the home appreciated while you owned it. This tool has been huge for our families in defraying the costs of college.

Putting these four legs together provides an amazing foundation for your child or student to leave school with no student loan or credit card debt, to understand ownership and personal responsibility as well as managing investments and assets.