E15: How to Pay For College Tuition Without Delaying Retirement

Nate: In this episode, we will discuss the biggest myths about paying for your children’s college education and how you can survive the college years without destroying your retirement. She’s Holly, and she helps people find financial freedom.

Holly: He’s Nate, and he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered, episode 15.

Nate: This is really exciting stuff. This is something that’s on almost every parent’s mind . . . with the college education cost just spiraling out of control that can cause a lot of stress on parents who think that it’s really up to them to be able to afford for their kids to go to school.

Holly: Yeah, and really, Nate, a lot of parents today have a bunch of myths or things they’ve been told or taught that affect them, and they believe the myths to be truth, and that’s how they’re planning on paying this college education or on trying to provide the most for their children without realizing that some of those myths aren’t true, and that how colleges and universities determine financial aid and grants and things like that is very different from what most of us are taught to believe. I know I live in an area where we’re told right off the bat that per kid you have to put $600 a month away starting when they’re newborns just to be able to afford four years of university. And how many of us can afford that? Or is the belief that if we can’t afford that, they’ll be able to make it through college and graduate and have these great jobs.

Nate: It’s a huge investment for the family. And one of the biggest fears that we mentioned at the very beginning was that there are so many people that are sacrificing their own ability to build wealth and hopefully retire one day. They’re kind of forsaking that with the good intention of investing in their children so their children can have a better life and go to school and not have to graduate with all this debt. But with the costs spiraling out of control, our goal here today is to dispel some of the myths out there that are making college less affordable for people and maybe even present a new way to fund it that will allow you to get the money back and retire in a way that you can actually do it without having to push back retirement ten extra years. That’s probably almost the average for a lot of people, especially if you want to pay the full force of your kid’s education. If you have a couple of kids, that’s hundreds of thousands of dollars you may be on the hook for.

Holly: Yeah, and I think most of them look at it like they’re going to school for 4 years, maybe 5, and they still have that belief that “Four or five years, I can get them through that.” When the reality is the average student is going to school for six years. So thinking long term even I really can’t afford that. Instead of retiring in ten years, now it’s fifteen years because they went to school longer, and I have even more bills.

Nate: I know for my kid I’m going to try to force them, if they go to school, to graduate in three. I’m going to be like no messing around. This is dad’s money.

Holly: It’s called summer school. And midterm school.

Nate: Taking 19 credit hours. Just get through it as quickly as you can. Anyway, we have three myths today that we’re going to cover, and we’ll cover those right after this break.

Holly: Welcome back. We’re going to dispel some of the myths around how to fund college education today. And the first myth is “I make too much money.” Or as a family, individual, couple, you make too much money in order for your kids to receive any aid.

Nate: I think almost every one of us believes that to a certain extent. And even people who don’t actually make a ton of money believe that I make too much money for my kid to receive any aid when they go to school.

Nate: Yeah, so one of the things we wanted to mention is that there are four tiers of what most schools and FAFSA, the federal aid program—they have a tiered approach for what they weigh most heavily when they come up with a number. The number is called an expected family contribution. So based on a few factors, they say your family should be able to afford, to contribute, this much. What is weighed the heaviest, if you think of a pyramid, the very bottom of the pyramid, the thing that weighs the heaviest, is the student’s assets. They will actually take into account 20-25% of the student’s assets, they will include into the expected family contribution. Right from the beginning. So one of the things, Holly, is should your kids really have much in their name when they go to school?

Holly: Nate, this is their checking account, or maybe they were left money by a loved one or grandparent that wanted to help them out with their future or education, so then this money has been transferred to the student’s name as some sort of asset. As soon as that transfer happens to the student’s name, it directly impacts what they’re able to receive. I had a couple who their daughter received money from her grandparent, but she didn’t receive it until she was 21. So as soon as they transferred that asset from her parents’ name to her name, she immediately got half of her financial aid cut due to the amount of money that was now considered an asset to her and that she could afford the cost of going to university.

Nate: The biggest thing that will prohibit you from getting any financial aid is if your kids have assets: checking accounts and savings accounts, especially 529 plans that are in their name. They prohibit you from receiving free money. That’s the best. The government does provide loans, even interest- free loans if you get subsidized. But the main thing we want to get is scholarships and grants and the free money. So if the kid has a whole bunch of assets, if your child does, that’s not good. The second tier, the next heaviest weighed right after the assets, is the student’s income. That’s the next amount. There’s, I think, up to $6000 they give the student an allowance in that area that you can earn before it starts coming into effect. But one of the things is as your kid is going to school or beforehand if they have a high income, that’s also going to count against them pretty drastically.

Holly: So if they’ve been working since they were 16, 17, 18 and they’ve been making pretty good money and they’ve earned more than $6000 or they continue to earn more than $6000, automatically then that’s a big no-no for funding. And they once again get a strike. Three strikes and you’re out. To receive that free funding in the form of scholarships and stuff. Because they look at it as, “Well they have a job. They can afford college. They’ve been working.” So this is just another tier that is added on for the student. Basically, you may have wanted to work hard so you could afford to go to college, but what has happened is that has worked against you.

Nate: After the student income is taken into effect, then the next tier is the family’s assets. The family’s assets that they’ll take into account, like the student was 20-25% of their assets will be included into the expected family’s contribution, around 5-6% of the family’s assets are included in that regard. And certain assets are more included than others. What FAFSA counts, as far as family assets, are 529 plans. They definitely count. Money checking and savings accounts weigh heavily against you. Many times FAFSA doesn’t include your home equity. But some schools even go deeper themselves. There are about 300 schools that go deeper than FAFSA, who will include your home equity as a part of it. I was surprised to hear that retirement accounts don’t count as family assets for the most part in FAFSA. I think they do in the more deep ones, but in FAFSA, money and retirement accounts don’t. What was interesting was the money that you were putting into retirement accounts that year, so in other words if you normally max out a 401k contribution or IRA contribution, they’ll say, “Wait how much money did you actually put into that retirement account?” They’ll count that towards your assets, as saying you could have not made that contribution this year. You could have helped pay for school.

Holly: A key with that is just to say the myth of “I’ll have to work 10 more years or 15 more years” does come into play because a family, or a mom or dad, is making a choice to either not contribute towards their retirement program because it will look against them because of FAFSA or what they’ll do is say, “Okay, we’re still going to contribute because that’s our retirement program,” and then it affects what the child is able to qualify for in regards to funding. So it’s sad that they look at it as, “What did you put in this year?” And you could have put that towards your kid’s college. Having to actually pick between my kid’s college education or retirement in the future.

Nate: So that leaves us with one more tier. And that’s the tier that most people think of when they say, “I’m not going to get any money or aid,” is they think of their income. They say I make too much money. The very last tier, the one that [weighs the least] as far as all the tiers you can think of is family income. And I believe that’s subject to allowance. I think it’s only $25,000, anything above that they take into account. What we really want to stress is that the family income—the thing that most of us think I make too much money to get any aid—is actually the thing they weigh the least out of all the possibilities. That’s the first thing: I make too much money. I wanted to bring in one more thing before we move on to the next point.

Holly: One of those keys is it normally is around October, some October date, for the following year. Really, you may not be thinking about what college your kid is going to . . . or they’re just going to start applying in January or February, but what you’re doing is hindering them from receiving those funds first because you’re at the back of the pack. And those parents that were prepared and are on top of it, October 1st they were filing for that funding for 2017. They weren’t going to wait.

Nate: That’s a huge thing that most people don’t realize. So the first myth was you make too much income. That is the least important. The most important is filing on time. And moving the assets out of the student’s name. On top of moving the assets from the student’s name also understanding what are you going to do with your assets. Because there are ways to shield your assets from being seen. And that’s what we’re going to get into with myth 2. Myth 2 is that most of us believe 529 plans are the best place to save money for college. Now, Holly, why is that a myth?

Holly: The reason that is a myth is because we often put it in our kid’s names, or it’s our names, so it goes against them for funding. The other biggest reason is that the belief that this money can be used for anything for college education, and actually 529 plans are very specific in regards to what the money can be used for and can’t be used for, and it actually is a strike against your student when you have a 529 program versus someone who never did the 529 program.

Nate: Definitely. So the first thing that you mentioned was first off many times it’s in your name or worse in your children’s name, which is a huge strike against you and is going to increase your expected family contribution that people are going to assume you can come up with. We want our expected family contribution to be way down, so that if you have most of the money set aside that you wanted to use to spend for your children in a 529 plan, they’re not going to give you any free money. They’re going to say you have to use that first before we give you the free money. So that’s terrible. And then secondly as you said, Holly, what happens if your kid doesn’t want to go to school?

Holly: If your kid doesn’t want to go to school, then you have all this money in a 529 program and there are penalties to take it out and penalties to remove it. So you’ve put all this money into a 529 program that you have no access to without penalty even though it was your money to begin with that was for your kid’s education.

Nate: It’s such a shame. Especially because (Holly and I were talking about this before the podcast) on top of that, college education itself is turning out to be a pretty bad investment. Because there’s so many people who go and spend all this money and get into debt and then they go and work as a bank teller after graduation. So not only do these 529 plans require you to use the money for education or else they will charge you a fine to pull it out or they’ll fee you, but the chances are more and more likely that college is not even a good idea if the costs of it continue to inflate the way that they have.

Nate: Yeah, 529 plans, what most people are using them for is simply because you can put money into the 529 plans, and the 529 plans is actually after- tax money. So you put money into the 529 plan. You don’t get a deduction for it. The selling point is that when you pull the money back out, if there are gains in whatever the money was invested in, you won’t have to pay taxes on the gains when you use it for college, which is nice. But many times that money is invested in the stock market directly or in mutual funds, and what happens if you have a 50% drop, like we had in 2008, and that happens to be the time your kid goes to school? That’s going to be a rough time to go pull money out of the 529 plan to pay for [your] kid . . .you thought you had enough money to send them to school, but half of it is gone. So first off, the volatility that is normally associated with those is terrible. The tax benefits are there, but honestly, Holly, essentially what I’m getting at, you can do the same thing with a banking policy, what we use for infinite banking that’s designed for cash . . . You can do the same thing with a policy that you can do with the 529 plan and not pay taxes when you pull the money out just by the nature of it being life insurance. And you never have to worry if there’s a stock market collapse by the time you get there. And secondly (I don’t mean to hog all the airtime here), the policy is not counted against you or your children when it comes time to fill out the FAFSA. It’s a hidden asset according to FAFSA. We don’t even have to report it. So not only can you guarantee you’ll have the money, and you’ll also guarantee it’ll be tax-free when it comes out, but on top of that the chances are higher by you changing where the assets were. Instead of having a 529 plan, moving that into a policy, you’ll potentially reduce what your family was going to have to pay in the first place.

Holly: Nate, there’s also a guaranteed growth rate that’s tax-free for them. So you have the same, in my viewpoint, you have better tax considerations that the money is growing tax-free for you. And the thing is that this 529 program ties up your money for a period of time. You’re giving them those strong dollars today. Maybe 18 years you’ve been putting money into this program, and it’s not necessarily there . . . because you’re not in control of it. [Whereas] with a life insurance policy, you’re in complete control of that money. And if you need to use it, you can use it. And if your kid didn’t want to go to college, you’re not out the expense of having put it into a 529 program. In fact, there’s way more flexibility with a life insurance policy and to send your kid to college and university then there ever was with a 529 program.

Nate: You can use it for whatever you want. And there are no fees, even if your kid never goes to school. So it’s such a better place.

Holly: Well, there’s more flexibility. If you want to pay for your kid to have a computer when they’re at school to do schoolwork, you can take that money out of that life insurance program. A 529 plan—you can’t use that for that. It prohibits you. So your hands are tied. Like you said, the fact that this life insurance policy doesn’t affect the funding your student will be receiving. It has no bearing on that. Even if they go deeper into your financials, most of the time nothing is asked in regards to a life insurance policy.

Nate: Yeah, very few schools even ask about it. FAFSA definitely doesn’t. But there are some schools that may, but very few count it as a true asset, so that just adds to the power of using it. Are 529 plans really the best place to save for college? The answer is no, for the most part. They’re actually one of the worst because they’re market-based, they penalize you for using it for anything else, and they count against you when it’s time to receive aid. So let’s not worry too much about using those, and let’s focus on building our wealth elsewhere. The third point and the third myth, Holly, is that most people think they’ll have to delay retirement or they’ll pretty much never retire because of how much money they’ve had to spend sending their kid to college. Now why is that a myth? Or how can we bypass it at least?

Holly: The biggest way to bypass that myth is if you didn’t put your money into a 529 program, and you used it in a whole life insurance policy, [banking policy], by being able to borrow that money and pay it back, it actually gives you additional income later on to retire. But really that big myth of “”I’m never going to be able to retire” if you’re depending on funding your kid’s education and you’re only going to use those resources—the 529 programs or borrowing the money and paying it back or hoping they get grants or scholarships—you do have no hope that you’re going to be able to retire because you’re using the traditional method. You haven’t thought outside of the box. You’ve believed what everyone told you. “Do that 529 program! Put it in there!” And instead it didn’t give you any flexibility. By using those whole life insurance banking policies, you’re able to not only borrow but continue to have the money grow for you and still have money at retirement.

Nate: That’s a huge point. Whenever you build money the traditional way to spend for college, which is normally in a savings account or in a 529 plan, that’s how most people pay for it, every single time you take money out of that and go send it to the school to pay for tuition, the money is gone and it has no chance of earning for you. The only way for you to replace it is to just work harder. And start earning more money or start scrimping and saving more to replace what you just spent. Whereas inside of a policy, you can actually borrow against the policy to send the money to the school, and all the money in the policy is going to grow as if it’s all there because you didn’t actually make a withdrawal; you took a loan out. And you can decide, okay I can repay this policy if I want to and get all the money back in there, plus all the growth that occurred during that timeframe. Or other ideas we’ve had, Holly, at one point you can lend the money from the policy to do it but also, essentially, have the child pay you back just like they would have normally paid back a student loan company, and you can show them how they will receive such a great inheritance by doing so more—so not only can you get your money back, but upon your death they can get all the money back they paid you back from the loan. So all the money that normally people just spend can be kept in the family and reused for generations to pay for things like college education.

Holly: And I think one of the real important points there, Nate, is you can either pay it back or you can give that responsibility over to your child and show them the power and the benefit of what it does for your future and their future by having them actually pay you back the money that was used for the college education. And it’s not something they have to start while they’re in college. You can delay that and wait until they’re out of college and they have a job and you can determine what those rates are and how long it’s going to take to pay it back, so it’s not a financial burden to your child. It increases their future wealth when you graduate from this earth, and it also increases your ability to retire and have more retirement income.

Nate: Yeah, and honestly the whole point—if they also know they have to pay it back, it may make them more serious while they’re going to school, knowing it’s not just free money, to a certain extent. But even on top of that, we’ve built plans and done things and seen it happen where we’ve built it to where the parent goes out and funds a policy during the building years as their kids are growing up and uses that policy to fund college education. After the college education is funded, down the line maybe 5 or 10 years after the kid graduates, because the policy never stopped growing the entire time, they may actually have enough money in the policy to recoup all the premiums they paid in to build the cash values plus the interest they would have paid on the policy loans that they took out. So they get all their money back that they put into it. And then they can give the policy over to their child at that point. So the parent is made whole, and normally the policy actually still has enough money to benefit the child, and the child can choose to repay the policy loan back, get back all the money, make all the profits. In other words, everybody can be whole. The parents can help fund it; the kid can receive it and receive benefits for the rest of his life from that same policy. It didn’t just go away like a 529 plan does when college is over.

Holly: Nate, the key there, too, is basically what clients have discovered and individuals who work with us is they can pay for their kid’s entire college education. Still got all that money back and still been able to give their child something with the life insurance policy for the child to be able to use. I mean, to have the freedom to know all the money that you’ve put in to pay for education you have been given back, and yet your child still has this life insurance policy that they can use later on down the road, whether it be for a down payment on a house or a wedding or a car. Or whatever it is that they’re going to use this for. It’s a win-win for both the parent and the child.

Nate: Exactly. The final thing is that you actually can retire after spending the money on college. The issue is you need to think differently about how you’re going to spend the money and where it’s coming from because for the most part, the way normal people are doing it is they’re losing a whole bunch of money—not only the money you’re spending but the earning potential that money had. That’s what really is keeping you from being able to retire. A policy that you never kill the earnings potential. So that makes it extremely powerful over the lifetime. Anyway, just to recap, the three myths when it comes to funding college education. The first myth is that you make too much money to receive any aid. That’s just not accurate. Many times that’s the least important thing. The most important is where [your] and your children’s assets are held, and you want to try to find places where they’re not going to see them when it comes time to receive aid. Because any free money you can get is money you don’t have to spend, which is money in your pocket. The second myth is that 529 plans are the best place to save money for college. As we’ve talked about, they’re not. They go against you, they’re mostly market-based, which means they may not be there, and they’re so restrictive on what they can be used for. And the final myth is believing that you’ll never be able to retire or that you’ll have to work longer to make up for the money that you spent on college, which if you just simply change where the money was coming from that you spend on it [and] didn’t lose the earning potential, you can get the money back and recoup it over the rest of your lifetime to be able to retire at the same time you thought you could.

Holly: I couldn’t agree with you more, Nate. I hope that everybody has learned something new today and that you are able to start thinking outside of the box. This has been an episode of Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Get free resources and transcripts for this episode at livingwealth.com/e15.