College costs are skyrocketing every year, and there is nowhere to hide. Sure, your kid may get a full scholarship, but chances are they will have to pay some costs out of pocket. As parents, we have to also worry about our retirements and college for our children.
This financial situation is tough to put on anyone, let alone new parents. But we only have two options: cry about it or solve the problem. I have been sitting on this article series for over two months because I wanted to finish the Creative Financing in Real Estate Series(101, 102, 103, 104, 105, 106) first.
I did this because I can already hear the chatter, “But Josh, I can’t afford to buy real estate, blah, blah, blah.” I already solved that problem for you; read those articles. Now that we can find a way to pay for our real estate let’s decide if we actually need to.
The Magic of Rents: Consistent Wealth
The primary vehicle for saving for college is the 529 savings plan. The 529 program offers some decent tax benefits and ways to transfer to other beneficiaries if necessary. So let’s take a look. For a deep dive on 529 plans, go to the Savingforcollege website.
1) Your money goes into the 529 after taxes, similar to a Roth IRA. Your cash also will grow tax-free and can be withdrawn 100% tax-free if used for qualified educational expenses. The caveat being the word qualified. Under this definition, plans may not cover some things like transportation and health insurance.
2) There are lifetime limits for your contributions ($235,000-$529,000) but not on the capital gains. This means that you could fund the account rather quickly if you need to. Faster than the $6,000/year of a Roth IRA.
3) You can change beneficiaries as required. So you are not locked into one child; you can change who receives the money. However, it has to be used for higher education or K-12 private schooling. Parents can even give the money to themselves and fund their own higher education.
4) You can withdraw the money at any time; however, there is a penalty for it. First, your capital gains will be taxed at the ordinary tax rate, not the long-term capital gains rate. This tax hit could be a difference between paying 15% or 33%, depending on your bracket. Second, the money you invested will not be taxed again, only your gains.
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You will also pay a 10% penalty for withdrawing your money. This penalty only applies to the capital gains as well. So there is a stiff penalty (totaling 35-45%) for removing money outside of educational expenses.
Can real estate provide better options? That is the million-dollar question and one I intend to answer throughout this series. But, first, we need to make some assumptions. In the military, we make assumptions to continue with the planning process—or else we would be caught in a never-ending loop of planning.
So let’s assume a few things: we will get a 15-year mortgage, the home will be a rental, and the child will attend an in-state college.
Become a Real Estate Agent/Investor
Our goal will be to get $150,000 in time for the child’s first year of college. Most of us are already older and thus have older children; however, this is a perfect time to plan our grandkid’s college costs. Okay, so here are the scenarios that I will cover in the series. I may add more as time progresses.
102: Buy and Sell Method. In this method, we will buy a house to sell it ultimately to fund the college costs.
103: Home Equity Loan. Here, we will pay off the home entirely by the time our child starts college, but we will take a home equity loan out instead of selling.
104: Rental/Airbnb Method. The home is paid off for this method, and we will use it as a full-time rental.
105: Bachelor pad Method. Here, our child will move in and get roommates to fund his/her college.
106: Overseas College Method. In this method, we can use the most affordable way available to fund a cheaper school overseas.
So we have a lot to discuss throughout the series. Sit back and relax. I know most people do not want to talk about numbers or the future, but we have to get ahead of the game at some point. I’ll see you for the next one. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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