What if I told you that maybe you shouldn't save for your kid's college education?
To me, it’s an obvious choice when it comes to saving for your kid’s college education versus your own retirement (retirement all day), but it’s a choice that gives a lot of physician parents heartburn. Good news, though: there are more than just these two options.
I live in North Carolina, and based on that, I crunched some numbers. Presently, to attend the University of North Carolina, you’d need to cover the cost of tuition, board, and living expenses at about $26,000 per year. By the time my six-year-old is of college age, so 18 to 22, the total cost of attendance at that same state school will be more than $225,000 – assuming that the trend continues to increase annually by 6% (which it has for the past 10 years).
If my kids attend a private school, like Wake Forest where I teach, the cost is something more like $400,000. Adding private school numbers up for three kids lands me at $1.2 million that I’d have to save up in the next six to 12 years.
I can't tell you the number of people I've talked to who feel like they're in the situation of having to choose between being able to retire at a reasonable age or saving for their kids' college education.
To be clear, I don't think this is a debate: I think that you should save for your retirement. Why? You can't borrow for your retirement.
Entrepreneurship or Learning a Trade Are Viable Options
I really do think there is a lot of merit to the idea of your kid not going to college at all. If any of my kids decided that they wanted to go be an entrepreneur, they’d have my support.
For example, my oldest loves to bake and really enjoys a creative atmosphere. I would love it if she wanted to open up a bakery. I'd be perfectly fine putting money into a building where she could house the bakery and equipment so she could set up shop.
I’d feel the same way if she wanted to develop a trade, and become a plumber or an electrician or a beautician, something that makes decent money that she can start at 18 – as opposed to taking the medical school path and waiting until she’s 30 to make anything.
Your Savings Are Not the Only Option For Payment
Loans and Loan Forgiveness
The state of North Carolina has something called a FELS program, which stands for Forgivable Education Loans for Service. As long as you stay and work in North Carolina, then for every year that you borrow money, you get $14,000 forgiven up to a maximum total of $56,000. Though this program is specific to North Carolina, I’m sure there are comparable programs.
There are also public service loan forgiveness (PSLF) and merit-based scholarships, and work-study programs that can all contribute to paying for school besides depleting your savings. And let’s not forget traditional student loans.
Invest and Contribute with a 529 Account
The 529 is a specific account that allows you to set aside money for your kids' college education on an after-tax basis and grow it tax-free. As long as it’s withdrawn for tuition or educational purposes, you don’t have to pay taxes on the gains, either.
How much you can give per year is based on the gift tax, and the gift tax changes every year. In 2023, the gift tax is $17,000. With two parents, you could potentially deposit $34,000 per year.
The government has recently put in a new allowance for extra money. Let's say your kid gets a partial scholarship and maybe you invested $150k for them, but you only needed to use $100k of it, so you have $50k left over. You have two options now: one, change the beneficiary; or two, transfer money from that 529 into that child's Roth IRA. Be mindful though, that the typical Roth IRA rules apply.
Prepaid State Tuition Plans
The premise here is that you can actually pay for college in the future with today's prices. By taking the cost of college today and adding on a small fee for inflation, you get a big discount if you go ahead and pay for college in today's dollars for your kid to go to college in the future. The only caveat with using these prepaid tuition plans is there's typically a stipulation that the kid has to go to college within that state.
The Uniform Transfers to Minors Account (UTMA) and Uniform Gifts to Minors Account (UGMA) are two types of custodial accounts, meaning they are a shared account controlled by a guardian (parents, grandparents, etc.) until the minor child reaches the legal age of adulthood in their state.
This is a great option if you’re not sure college is in your child’s future. In that case, it doesn't make sense to open a 529 that can only be used for educational expenses. In those instances, you might like having the option to fund a custodial account and make contributions on behalf of your kid. If they do go to college, great! They can be responsible for paying for college out of the custodial account. But if they don't go to college, they still have a set amount of money to start a business, buy some real estate, or invest in trade school.
I'm not currently anticipating paying for all of my kids’ college. Maybe it’s important to you to cover 100% of your kid’s college education, and that’s great. Hopefully some of these options will be useful for you. It’s all about finding a middle ground when possible.
Are you planning to or did you pay for your child's college education? Share your experience in the comments.
Dr. Jimmy Turner is a practicing anesthesiologist, physician entrepreneur, and coach for doctors. You can find him on Instagram or Twitter @tpp_md. You can also learn more by visiting his website.
Illustration by Jennifer Bogartz