Five Facts You Need To Know To Help Pay
For Your Kids' or Grandkids' College Educations
Fact #1: Our Kids Face A World Of “Haves” and “Have Nots”
The large American middle class that thrived for the past 60 years is eroding. The bell curve created by this large middle class is being replaced with a bi-modal curve with “haves” at one end of the economic scale and “have nots” at the other.
The gap between the rich and poor in the United States is growing larger and faster. In 1994 — for the first time since such data was recorded — the richest 20% of U.S. households received a greater share of national income than the middle three-fifths combined. Those in the bottom 40% were worse off (when adjusted for inflation) in 1993 than similarly situated people two decades earlier. [Source: U.S. Dept. of Labor].
Fact #2: A College Education is the Difference
The primary differentiator between the “haves” and the
“have nots” is education. Earnings of full-time workers who
have a college degree continue to accelerate faster than
those with just a high school diploma.
In 1979, the average college graduate earned 49% more a
year on average than a worker with only a high school diploma. By 1994, that earnings gap widened to 89%. Each year of formal schooling after high school adds 5-15% to annual earnings later in life. [Source: U. S. Dept. of Labor].
Fact #3: College Costs Are High And Rising
Today, the minimum per-year cost to attend a 4-year, in-state university is about $10,000 per year.
This cost includes in-state tuition, books, and room and board. (Private and out-of-state schools are more expensive).
Most parents don’t realize that most students take an average of 5 years to graduate.
In fact, only about 40% graduate in 4 years. One of the reasons is that more students now must work to help pay the high cost of a college education. The following chart illustrates the minimum costs of a college education based on 5 years to graduate and college costs rising at 5% per year.
Today In 5 Years In 10 Years In 15 Years
$50,000 $63,814 $81,445 $103,946
Thus, a family today with two pre-school children should plan on spending over $200,000 for their children’s education.
Fact #4: You Have Four Choices
Fact #5: Owning Rental Property is the Easiest Way To Pay For College
Here’s the equity created in a $125,000 rental property with a 20% down payment.
Equity Today In 5 Years In 10 Years In 15 Years
* $25,000 $45,577 $77,003 $125,000
** $25,000 $80,112 $155,614 $259,866
* Assumes no increase in property value
** Assumes 5% per year appreciation.
By the time your kids are ready to go to college, you’ll own debt-free real estate valued between $125,000 and $250,000.
We have helped many families get their kids through college this way.
Reprinted and edited with permission of Larry Kendall, founder of The Group, Real Estate Associates Fort Collins Colorado
1. Pay college costs out of ordinary income
This is very difficult for most families and it’s worse if they fail to plan and save. Moreover, they will have to overcome the tax effect, meaning they have to add 30% to 40% to the cost due to the added cost of taxes on their earnings. (It takes $15K in pre-tax income to net $10K.) Most families simply cannot increase their incomes enough. Many wait too long to plan for college and are generally forced into alternate tactics.
2. Kids work to pay part of costs
This choice generally causes your children to take longer to graduate. The sad downside is that the data indicates that the longer it takes to graduate, the higher the drop-out rate.
3. Student Loans
This can mitigate the advantages of a college education. While the higher education is supposed to increase your children’s earnings, now they start out in life deeply in debt.
We work with many recent college graduates who are carrying $20,000 to $50,000 in student loan debt, often their largest single monthly expense. In many cases the debt prevents them from qualifying to buy a home. While student loans can sometimes be amortized over a 30-year period to reduce the monthly expense, it results in your kids paying for their college education until they are well into their 50's!
4. Pay college costs out of assets
This is the best choice and requires some advanced planning to create the assets. One of the easiest ways to pay for a college education is to buy a rental property that will be debt free by the time your child is ready to start college. Optimally you should own one rental property for each child.