What do Stephen Covey and Miguel Cervantes have in common?
They are commonly attributed with two fundamental maxims that hold true in college funding. In his book 7 Habits of Highly Effective People, Stephen Covey says, “Begin with the end in mind.”
In his book Don Quixote, Cervantes is credited for saying, “Don’t put all your eggs in one basket.”
These two guiding principles are universal in life and very applicable in planning for college.
Think About Your “Endpoints” and Use Baskets Accordingly
When starting to save for college, parents usually ask, “Where do we begin?”
The question they should be asking is this: “What is our destination, and what is the most efficient way to get there?”
This, in turn, begs a further question, “What is the destination point?” Some regard it as the start of college; others say it’s the midpoint; others say it’s the day of graduation. Actually, these are all true.
When investing, we realize that time horizons are an important component in planning for college. Having different timelines gives us some flexibility with diversification.
This connects directly with the “don’t put all your eggs in one basket” principle. From an investment standpoint, don’t rely on just one strategy or one investment vehicle. Diversification reduces risk, and the fact that we can save with multiple endpoints in mind opens up more opportunities.
What are some of the college-funding baskets you can use?
- 529 Plans (qualified state tuition programs)
- Roth IRA’s
- Coverdell ESA’s (education IRA’s)
- UGMA or UTMA Accounts
- Stock Market/Mutual funds
- EE Savings Bond
- Cash Value Life Insurance
- Home Mortgage Loans
- Savings Accounts
The good news is that there are many options. It may appear daunting, but a good financial advisor can help navigate the best path for YOU—considering not only the various vehicles, time horizons, and tax implications of saving but also your family’s unique journey with its own circumstances and preferences.
My Own Story – No Silver Bullet
I was one of those parents who had trouble deciding which funding vehicle was best. The double whammy was, I also faced the dilemma of having a son AND daughter with overlapping college experiences for a total of six years. Not ideal!
I designed a plan using a variety of options available following the diversification principle. Like many of you, I wasn’t entirely sure what the “best” strategy was. And that’s the kicker. There is no silver bullet. It’s about what works for you; it depends on your unique family and financial life. And this is where a solid financial advisor steeped in the college planning process can be invaluable.
Fast forward: Both kids were away at college when 9/11 occurred. I had paid both tuitions with mutual funds a month earlier, so I had sold high. A combination of scholarships, grants, and savings accounts provided peace of mind for the “short term horizon.”
Using Life Insurance to Pay for College
The biggest and best surprise was the tax-free cash value life insurance policies. The cash values continued to grow because they were NOT correlated to the market. Since the insurance was with a mutual company, it also earned dividends. Even though dividends are not guaranteed, they did pay higher than expected. The other nice thing about tapping into a life insurance policy is that it does not count against your potential for financial aid like a 529 Plan or brokerage account would.
That being said, this option is not the right fit for everyone—it takes a while to see some serious earnings (it’s definitely NOT a short-term funding option), it can be costly to maintain, and there can be confusing withdrawal fees and policy loan fine print. You really have to do your research, find an advisor you trust, and know exactly what you are purchasing!
Unlike a 529 Plan or Coverdell ESA, life insurance is not thought of as a primary funding mechanism for college. It is, however, a versatile basket that is not tied to the market and may be used—with the help of a trusted financial advisor—to help solve the college funding conundrum.
Say, for example, that the market dips right at the most inopportune time. Your 529 plan is
Ultimately, begin with the end in mind and don’t get tunnel vision on one basket. Build in a variety of funding options with different time horizons to maximize and plan for whatever contingency life throws your way!
Remember, there is no silver bullet. Ideally, you created (or will create) a long-term financial plan with a combination of strategies when your kids were/are young. The key word here is ideally.
Let’s talk realistically for a second. Many of us are caught up in the struggles of our day-to-day lives. We are busy focusing on the immediate well-being of our families and our jobs. We spend much of our time working, taking care of our kids, and trudging through ordinary day-to-day tasks. We also spend our time growing our careers, strengthening our personal relationships, maintaining (or at least trying) to maintain our emotional and physical health, supporting our communities, and cultivating our talents. In all the time spent doing these things, many of us don’t put together a sound financial plan until it’s late in the game and the specter of college looms large and leering.
But here’s the truth: It’s never too late in the game. There are many steps that you can take to make college more affordable in the final hour, so to speak. And this is before resorting to student loans. All of these steps have a common theme: if you want to avoid or minimize student loans, make someone else pay for your college.
Last Resort: Student Loans
If you need a longer time horizon for your money to work, you need to get creative with your approach. You and your student might take out loans to help assuage college costs while your investments build. Maybe you start a 529 Plan a little late in the game; that 529 Plan can now be used to pay off up to $10,000 in student loans now. Perhaps you could contractually agree that if your child finishes in four years with an agreed-upon GPA, you will pay all or a portion of the loan upon graduation.
Remember, if you do take out loans, the general rule of thumb is to not take out any more than the estimated starting salary of your student when they graduate. It’s a good idea to lowball the estimated salary. Do not take out loans until you have a game plan in place for the debt you are taking on. A college degree is valuable for being competitive in the workforce and opens many doors, but remember that a significant amount of debt can really cripple your ability to live the life that you want.
CFC Texas – Southlake Team