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College Funding: Make Sure the Kids Are Fit Too

Time to do something about the ever-famous college fund. Many of you have been wringing your hands while we walked through four Baby Steps and have not saved so much as a dime for those little cherubs. Some people in our culture have lost their minds about college education. We need to examine our culture’s value system on the college issue. We have sold our young people so hard and so long on college that we have begun to accept some myths about college degrees. College degrees do not ensure jobs. College degrees certainly don’t ensure success. College degrees do not ensure wealth. College degrees only prove that someone has successfully passed a series of tests.

Because we have turned a college degree into some kind of “genie in a bottle” formula to help us magically win at life, we go to amazingly stupid extremes to get one. I have been a millionaire starting with nothing two times before I was forty, and I attribute 15 percent of that to college knowledge and 0 percent to the degree. The book Emotional Intelligence reported a similar finding. In studying successful people, the author discovered that 15 percent of success could be attributed to training and education, while 85 percent was attributed to attitude, perseverance, diligence, and vision. College is important— very important—but it is not the answer to all your kids’ problems. I will be so bold as to say college isn’t even a need; it is a want. It isn’t a necessity; it is a luxury. This luxury is one of the first on my list, but not before retirement, not before an emergency fund, and certainly not as a reason to go into debt.

Do some research on the cost of attending college. In some areas of study and in a very few careers, where you graduate from will matter, but in most it won’t. Pedigree means less and less in our work culture today. How can you justify going into debt $75,000 for a degree when you could have gone to a state school and paid for it out of your pocket debt-free? You can’t.

The first rule of college is: pay cash. The second rule is: if you have the cash or the scholarship, go. A couple of years ago, I met with the dean of the college of business from the university where I graduated. At that time, the average college student graduated with about $15,000 in student-loan debt after spending three of four years in an apartment, not the dorm, and eating off-campus, not on the meal plan. The average student paid $5,000 more per year to live and eat off-campus than to live in the dorm and eat cafeteria food. The student loans that they “had to have” or they wouldn’t be able to go to college weren’t for college at all. The student loans, on average, paid for an off-campus standard of living, and no debt was needed to get the degree, only to look good while getting the degree.

Student loans are a cancer. Once you have them, you can’t get rid of them. Not true! If you’ve planned your savings goals and don’t have much room in the budget for college, don’t panic. In past generations, students lived with relatives, slept in dorms, ate cafeteria food, and endured other hardships to get a degree. Now, after spending pages harping on mind-set, we can set some reasonable, attainable goals for saving for college.

Baby Step Five: Save for College

Virtually everyone thinks that saving for college is important; however, hardly anyone saves money for their kids’ college education. Money magazine and CBS Market Watch both quote the alarming statistic that 39 percent of Americans with kids don’t save a dime toward college. According to a 2008 study by SallieMae and Gallup, only 9 percent of families use college savings funds like ESAs and 529 plans. That means 91 percent have saved nothing or close to nothing! On the other hand, by the time you get here in the Baby Steps, you’ll have a strong foundation and money to save. If you don’t have children, or your kids are grown and gone, you will simply skip this step. For everyone else, a college fund is a necessity. And, if you do what I say, when you do start a college fund, you won’t end up raiding it.

College tuition goes up faster than regular inflation. Inflation of goods and services averages about 4 percent per year, while tuition inflation averages about 8 percent per year. When you save for college, you have to make at least 8 percent per year to keep up with the increases. Baby life insurance, like Gerber or other Whole Life for babies to save for college, is a joke, averaging less than a 2 percent return. Savings bonds won’t work either (sorry, Grandma!) because they average about 5 percent. Most states now offer prepaid college tuition, but remember that when you prepay anything, you simply break even with inflation on that item. If tuition goes up 8 percent a year and you prepay it, you make 8 percent on your money. That is not too bad, but keep in mind that a decent growth-stock mutual fund will average over 12 percent when invested long-term. Let’s do Baby Step Five the right way.

I suggest funding college, or at least the first step of college, with an Educational Savings Account (ESA), funded in a growth-stock mutual fund. The Educational Savings Account, nicknamed the Education IRA, grows tax-free when used for higher education. If you invest $2,000 a year from birth to age eighteen in prepaid tuition, that would purchase about $72,000 in tuition, but through an ESA in mutual funds averaging 12 percent, you would have $126,000 tax-free. The ESA currently allows you to invest $2,000 per year, per child, if your household income is under $220,000 per year. If you start investing early, your child can go to virtually any college if you save $166.67 per month ($2,000/year). For most of you, Baby Step Five is handled if you start an ESA fully funded and your child is under eight.

If your children are older, or you have aspirations of expensive schools, graduate school, or PhD programs that you pay for, you will have to save more than the ESA will allow. I would still start with the ESA if the income limits don’t keep you out.

What if you have only a couple of years and will not be able to save much because you started your Total Money Makeover later in life? First, plan on your child attending somewhere that is cheaper, living on campus, and eating the cafeteria food. You must get creative and resourceful. Look into companies that have work-study programs. Many companies offer to pay for school and have struck tuition deals with local colleges to attract a labor force. UPS, for instance, has a program in many cities where you can work twenty hours per week sorting boxes at night, and they will pay your tuition for school during the day. The military isn’t for everyone, but a young man who used to work for me got a free college education by serving four years in the army. If full-time military service isn’t for you, check out the National Guard.

Take a high-rejection, high-paying summer sales job. There are countless stories of young people selling books or participating in similar programs to get through school. Some of these young guerrilla-combat salespeople get more of an education in the summer trenches than they do in marketing class. A friend of mine made $40,000 selling in one summer.

If you already have the student loans or don’t want to get a loan in the first place, look into the “under-served areas” programs. The government will pay for school or pay off your student loans if you will go to work in an underserved area. These areas are typically rural or inner-city areas. Most of these programs are for law and medicine.

Probably my favorite method of funding school, other than saving for it, is scholarships. There are hundreds of millions of dollars in scholarships given out every year. These scholarships are not academic or athletic scholarships either. They are of small-to medium-sized dollar amounts from organizations like community clubs. The Rotary Club, the Lions Club, or the Jaycees many times have $250 or $500 per year they award to some good young citizen.

The lists of these scholarships can be bought online, and there are even a few software programs you can purchase. Denise, a listener to my show, took my advice, bought one of the software programs, and worked the system. She spent the whole summer filling out applications and writing essays. She literally applied for 1,000 scholarships. Denise was turned down by 970, but she got 30, and those 30 scholarships paid her $38,000. She went to school for free while her next-door neighbor sat and whined that no money was available for school and eventually got a student loan.

If you walk your way up these Baby Steps, you can send your kids to school without debt. Even if you start late, perseverance and resourcefulness can get them through school.