My College Tuition Experience

The student loan debt crisis is getting worse, not better. The current debt level is $1.5 trillion, and since 2003 it has increased 522% while inflation has risen 42%.  A child born today can expect to pay $655,000 in tuition to attend a private college or $323,000 for a public school.[1]

My daughter recently graduated from a private college in Texas, and, thankfully, we did not use student loans. Shortly after she was born, I opened a Uniform Transfers to Minors Accounts (UTMA) and transferred shares of Philip Morris to seed her account.

When my wife and I started saving for her college, we didn’t have the financial resources to contribute significant amounts of money, so we did what we could with what we had. We added $25 here and there, and when we were able to add more, we did. Her great-grandfather purchased a bond for her account, and her grandparents helped with supplies and books while attending college.

We started investing in her account during the late ‘90s, before one of the worst decades on record for common stocks. During the tech-wreck from 2000 to 2003, stocks fell 47%, so I sold the bond and added more stock. The asset allocation in her account for most of her pre-college years was 100% stocks. We owned JP Morgan, Disney, Pepsi, Apple, Amazon, and Google, to name a few.

When the market fell, I used it as an opportunity to buy great companies at discounted prices. A few years later, during the Great Recession, when stocks fell 53%, I added more companies. I bought the dip at every opportunity. During the first ten years of her life, the S&P 500 had a negative return; however, the next ten were much better, and the S&P 500 returned 338% from when we first started investing for her college career.

After I opened her investment account, I created a spreadsheet to track various colleges from around the country. The original list included fifty different schools, some private, some public. I updated the list annually to get an idea of what it was going to cost me to send my daughter to college. The figures were overwhelming and alarming, but we continued to save and invest.

As she got older, I culled the list. During her junior year of high school, it was cut to five, before she settled on her final choice. In my research, I noticed the smaller the school, the more beautiful the landscaping, the more expensive the tuition. I attended the University of San Diego, and my friends and I joked there were more gardeners than professors on campus.

When she was ready to attend college, I sold enough stocks to cover tuition, room, and board for one year. As we paid her expenses, I would sell more stock to replenish her cash balance. Thankfully, through the power of compounding and a rising stock market, her account kept a steady level, despite the withdrawals.

As I mentioned, when we started saving for college, we weren’t in a great financial position, but we were determined to pay for her tuition. We knew most of the inputs needed to figure out how much to save. For example, when she was born, we knew we were going to need a pile of money when she turned 18, and my spreadsheet allowed us to track the cost of fifty different colleges. As a result, we knew when and how much she would need, so it was an easy calculation.

Here are a few suggestions to help you and your family save for college.

  1. Take an inventory of your financial assets. How much money do you have in checking or savings accounts? Do you own any stocks, bonds, or mutual funds? Does your company offer an employee stock purchase plan (ESSP)? These are assets you can use to fund your child’s account.
  2. Open a 529 education account. The 529 account allows your money to grow tax-free. If you use the money for tuition and other college expenses, the distributions are also tax-free. The funds in a 529 account are invested in various mutual funds.
  3. If you want to purchase individual stocks or bonds, open a Uniform Transfer to Minor’s Account. The money you deposit into this account is considered an irrevocable gift to your child, so if they decide not to go to college and buy a Corvette instead, there’s not much you can do to stop them.
  4. Identify a few colleges and start tracking their expenses. Several websites will help you find the cost of most colleges, and some college websites will also have a tuition calculator.
  5. After identifying the school and cost, start investing. Set up an automatic draft so you can invest monthly to take advantage of the long-term compounding of the stock market.
  6. If the cost of attending a four-year university is too expensive, consider a community college. The tuition for a community college is about a third less than a public college.[2] After a year or two, you can transfer to a university.
  7. Work with a Certified Financial Planner® to help you formulate a plan for paying for college.

Unfortunately, the rate of inflation for tuition is growing at more than 7% annually.[3] At 7%, the cost of college will double every ten years – a sobering thought, so you must own stocks to help you keep up with the sharp rise in the price of tuition.

Regardless of your financial situation, saving any amount toward college will allow you to borrow less.

An investment in knowledge pays the best interest. ~ Ben Franklin.

January 26, 2020

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] Money Guide Pro College Cost Calculator

[2] https://www.affordablecolleges.com/rankings/community-colleges/, website accessed January 25, 2020.

[3] https://www.edvisors.com/plan-for-college/saving-for-college/tuition-inflation/, website accessed January 25, 2020.

Morehouse College

The graduating class of Morehouse College received an unexpected gift from their commencement speaker.  Mr. Robert F. Smith offered to forgive all the student loans for the class of 2019. Mr. Smith is a billionaire, philanthropist, investor, and fellow Austinite who announced his generous offer to the students this past Sunday. He said, “My family is going to create a grant to eliminate your student loans!”

The announced figure was $40 million. There are about 400 men graduating from Morehouse College so the average debt per student is $100,000. Quite an offer.

The beauty of his gift is that he can watch these young men bear fruit. He will witness firsthand how it will multiply many times over for generations to come. He added, “Now, I know my class will make sure they pay this forward.”

Individuals often wait until they die to give their money away for fear of it running out while they’re still living. Is one strategy better than the other? It’s a personal choice, of course, but giving your money away while you’re alive will allow you to observe the joy of helping others.

Do not withhold good from those to whom it is due, when it is in your power to do it. ~ Proverbs 3:27.

Are you blessed with financial resources? If so, here are a few ways you can help others.

Loan Forgiveness. You might not have $40 million sitting in your bank account but if someone owes you money, you can forgive their debt. A generous offer to those in debt, for sure. However, let them know it will likely be reported as taxable income. For example, if someone owes you $100,000 and you forgive their note, they’ll owe taxes on this amount.

At the end of every seven years you must cancel debts.” ~ Deuteronomy 15:1-2.

Private Annuity. Do you want to help your alma mater in other ways besides paying off the entire debt for this year’s graduating class? A private annuity may be an option. It will allow you to donate appreciated property like real estate or equities in exchange for an income stream. Let’s say you own a $500,000 piece of property with a low-cost basis. If you donate the land to the school, they will send you monthly income for a certain period. In addition to the fixed income, you’ll receive a tax deduction for the fair market value of your land.

Charitable Remainder Trust. This trust, like the private annuity, works well with appreciated assets. When you transfer assets to the trust, you’ll be able to sell them and diversify your holdings while avoiding a capital gains tax. Let’s assume you own $1 million worth of Amazon stock – your only investment. After the shares are transferred to the trust, you’ll be able to sell the stock, buy new investments, receive monthly income, avoid the capital gains tax and get a tax deduction. The charity will receive your assets after you die, thus the term “remainder.”

Donor Advised Fund. Establishing a Donor Advised Fund (DAF) will allow you to contribute cash or securities to your account and then distribute your donations over time and as you see fit. If you’re not sure who should receive your gifts, this is an excellent vehicle because you can bunch, or consolidate, your donations to receive a tax deduction and defer your distributions. The contributions are irrevocable, but you’ll be able to invest the assets inside the fund allowing you to control your investments and distributions.

Direct Gift. If you know the who, what, when and why for your donation, then a direct gift makes sense. If you want to give $100,000 to your favorite charity, you can create a direct link to the institution and bypass setting up a new account, trust or foundation. You’ll be able to deduct the fair market value of your donation.

Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this,” says the Lord Almighty, “and see if I will not throw open the floodgates of heaven and pour out so much blessing that there will not be room enough to store it. ~ Malachi 3:10

Mr. Smith’s gift is breathtaking and monumental. It will allow these young men to hit the ground running unencumbered by debt with an opportunity to make an impact from day one. Morehouse College has some notable alumni like Martin Luther King, Jr., Edwin Moses, Spike Lee, Samuel L. Jackson and Herman Cain. Who knows, maybe a few men from the class of ’19 will join these legendary graduates as a result of their good deeds and works.

Et Facta Est Lux (And there was light) ~ Morehouse College Motto

May 20, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.