By any standard, college has become outrageously expensive.
Last year, the average cost for a single year of schooling was $14,210 for in-state public universities, and a gargantuan $26,100 for private colleges.
One year! Imagine multiplying that by four (or five, if your kid’s on the “super senior” track). And then multiply for each of your children.
That’s $313,200 if you have three kids going to private colleges. Who has that kind of money lying around?
Tuition and other costs have also risen dramatically over the last few decades. For a quick dose of depression, check out this graph (and yes, it’s adjusted for inflation):
So, what’s a parent to do? How can you take some of the sting out of tuition?
Here are nine “tuition hacks” to slim your college bills; some require investing years in advance, others are on-the-fly discounts and programs you or your kids can apply for. But all will help you reach the finish line, watching your children walk the stage with the world’s most expensive piece of paper.
The Lesser-Known Benefits of a 529 Plan
Let’s start conventional, shall we?
You’ve probably heard of 529 plans. In a sentence, they’re tax-advantaged accounts where you can save for college. They’re a bit like an IRA for college savings, rather than retirement savings.
“You get a small state income tax deduction, the appreciation is tax-free when used on education,” explains Jim Wang of WalletHacks.com. Some states even offer a tax credit, rather than a tax deduction!
Here are a few of the lesser-known benefits of a 529 plan:
- You can own 529 accounts in multiple states. You don’t have to stick with one state – you can own multiple accounts across a range of states, and never combine them if you prefer.
- Your friends and family can contribute, too. While they may or may not see tax benefits depending on their state, friends and family members can contribute toward your 529 plan. For many practically-minded folks, or people who don’t want to be bothered to follow the latest toy fad, this is a great gift option.
- You can change beneficiaries. Did your first child get a full ride at Stanford, based on their brilliant poetry? No problem. You can change the beneficiary to your second child, or your grandchild, or niece or nephew. Or you can cancel the account entirely (although you may owe some taxes on the money).
- You can contribute even if you don’t have kids yet. This is huge. Jim Wang explains further: “Even if you don’t have kids, you can make yourself the beneficiary, contribute, and then change the beneficiary if/when you have kids (or when you need to use the money for your kids).”
Get a $2,500 Tax Credit
Tax credits are awesome. Unlike tax deductions (which come off your taxable income), tax credits subtract directly from your final tax bill!
Parents paying for their kids’ college education can utilize the American Opportunity Tax Credit, which entitles them to knock up to $2,500 of their tax bill. For each student!
There is an income limit however. Parents’ modified adjusted gross income (say that five times fast) can be no more than $90,000 for single filers, and $180,000 for couples filing jointly.
This is a rental income blog, after all! But to illustrate this point, here’s a fresh perspective from family finance guru Greg Johnson of ClubThrifty.com:
“One way we’re planning to pay for our children’s college education is through the money we earn from our two rental properties. Although we also contribute to their 529 college savings accounts, our plan has always been to use part of the rental income to help pay for their college.
“Even though our kids are still a decade away from going to college, we’ll have both our rental properties paid off within the next 24 months.”
Think about it: say you put down $15,000 on a rental property that cashflows $300/month. That’s $3,600/year toward your tuition. You buy four properties at those numbers and your in-state university tuition is paid in full!
And unlike bonds or note investing, rentals are the gift that keeps on giving. What happens after Junior walks across the stage with that expensive piece of paper?
“Then, we’ll use that rental income to help fund our retirement!”
Free Mini-Course: Passive Income from Rentals
Pay Off Your Mortgage
Rental properties come with all kinds of advantages, but they’re not the only way real estate can help your budget.
“An overlooked and low-risk strategy is to put extra money towards your mortgage so that it is completely paid off by the time your children start school,” offers Certified Financial Planner Matt Becker of MomandDadMoney.com. “You get a guaranteed return at the interest rate of your mortgage, and paying it off frees up significant cash flow that can be used towards college expenses or any other savings needs you have at the time.”
If college costs you an extra $18,000/year, that comes to $1,500/month. Which is curiously close to the median U.S. mortgage payment of $1,494. Coincidence? Yeah actually it is, but you get the idea.
The overwhelming majority of millionaires own real estate, and the ability to own your housing free-and-clear is a huge reason why.
Make Your Kids Work, Gosh Darnit!
“When I was your age, I worked five jobs, volunteered at the homeless gerbil shelter, walked to school uphill both ways, and still managed to graduate in three years!”
Or something like that.
But your kids should have some skin in the game, for their college costs. If they have to work on the side to chip in, they’ll be far more likely to, you know, actually go to class.
If they get straight As, you can always reimburse them for their portion of the semester. A little extra incentive never hurts, right?
Apply for Private Scholarships
Sure, colleges offer scholarships. But guess what? They’re not the only ones.
There are tens of thousands of private scholarships available, for every conceivable reason. Many revolve around financial need of course, and there are merit scholarships… but what about all the arcane scholarships out there you’ve never heard about? If your daughter’s into singing glee-club-style while performing horseback gymnastics, there’s probably a scholarship for that.
The challenge, of course, is finding them. Scope out Scholly for some help, and you can also get free scholarship mentoring and help through NextGenVest.
Every little bit helps, and if you add up enough $500 and $1,000 private scholarships, you’ll suddenly find college far more affordable.
Along similar lines, you can apply for grants. Grants are similar to scholarships, but are usually provided by the state or federal government, and/or by the college itself.
Typically grants are given based on financial need. One option are Federal Pell Grants, but they cap family income at $30,000. States vary however; here’s a list of where you can view various state standards for financial aid grants.
Negotiate for More Financial Aid
If the college didn’t offer you much (or anything) for financial aid, that’s not the end of it.
It’s the beginning.
First, have your child write a formal appeal letter. Lather on some extra “why I’m such a good fit for this school.” Don’t be afraid to use the classic comparison shopper line “My second-choice school offered me $_______, but I’d rather go to your school.”
Keep in mind the FAFSA application doesn’t necessarily include all of your expenses, and it’s often a year out of date, since it’s based on the prior year. For example, medical bills aren’t taken into account on FAFSA, but they’re very real for you. (They’re the other expense that’s skyrocketing as fast as college tuition!)
Roth IRA to the Rescue (Again)
IRAs are awesome – you can even use your retirement accounts to finance rental properties!
And they work for retirement, too (or so we’re told).
Here’s Matt Becker again on how to use Roth IRAs for college tuition:
“A Roth IRA can be a great way to prioritize retirement while also keeping the money available for college.
“You can withdraw up to the amount you’ve contributed to your Roth IRA at any time, and for any reason without tax or penalty. And as long as the account has been open for at least five years, you can also withdraw the earnings penalty-free if the money is used for higher education.
“Of course, if you don’t end up needing all of the money for college, you can simply keep it in the Roth IRA and use it tax-free in retirement.”
If you’re worried about the downsides of using your Roth IRA for college tuition, Matt covers those as well here.
Start Saving Your Pennies…
No matter how you plan to pay for college, the earlier (and more!) you can save, the better.
How close can you get to living on half your income, so you can invest the rest? How much passive income can you add between now and when you’ll need to start shelling out for tuition?
If you really want to boost the throttle on your savings, try house hacking.
Investing for high returns is great, but only to the extent you actually save to invest. No, really – here’s one firm’s breakdown of the math showing that savings rate is far more important for your bottom line than ROI. And they even gave investments 30 years to compound returns!
Start saving now, so your kids can go to college, go out and make a bunch of money, and then take care of you in your old age.
How are you planning to pay for skyrocketing tuition costs? Have any clever ideas? Share them so our kids don’t grow up to be worthless bums!
Awesome article. My kids are still young, but my wife and I were just talking about how we need to start putting together a plan for college. I do think they should have some skin in the game, but my parents paid for my college (back in the stone age when it was “affordable”), and I want to help our kids too.
Thanks Greg! And I hear ya about your kids having skin in the game, that’s how I intend to handle it as well.
Our kids are in their teenage years, so this is definitely looming over us! Thanks for covering this, it’s a big part of why we’re investing in rentals, and it’s great to see some more creative ideas.
Glad you found it useful Cara!
A key caveat with the 529 plans — the money you spend from the 529 can’t count toward the $2,500 American Opportunity Tax Credit. That would be double-dipping.
To max out your tax credits:
First, plan to pay $4,000 out of pocket for tuition each year. That will get you the full $2,500 AOTC. Then you can pay the remainder from the 529.
Another quirk: Housing costs don’t apply to the AOTC, so if they’re staying in a dorm or off-campus housing, that doesn’t help get you the $2,500 tax break. BUT, housing expenses ARE valid educational expenses to pay from a 529 account, up to a point.
Make sure you plan accordingly, otherwise you’ll find out in April that you screwed up your tax breaks back in September when fall semester started and you can’t go back and fix it!
Great tips! Thanks for sharing some of these quirks, very helpful.
Excellent article. This is something we’ve been thinking about more and more. Glad you covered this, ties in with the main reason people invest in real estate: to have more opportunities for their family.
Great article Brian!
One other idea to consider is Running Start programs. Basically the federal government pays for high school students to take college courses, and the credits are usually transferable to whatever college they end up in.
Some excellent ideas in here that I’d never thought of! Great article, and I’m particularly going to try using income from rental properties to help cover some of my daughter’s tuition expenses.
Thanks Kiera, glad you found some of the ideas useful!
With college so expensive nowadays, you HAVE to get creative. Some great tips on here, going to try buying a rental with my daughter as a collaborative project to help cover costs!
I hear you Mayce – it’s gotten outrageously expensive. Definitely need to get creative, and use multiple tactics to make it affordable!
I love these! Not enough people think outside the box for ways to pay for college tuition. And real estate is a great avenue to help cover the costs.
Thanks Mellissa, appreciate the comment, and I (of course) agree!
It’s gonna be tough to pay for college tuition so I am starting to build my passive income through rental as you mention & I’m gonna take the other suggestions too!
Yeah college tuition has gotten crazy expensive. Raging inflation certainly isn’t helping either…