Money Matters

How to Pay for Your Kids College Without Saving For It

By : Phillip Washington |

My first child was born a little over 6 years ago.  It was around that time, I began really thinking about the kind of lifestyle I wanted my family to have (Since then, we added another kid to the mix…”Jesus take the wheel”).  My wife and I discussed the type of education we wanted for our kids, what area of town we wanted to raise our family, experiences we wanted them to have, and what values we wanted to instill in them.  I also started projecting out the cost of paying for college, and almost pissed my pants.


I remembered thinking, “How in the world are we going to be able to pay off our student loans, car loans and mortgage, and still be able to make sure our kids don’t start off in debt like we did?  And even if we could figure out how to do that, there was no way I could see us having a comfortable retirement at an age where we would still be able to enjoy ourselves.  I love my kids, but dang,   am I really willing to give up our financial freedom to make sure they would be financially comfortable early in life?”  If push came to shove, I would because I love my boys, and I want to set them up to be successful.  Luckily, I don’t have to choose.


The beauty of being in the business I’m in, is I get to talk with financially successful people all the time.  I often pick their brains on strategies they used to solve tough financial problems.  I learned this particular strategy from another wealth manager at a planning ideas brainstorming session.


(I made up the details around this case study.  This is not information I pulled from any specific client or person I’ve worked with.  However, it’s a very common client profile, and I’ve been able to help many families implement this strategy.)


Case study details:


Married couple; Age 32


Two kids; Age 6 and 2


Income: $10,000 per month


Monthly debt payments for student loans, car loans and mortgage: $3,400 per month


Amount they can currently save: $600 per month (Outside of what they are putting in their company 401(k) to get their match).


(To keep this case study simple, I’m not going to project inflation or salary and savings increases.  I’m not going get into other assets they may have.  I can model this out in my sophisticated planning software, but only financial geeks like me would enjoy reading about that case study.  Just stay focused on the big picture idea.)



Take $300 per month of the monthly money they can save, and save it.

Not in a college fund where you can only use it for college expenses without being penalized.  Set up a regular brokerage account with a conservative or moderate investment allocation (depending on their risk tolerance and total financial picture).  That money is accessible without penalties to pay for college, retirement or whatever.  They give up the tax benefits college savings plans and retirement plans provide, but gain flexibility.


Twelve years from now (when their first child goes to college), assuming a 7% average annual return, they would have about $64,000 saved up.


Take the other $300 per month, and put it towards their automated debt elimination strategy (Dave Ramsey calls it the debt snowball).


It’s not uncommon for someone with the debt payments in this example to be completely out of debt in 8 to 10 years (I ran the numbers assuming different amounts owed with those payments to test it.  Again, I’m wanting keep this as simple as I can.  You can download the sheet by clicking the link above and play with different numbers yourself).  Let’s assume they are debt free in 10 years.  That means, this couple now has about $3,700 a month freed up at age 42.  That’s about $44,000 a year.


If they add that $44,000 a year to their brokerage account for 2 years, instead of the account only having $64,000 in year 12, it would now have around $152,000 when their first child starts college.




Now here’s the best part. They don’t actually have to use the money save up in the brokerage account for college.  Or, they can.  It’s up to them and really based on what else is going on in their life.  What if one or both of their kids don’t go to college or get a scholarship?  They could use their freed up cash-flow to help their child start a business, or if they get a scholarship, to buy them their first home. Then, charge their roommates rent…money, money, money, monayyy!  The point is, they have options and can be flexible.


Let’s assume they pay for college with their freed up cash-flow (the $44,000).  The average cost of a 4 year public college is about $24,000 a year (Room, board and tuition).  That leaves $20,000 to supercharge their brokerage account balance. (They could put that money into their 401(k) and other retirement accounts, but I’m again, just keeping it simple.  Everything depends on their goals and priorities at that time.)  Once the kids are out of the college, they plan to use the $24,000 a year they were putting towards college to start traveling, enjoying freedom as empty nesters, and stalking kids who move out away with their grandkids.


Adding $20,000 a year to the $152,000 brokerage account balance from age 42 to age 65 assuming at 7% average annual rate of return would grow their account to about $1,789,283.  This is money that will be supplemental to whatever they were saving in their 401(k)s to get their employer match.  My case study also doesn’t include any outside businesses they may start to provide extra income to possibly retire early (See “A simple and strategic plan to escape your 9 to 5”)

That’s it.  Pretty simple.  Not a bad financial outcome for a family with limited resources.  It just takes careful planning, strategic thinking, and the ability to think outside the box (or have a good wealth manager who does).

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