Our education system in the United States is rapidly changing. On this podcast, Karl welcomes guest Oliver Norman, CFP to discuss how we should be thinking about education for our kids and grandkids and the best ways to fund it.
Karl Eggerss: Good morning everybody. Welcome to the podcast, Karl Eggerss here. Thanks for joining us. As usual, just a reminder of the show’s brought to you by Covenant, Lifestyle. Legacy Philanthropy. Our telephone number, (210) 526-0057. The website, creatingricherlives.com, creatingricherlives.com. We have a guest today. It will be Oliver Norman. To you and me, it is Oli, you can call him Oli as well. We’re going to talk about educational planning, whether it’s you doing educational planning for yourself, for a child, for a grandchild, maybe for a great-grandchild, we’re going to run through some of the items that you should be considering, some ways to do it, and also just some considerations in terms of college. And some of the things we’ll be talking about really come from the concept of a journalist Ron Lieber, who had a new book out called, The Price You Pay for College.
And it’s an interesting book, and so we’re going to be talking about some of those concepts in here, in this interview with Oli in just a few minutes. But before we do that, want to give a brief recap of really what moved the market this week, because it was a fascinating week, especially if you’re watching the bond market and while that’s typically fairly boring, it did come into play into the equity markets or the stock market. So some things that I saw this week, first off was the Federal Reserve chair person, Jay Powell, emphasizing that the fed’s going to really back the economy in terms of not being too quick to raise interest rates, and they’re really going to be there to make sure that the economy continues to progress, and so they’re committed to keeping interest rates low and policy easy for some time, which is really what the investors on Wall Street want to hear.
And the market wants to hear that as well, and so that that was some of the big news this week. We also saw GameStop, yes it’s back, and some of the stocks that we saw a month ago, going bonkers and having huge moves from volatility standpoint, we’re at it again this week and GameStop was no different, plenty of other companies in there doing the same thing and so again, there were some shakeups, there’s a lot of reasons why this could have been, people were trying to take cues from some heavy investors that would put out little signals on Twitter and places like that and read it, and they try to take these cues as almost like they’re playing a decoding game and they’re looking at what these people are saying, and they’re saying they made the symbol or made the statement, so that must mean they’re buying this particular stock, and so then they would try to front run it and to go jump on that particular stock.
So a lot of crazy frothiness, as I’ve been saying, I’ve been saying for months that I thought we were in a bubble, a specific bubble, not a bubble in the stock market, but certainly a lot of stocks, a lot of areas that were bubbles, and I still think they are primarily in the technology sector. There are some good deals in the technology sector, it’s not that we don’t own technology at Covenant for a lot of our clients, but you just have to be very careful, and we saw some of that vulnerability this week. And I think that may continue for a while, so watch that and also investor behavior, we’re seeing some still crazy erratic behavior, people that normally wouldn’t talk about stocks, I’m seeing them checking their phones and doing crazy trading again, very similar to 1999, except it was not necessarily on their phones as much back then, but very similar behavior just as if things are going to continue straight up forever, and that’s not healthy, and corrections typically come when you see that type of behavior.
So seeing some of that, but you also have another camp on the other end of the spectrum that is still climbing the wall of worry. That’s what the market’s doing, there’s a lot of people who still think the market’s going to crash, it’s got to come down, it doesn’t make any sense. And they’re sitting on the sidelines, they’d been out for the last several months, the market’s skyrocketed, and yet when it goes down for a day or two, they say, “See, it’s starting to go down,” but they’ve missed out on this big run. So again, we’re not trying to be in either camp, we’re trying to keep you invested in a prudent manner based on what you’re trying to do in life for you and your family period.
But I’m going to comment on things that I see out there, and we saw a massive rotation in February. And really it started in November, and now that the trading month of February is behind us, we’ve seen some big, big moves, and I’ll talk about those in just a minute before we get to our interview. The other couple of things I saw this week of course, we kind of had a flash crash in the bond market when interest rates on the 10-year Treasury spiked up over 1.5%. I mean, they went from like 1.4 to 1.6, which is a big move in a short timeframe. It caused the stock market to sell off, and we saw that really late in the week, some things bounce back on Friday, but we really saw a pretty sharp bond sell-off. So interest rates are starting to spook people, but I think around 1.5%, is a very interesting area for people to start buying bonds, and we saw that late Friday.
The 1.5% on a 10-year Treasury is very interesting because number one, it’s pretty much the area we were at prior to the COVID shut down, lockdown when rates just plummeted, right? So we’re kind of back to that, which makes sense. The economy’s recovering and it’s really undoing, the bond market’s undoing what had happened to rates during that time, so rates collapsed down to maybe 0.4% when things were at their worst, and now it’s working itself back up and look, the economy is continuing to recover, so it makes sense rates are going up, it’s just the speed at which they are going up, started to accelerate this week and it caused a little spooked stock traders, frankly. So that’s why we saw the stock market sell-off a little bit. The other thing is we saw the volatility index back above 30.
So those were your big items this week for the market. As we finish up with February here, we had some gigantic moves again, for the month of February, the markets were still up. I mean, we had, look, the Dow Jones is up about 3%, the Standard and Poor’s 500 up about 2.6%, but we saw small caps up 6%, value stocks up 6% measured by some ETFs out there. We saw big moves in those areas, but the biggest moves were things like energy up 22% for the month of February alone, a huge move. Airlines up 22%, we saw banks up 18% as a basket, oil up 17%, steel stocks up 12%, financials up 11%. So you saw some really big moves in the month of February, so this rotation that we’ve been talking about in the broad need out of the market has been very healthy.
And we’re trying to change over time, the last few months, our portfolios, our model portfolios as well to reflect the changes we see. And we started adding commodities and things like that. We started to broaden out in terms of small caps in value in emerging markets. All these things are a healthier stock market. The market has been stretched due for a pullback, but look, at the end of the day, this was not a big pullback this week. I mean, the Standard and Poor’s fell about 2.5% this week, small caps fell about three, and the Dow Jones fell 1.76. So these rates adjusting are causing a little bit of nervousness, but again, we haven’t seen a sell-off anywhere, close to even what we saw in October. So let’s continue to watch where rates are, I think they may be at a point right now where we may see that pause and money, come back into bonds.
All right, we’re going to transition into our interview today. And I’ve asked Oliver Norman, back on the podcast. You know him, you love him, and he is back. He is one of our wealth advisors in our Oklahoma City office. And oftentimes he brings us a wealth of knowledge. And I thought, you know what? Let’s bring him back on because today we’re going to talk, education. Education is extremely important, and many of you want to know what’s the best way to fund a child’s education. Maybe you’re funding a grandchild or even a great grandchild. And there’s lots of ways to do it, there’s lots of pros and cons of different avenues to fund education. And Oliver, you just had a brand new little bitty boy, so you’re thinking about this right now, and I understand that you did not name it Karl, is that correct?
Oliver Norman: He is not named Karl, we’ve actually named him Gregor Eggers, Norman. He’s affectionately known as egg man, which I believe was your nickname growing up. Right Karl?
Karl Eggerss: It is still my nickname around the office, yes. Amongst other things people call me. So I will tell you this Oli, I started both of my kids when they were a month old, as soon as they had a Social Security number, I was there doing a monthly contribution. Now, I chose a 529 plan. And we’re not going to necessarily jump straight to that, I’ll kind of get into why I chose that particular avenue, but let’s start off by just talking about the big picture. I mean, we’re primarily talking about young kids. We don’t know what they’re going to do, and so that’s the challenge, right? And back in the 70s and 80s, a lot of people used UTMA or UGMA accounts, which were [crosstalk 00:10:22] for transfers to minors act. The problem with those that I saw was that at 18 or 21, depending on the State, the money was theirs, this was not an educational account. This was just a gifting account. And I saw some really tragic things when you give a kid that much money with no strings attached.
Oliver Norman: Exactly. And whether it’s education or receiving a lump sum, like that, big decisions which is what to do. And also they’re taxable as well, that’s the other piece to them.
Karl Eggerss: Yeah, they used to be, they used to have, so much was tax-free then the next was at the kids bracket, then the next was the parents. And so they were a good avenue, but the tax savings were not worth the risk of what was going to happen to the money and ultimately the child, but then in the 90s, we started to get a lot of other options in terms of educational savings accounts.
Oliver Norman: That’s right. And Karl, if we just take a step back and just navigating the whole education piece is massive. I mean, even the difference between state and private in itself can be a six-figure number. And mean you multiply that by three kids, and the total cost of college could be, well, exceed a mortgage, for example. And these are the most complex and emotionally fraught financial decisions families will ever face. Because you just don’t know what you’re going pay, and that’s what makes this very, very difficult to navigate. And then you get into the whole financial aid programs and what do I have available to me, et cetera. So it’s a big minefield. And I will say as a resource, there’s a book
Oliver Norman: … book by Ron Lieber, The Price You Pay For College. It’s a fantastic book, and it really helps navigate some of these big issues.
One of the things which I like, which he says, is start with the elemental question. What is college actually for? Typically, it’s three things where the emphasis is. One, it’s all about the learning, grow and blow your own mind. Two, it’s a search for kinship. I don’t know about you, Karl, some of my best friends, I met in college. Then for other people, three, college is just a means to an end, getting a credential and getting a job. I know at least two of these were put to the test in this COVID environment.
So the main thing is, is there anyone who pays a five-figure sum needs to have an idea as to what they’re buying? That’s really what it’s about, and just trying to educate people in that area, and where do you derive value.
Karl Eggerss: Unlike you meeting your best friends in college, I met my best friends at Covenant, right here on this podcast. But that’s fine if you want to choose other people that you could deem your best friends.
Oliver Norman: I’m sure Justin was incredibly touched by that, Karl. Thank you.
Karl Eggerss: Yes. Yeah, I think you bring up a valid point, though, because we think about what are we going or sending our kids to college for? Is it to get an education, or is it to teach them life skills? Is it to have connections and friends and all of that? The answer is yes to all of those things.
I’m going through that right now. I have a freshman in college, out of state, and it is the networking for his particular field of study is huge. He’s at a school that is really built for what he wants to do, and so I’ve told him the connections you make there, you hit the ground running. Do not wait. Do not wait till your senior year. So that’s valuable, just as much as the education is.
Not only that, learning to live on your own and being resourceful when the tire goes flat, right? Instead of us going over there and changing it for them, you got to figure it out, and you got to manage the money as well.
Oliver Norman: That’s right, Karl. I mean, let’s just take, for example, if you could come out of college with a true mentor relationship with a university professor, there’s a value to that. Statistically speaking, you’re more likely to get that in a smaller class size than you are a large one.
For me, I think once you figure out what you have to pay, then you think about value. What is the degree from a college worth? Is it worth paying $50,000, $100,000, $150,000 extra? What’s the return on investment with that? Those are some of the things for me.
Because when you’re 17 years old, you’re navigating this in high school, and it’s one guidance counselor for every 430 students. That’s a stat, by the way. That’s nationwide. So good luck picking schools trying to figure that out where you’re going to get the most financial help. So it’s really important to educate yourself as best you can and put time and resources into making the best decisions possible.
Karl Eggerss: Yeah. When I was in school, usually you went and did your, quote unquote, basics your first two years. Then you would declare a major end of your sophomore year, and you would know what you wanted to do, and that was a decent timing.
Unfortunately, what I’m seeing now is kids pretty much have to go into college knowing what they want to do, and that’s pretty challenging. So for me, I think getting your kids some experience in internships when they’re in high school, if you have friends in other occupations, see if your friends will let them hang out with them for a day at their office to see what they do and offer that up to them.
I do that a lot. I’ve had tons and tons of high school seniors in my office that hang out for the day to determine, is this something that even interest me at all? Because, again, all you’re trying to do is funnel that down to something reasonable because I think our biggest fear is that you go spend $100,000, $150,000, and, unfortunately, they still don’t know what they want to do, they’re not interested in their degree. It’s either because mom or dad pushed them in a direction. So really understanding what’s the kid’s skillset, what are they interested in, and then what does the career path look like? So really helping them through this as much as possible before you get to college.
Oliver Norman: And Karl, thanks for giving away your secret sauce as to why you’re so down with the kids. That’s helpful. I mean, did you know what you wanted to do when you were in college, or when you went into applying for college?
Karl Eggerss: You know, a lot of people on the podcast know my story, but I basically started trading stocks at 14, so I certainly had an interest in that. Math was always a great subject for me. As opposed to the other ones, math was a very good subject. So when I went into school, I thought, “Well, I’ll be a math major because I’m good at math,” and I wanted to be a professional sports statistician.
Then I started doing some research on it, and it didn’t pay a bunch. And everybody kept saying, “Oh, you’re a math major? So you want to be a teacher?” and I thought, “Well, no, I don’t want to be a teacher,” even though I ended up kind of doing that as a career in some ways. But it took me about a semester to figure out, “Wait a second, I like numbers but I also liked the stock market” and landed on finance fairly early.
Sometimes we know only two people. I would rather have somebody that’s a great person, a hard worker that has a degree. They don’t have to have a specialized degree necessarily, depends on the field they’re going into, but I want that well-rounded great kid that is just very hungry, humble and smart.
Oliver Norman: Absolutely.
Karl Eggerss: I’d rather have that than some, pardon the frankness, but some snot-nosed kid, who’s got some degree from some great school that is expecting too much and thinks that they want to own the company when they come in.
So I do think getting a degree is important, but I think there’s a lot of other things that go along with that. As parents, we can teach our kids about how to communicate, how to manage their own money, how to discuss with adults kind of what they’re trying to do. Again, there’s ways to increase their chances of getting a good job than just having that piece of paper.
Oliver Norman: Exactly.
Karl Eggerss: So let’s transition from that. We know what we’re talking about and we’re trying to frame this, we’re talking about now funding that. Specifically, I would first say, correct me if I’m wrong, but if you, as a parent, don’t have a financial plan and understand if your own retirement’s taken care of, it’s pretty hard to sit there and stick money away for education.
Oliver Norman: Exactly. And Karl, you hit it right on the head. I mean, for me, there’s an element of, “Hey, you put your own oxygen mask on before you take care of your child.” I think that very much speaks to the point you’re making there.
Karl Eggerss: There’s some parents that are willing to work longer in order to pay for their kid’s college. There’s some parents that say, “No, you pay for it.” There’s other parents that say, “Let’s do this together. There’s scholarships, all of that,” but starting with the financial plan and then figuring out, “Okay, what do I want to contribute to my kid’s education?” So now we’ve done that. What should we be thinking of in terms of actual funding, the different options out there?
Oliver Norman: Yup. And, Karl, just to speak to your point, it’s so hard when you’re in your 20s, 30s, early 40s. There’s so many things just clambering for your attention, whether it’s “Am I putting enough away for retirement? Am I putting enough away from my kid’s college education? Do I have enough life insurance?” There are so many things that are clamoring for your money, and I understand that.
Two things. I would say, one, just get started with something, just do something because it’s very easy to get paralysis through analysis. Then in addition as well, know what you’re saving for. If you’re looking to save for your kid’s wedding or first car or first home, a 529 account may not be the best option for that. So know what the purpose is you’re saving for, so start there.
Then when we move on to, well, what would be an… Let’s just take the 529 plans. What is a 529 plan? A 529 plan is a savings vehicle that grows free from federal and state income taxes and federal taxes on the earnings on the account over time. When you take the money out, you don’t pay taxes, as long as you’re using the money for legitimate educational expenses. Many states, you can use the 529 plan for tuition charging elementary and secondary education as well. That’s what a 529 plan is.
Karl Eggerss: So it kind of works like a Roth-
Oliver Norman: Yep.
Karl Eggerss: … in terms of how it’s taxed. You’re using after-tax dollars to fund, but the growth is tax-free if withdrawn for appropriate purposes, being educational.
Oliver Norman: That’s right. And similar to the Roth, there’s penalties, and we’ll get to that. But yes, that’s a nice way to think of it.
But there are also different kinds of 529 plans and, broadly speaking, there’s two basic kinds. One, you have the prepaid plan where some states will allow you to pay for college tuition at a set price for any given year, but there are catches. Different states do the math differently.
Also they only cover schools in that state and one of the major things is, well, many people have no idea where they’re going to go to school. You can still get the money out, but you’ll get a modest rate. If you went outside of state, you can still get the money out, but you get a modest rate of interest and that’s a big catch. But it can be applicable for some state residents.
Karl Eggerss: Let me stop you there. You’re saying a prepaid tuition plan, but you said there’s different types of 529s, and you talked about a prepaid tuition plan.
Oliver Norman: That’s right.
Karl Eggerss: Explain the difference. Because in Texas, we have the Texas Tomorrow Fund, which was very popular in the mid-’90s or so, and then we have the 529s. Are you saying there’s something that’s a combination of both?
Oliver Norman: Okay. So under the 529 umbrella, you have the prepaid plan and then, which is the much most common one, you have the investment plan, and it looks just like a retirement plan. You decide how you invest. There are some administration fees. Some of these investment plans are either adviser-driven with higher fees and an adviser will manage them. Then there are others which are more just geared towards the everyday retail investor looking to do it themselves. That’s how you get the different types of the 529 plans.
Now, just on a side note, your state may or may not give you a state income tax break on that. So imagine two branches. One is the prepaid plan, and one is the investment plan.
Karl Eggerss: We know that there’s also different states’ 529. I think Fidelity uses a New Hampshire plan for their 529. That’s the one I chose way back in the day. Partially why I chose it, by the way, is because I had a credit card attached to it. So every time my rewards points were contributions to the 529, which accelerated, there was almost a matching type of plan.
But can you explain the 529 in terms of having different states? So if somebody from Texas or Oklahoma doesn’t necessarily have a 529 plan specific to that state,
Karl Eggerss: Correct.
Oliver Norman: For example, in Oklahoma, I speak to Oklahoma. I mean, we do have a state 529 plan, for example. But then there is also another 529 plan available as well, which is more advisor driven. So, the answer is, and you don’t have to just because I live in Oklahoma, it doesn’t mean to say I go and take the Oklahoma 529 plan. I can go to the New Hampshire 529 plan, for example. But here’s the thing, when you go and look for the 529 plans, here are some of the factors, one, do I get a state tax deduction? First of all, secondly, what investment options are available to me within that 529 plan? And third, what fees am I paying within that 529 plan? Because, regardless of the state, those are the factors that I want to be considering. And again Karl, I want to go back to the point which I made before, it’s very easy to have paralysis through analysis. There’s a whole range, it’s a very big world this is, but you do want to get started.
Karl Eggerss: And we’ll talk about other plans and we’re focused on the 529 because I think it’s my favorite, I think it’s probably Ollie’s favorite, but we’ll talk about other ones. But in terms of the 529, one of the nice features is that it’s not necessarily just for college and that’s a negative of prepaid tuition plans. So, 529s can be used for trade schools, they can be used for things other than college, as long as they’re for educational. And the other thing is, they can be transferred from one child to another.
So you have a rebellious child, unfortunately, that doesn’t want to do what you’ve saved that money for, you can transfer the balance to another child, another cousin. It’s pretty flexible within the family. In fact, a little pro tip is that for those that want to start saving for their own child, but don’t have a child yet, they can actually start a 529 for themselves and get the compounding started and then when they have a child, they can actually transfer it to that child. Now you run the risk of course, what if you can’t get pregnant, et cetera. But, that is a pretty cool little trick to get the compounding started even earlier.
Oliver Norman: That’s exactly. And Karl, it was 2017, they made some changes to the 529 plans to allow some of the money, some of the money, in some states to be used from K through 12 as well. So again, the breadth of these things is increasing.
Karl Eggerss: Yeah, private school is now included in there. And so they’re just flexible is the point. Let’s talk about also we’re thinking about people putting a hundred, $200 a month, $500 a month, whatever they’re doing, but let’s talk about the lump sum features of a 529. Because oftentimes I’ve seen grandparents take for an estate planning tool and getting some money out of their estate. They may fund a 529 and accelerate that a little bit. So you could put fairly large amounts into a 529 upfront.
Oliver Norman: That’s right. Five years worth of the annual exclusion for the funding amount, which can be a great potential savings for estate taxes. And also the maximum aggregate for a 529 plan amount is a very generous amount. It does vary by state, I believe it’s anywhere between 235,000 right up to 529,000, ironically. So yes, that’s very, very powerful there. The other question which I get asked a lot Karl is, can grandparents set up a 529 plan? Absolutely, yes. The other thing is as well, depending on family dynamics and it’s on a case by case basis, but it might be worthwhile letting the parents know that that’s what you’re planning on doing, and to what extent as well. Because so many times, I’m sure you’ve seen this Karl, the parents are saving and scrimping and saving aggressively, and then the child gets to age around 15 and then the grandparents announce, “Oh, by the way, we’re going to pick up the tab for any college education.” I was like, “Oh well, first of all, thank you. But that would’ve been so helpful for us to have known that.”
Karl Eggerss: Yeah, you and I have talked about that in the past on other subjects, but the transparency within a family, a lot of people are private, but sometimes that privacy can really backfire. And that’s one of those instances where it’s better to be transparent. I’ve got some clients that are grandparents, they open it and they put their child as the custodian on there. So, they’re funding it, but they’re letting the parent kind of run the show on it, which is a nice way to do it as well. But 529s a very flexible, I did mine age-based which for those of you that are in target date funds in your 401k, it gets more conservative as you get closer to college. I’m not a fan of target date funds for retirement because we don’t know what your situation is going to be then, but with college, you know you need the money at 18. And so, it automatically gets more and more conservative. Now, you can do it other ways as well, I just did it age based. So, it started ultra aggressive and worked its way down, getting more conservative as the child got older.
Oliver Norman: That’s a great point Karl. And again, another pro tip so to speak, make sure you understand that typically when a child becomes 18 and that’s how you can tell well, which one do I go for? Normally in the title of the fund that you pick, like the target based fund, it will say, let’s just say 2030. That’s the one where your child turns 18, for example, that’s the one which you may choose to go for. But all that to say is, I’ve seen this happen in 2008, people think oh my child’s 18, they’re going to be all in cash. Not necessarily the case, when you read the prospectus, there can still be some money there invested in equities and they weren’t absolved from that crash which we experienced. So, just to be careful, just make sure you check that out closer to the time.
Karl Eggerss: Before we give other options, give me kind of the negatives. What happens A, if you have an only child, let’s say there’s nobody else to transfer the balance to, child’s not going to college and you just need to take the money out, that’s one. And then the second question, which is similar, let’s talk about scholarships or financial assistance. What does that all look like with 529s?
Oliver Norman: I’ll try and hit the quick FAQs, if I may Karl, around that. So first of all, can I borrow against my 529 plan? No, you cannot. What if I put my money away and I need it in the event of an emergency? Well, you can get it, but you will pay taxes on the growth, including the dividends and interest. And you may also owe money to your state too, depending on its tax rules. Plus there is a 10% penalty on those earnings. So, you need to think twice about using the money before something else. So, that was the first thing.
The other question, which I get a lot is, what if my kid gets a full ride, well, you will be able to withdraw and you will not pay the 10% penalty, but you will still have to pay tax on the gains. And by the way, it’s only the amount of the scholarship that gets the waiver on the 10% penalty as well. And another one, what if my kid chooses not to go to college or dies, can I get the money? Yes. If it’s a choice, you pay both the taxes and the penalty. If the child dies, there is no penalty, but you still have to pay the taxes there. Karl, I know you asked a couple of questions, did that address it in terms of the penalties and what you can do?
Karl Eggerss: Yeah, absolutely. That’s great, especially the scholarship part, the scholarship part’s big.
Oliver Norman: Yeah, that’s a big one.
Karl Eggerss: Because you don’t know and even if it’s a partial scholarship, but I would say this that, again this is where financial planning comes into play. There’s a risk of over-funding these and so for me, what I’ve advised clients to do oftentimes is to let’s run the numbers, get a reasonable amount going into the 529. But then also maybe save in a joint account that’s separate from your retirement savings, that’s just a joint account with you and your wife, let’s say, and what we do there is invest it in a fairly growth oriented way, so there’s not a lot of taxes. And if the child needs extra above the 529, this is an earmarked joint account. If they don’t go to college, if something happens, if they get scholarships, you got extra retirement savings.
Oliver Norman: That’s a good point.
Karl Eggerss: I’ve done that myself.
Oliver Norman: Yeah. And you know what, if you do deplete that 529 balance for your kids, and there’s a pot leftover, you can just change the beneficiary to your grandkids, for example, or yourself, if you want to use it for qualified educational expenses. So, that’s the beauty of it as well, you can change the beneficiary.
Karl Eggerss: Okay. So this is the one we like, let’s take just a few minutes to talk about other options that may still be okay options, we just don’t like them as much. We’d already talked about prepaid tuition plans, which aren’t as favorable as they used to be, they’re limited usually by state, et cetera, et cetera. But what about like the Coverdell Education Savings Accounts?
Oliver Norman: Okay. So, like the Coverdell, normally the limits of which you can contribute to them are considerably less than the 529 plan. Also, as well, I believe there’s an income phase out before you start contributing to those, so that is something else which is available. I will say another common question which I get is, “Well, I’ll just pay for it out of my retirement account.” Well, you might want to think twice about that. The Roth, for example, allows you to withdraw on the contributions, not the earnings for education expenses. They do have maybe lower fees and a wider variety of other investment choices. Some people favor them because whatever’s left over you can still use for retirement. We would always want to have a conversation like you say Karl, and make sure we do comprehensive planning before those decisions are made. And then the other one as well, we mentioned the UTMA earlier on, the downside is its harder to control access at age 18. It could be taxable. And then also the flexibility as well, you can’t change the beneficiary with an UTMA.
Karl Eggerss: Yeah, no, that’s a very good point. So, clearly again, with the diversification of investments, the flexibility of the plan, the way the lump sum and the amount of contribution limits in the 529, that’s why we prefer 529s. Again, the safest route is to just save it yourself, just save it. If that’s what you want to do, it’s just you’re probably going to pay extra taxes you don’t need to. So to me, this all goes all the way back Ollie to financial planning. Again, at Covenant, we use a lifestyle legacy philanthropy process. So, we’re looking at what are the things that you need to take care of your own lifestyle, whether you want them, whether they’re discretionary items or not. But education is part of that. It could also bleed into the legacy part as well.
Instead of leaving my kids a pile of money down the road, I’m going to fund their education. So, there’s legacy built in that as well. But if you don’t know these numbers, we can even put a specific college in our financial planning software and it’ll give us the estimated cost, including the extra items. It’s not just tuition guys, it’s room and board, it’s food, it’s some of the expenses. If they don’t have a car there, they’re going to have to Uber places, all of those things, we want to include all of that as part of the educational expenses. So, planning is really, really important.
Oliver Norman: I agree, Karl, I mean, not just getting with a financial planner because, and I know the two things are, if you’re lacking in knowledge and or time, it’s really good to have a team of people behind you. Meet with a financial planner, because I also think of it this way, what mistakes would you make and what strategies would you not be aware of if you didn’t hire someone? And the second thing is with that as well, consider
Oliver Norman: … an independent college counselor when reviewing these can save you a lot of money, especially in the areas of financial aid as well. So definitely worthwhile consulting with some experts on this. It’s one of the biggest things you’re going to be spending your money on. Karl, I did want to say as well, even things like, well, how do I invest my money in the 529 plan? Talking that through, because the truth of it is, is that you need to know your risk tolerance, even with target date funds. With target date funds, that’s the fund manager’s perceived risk tolerance. It could be very different than your own. So you do need to have that conversation with the financial advisor to make sure whatever option you go down, it’s commensurate with your risk tolerance.
Karl Eggerss: Well, that’s my biggest issue with target date funds is that they’re using one parameter to invest your money, which is age or a date. That is one small little factor. I do like the fact that they are offered in 401Ks and they get people investing now that might’ve stayed in a money market or stable value funds. So don’t want to knock them too much, but in terms of they do serve a purpose for certain situations. But no, I think that’s a good point, and we’re not here to give you all the steps of getting your kid to college. This is about how to fund it primarily. But I will say for myself personally, I did invest in somebody and it wasn’t expensive, that looked at their talents, looked at what they weren’t very good at, and at least shaped them into saying, “You know what? This is the type of degree you might be good at and these are the schools for that type of degree.”
So that helped funnel it, and then in addition, we paid as well to have SAT and ACT prep courses starting their sophomore year and going into their junior and senior year, and it made a remarkable difference in their scores. There’s also people out there that will help you write cover letters. We actually put my son, who was into video editing, actually did a YouTube video that put a compilation of really, it told the story of really, and he’s an audio engineering major, but it showed the story of when he was a little bitty kid playing instruments with a turkey baster and he had a little small accordion, and we wanted to show that he’s been into music from the time he came out of the womb all the way up until 18, as it progressed into the video. And we’re talking a two minute video, it showed his accomplishments and it went along with a resume.
So all those little things we did, in addition to the biggest one, which was saving, as you said, just get started saving, but you do need to know that amount, whether it’s $100 a month or $1000 a month.
Oliver Norman: Exactly, that’s right. And Karl, and this may be a great topic for another podcast, but there’s different types of aid as well. One, you’ve got the financial aid. But what you were talking about, some of the things that you invested in, really helps to, what they call, the merit aid, and that is a discounted system where individual applications, it allows the college just to slash discounts in the hope of attracting best talent. And ironically, it’s nothing to do with financial aid necessarily. So things like knowing how to take advantage and maximize those opportunities is big. And, sorry, if I may, Karl, just on when it comes to aid, one of the questions which we get a lot is, “Well, if I start saving, will that hurt me when it comes to needs based assistance?”
And really I would question, “Well, what are you defining hurt? And what is the alternative to saving nothing?” Because when it comes to the federal aid financial formula, the government does expect a family to contribute a certain percentage. Now, it doesn’t necessarily include retirement savings or your personal home, and yes, it does include money in a 529 plan, but I would think very, very hard before declining to save anything just to try and take advantage of grants which may or may not be around by the time your child goes to college.
Karl Eggerss: Well, I thought we were all supposed to go get student loans because they’re all going to get forgiven, and that seems like a pretty, pretty nice trade. It’s like insider trading or something. Yeah, a little side note there. No. These are good tips. I can say this, Oli, of going through it in the last couple of years, colleges are getting harder and harder to get into, because there are certain slots available for certain people and so it’s becoming more challenging. Some of them are first come first serve, in a lot of cases, so be very proficient and efficient with how quickly you get your applications in. But number two is you have to sell yourself. You have to have a great resume. So when your kid’s a freshman in high school, they better start volunteering, they better start putting everything down that they do, and build that resume, a resume to get into college, because it does make a difference when they’re looking at your kids and the one next to it.
They’re going to say, “That kids a little more well-rounded, we’ll take him.” And there’s also obviously a lot of controversy right now on, is college worth it? As we said, we have a huge shortage of skilled labor in the United States. And I have friends that run construction companies, I have friends that run plumbing companies, they tell me all the time, “I wish I had a great 18 year old that I could teach the trade,” because the average plumber’s 57 years old in this country and there’s nobody behind them, because everybody’s being forced to go to college because that’s what we’re supposed to do. And they come out with mountains of debt and instead, if they just had a trade. So really examine your kid. It’s easy to say, “You know what? My kid’s a college kid.” But let’s look at the kids and not force them. And some kids are not college, and that’s okay.
It’s just like some people shouldn’t own a house. They’re okay renting. They’re okay living in an apartment. That may be great for what they want and what they need and what financial aid is best for them. Same thing with college. Not everybody’s cut out for college and, frankly, not everybody needs to go to college. We can look at some of the best technology companies in this country and they’ve got some pretty cool stories, especially nowadays. Nowadays, I mean, you and I were talking offline about how people can get their talents viewed by millions of people around the world. That wasn’t around in the ’80s and the ’70s. So we’re in a pretty unique world right now, and I think college is going to look a lot different, especially post-COVID as well.
Oliver Norman: And Karl, you’re a shining example of that.
Karl Eggerss: I am.
Oliver Norman: With your million viewers and your TikTok account.
Karl Eggerss: I know.
Oliver Norman: Twitter and all that stuff.
Karl Eggerss: Well, and I’ve got a face for audio podcasts.
Oliver Norman: Karl, just really quickly, one resource which the listeners might be able to take advantage of just when it comes to 529 plans and navigating that. There’s a website called savingforcollege.com. It provides a great guide to 529 plans. And there’s also a company called Morningstar. We’re very familiar with that in our industry. And Morningstar will rank those 529 plans as well. And, again, don’t get caught in analysis paralysis, get started.
Karl Eggerss: Yeah, savingforcollege.com is a great resources. Thanks for bringing that up. We’ve been speaking with Oliver Norman. He is a CFP, a certified financial planner, here at Covenant, one of the many advisors that we have, and if you need any help thinking about college savings, should you even be doing it, looking at your financial situation, we can walk you through that, do some cashflow projections for you, even look at those specific colleges and help you with that process. Oli, thanks for joining me today. Appreciate it.
Oliver Norman: Pleasure.
Karl Eggerss: All right, everybody have a great weekend. Thanks for joining us here on the podcast. Don’t forget creatingricherlives.com is the website. Or if you’d like to pick up the old fashioned telephone, you can do that. Just give us a call at (210) 526-0057. If there’s anything you or anybody you know needs help with, we’re always here to help and serve you. Take care and have a great weekend, everybody.
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