Guest article provided by: TheThriveVine
“Education is the most powerful weapon which you can use to change the world.”― Nelson Mandela
Let’s face it, nowadays saving for anything is difficult. With rising prices, and inflation worries, it’s intimidating to think about saving for your child’s college or educational journey. In fact, according to the Federal Reserve as of May 2021 the average debt of a college student is around 30k. This is no small amount for any family to take on. If you’re worried about how, and in what ways, to save for your child’s college fund, look no further. In today’s blog we’re going to address some investment vehicles and creative ways to start saving for your child’s educational journey, so everyone can rest easy! Stay tuned…
The 529 College Savings Plan – The 529 College Savings Plan gets its name from the tax code which it falls under. The 529 College savings plan is essentially an investment account used for your child’s college expenses which includes tuition, books, and other supplies. In essence when you contribute to this college savings plan and elect investments, such as index or mutual funds, your money grows over time, and as a result you end up with a solid nest egg to be used towards your child’s education. What is really nice about the 529 College Savings plan is that although contributions are not tax-deductible the growth, they experience are completely tax free upon withdrawal. For example, say you start investing 1k/yr for your child’s college (this equates to about 83.33/mo) when they are born and they go off to college when they are 18. By that time, you’ll have 18k saved up for them. Now if that 18k was invested in an S&P index fund with a rate of 7% per year, at the end of the 18th year you’d end up with about 37k! Not bad for saving just 1k a year. You can always play around with the numbers by using a trusted compounding calculator!
Real Estate – For generations many people have used real estate as a means to creating wealth. However not many people realize how real estate can help with your children’s college… There are so many options using real estate however I’d like to discuss my personal plan in this blog. Let’s Begin-
For my wife and I we have a plan of purchasing a rental property for our son by his first birthday. The home purchased will essentially be his one day, but most importantly will be his college fund. Our plan is to purchase a single family house and do a cash out re-finance of the house 18 years later to pull out any funds needed to help with college expenses. To put the math out there let’s say we purchase a home for 100k in 2022 with the intent of paying the home off in 18 years. Again, using a home appreciation calculator we can say that the home will appreciate 4% every year for 18 years (some years it might appreciate more other years less, however for this example let’s just say 4% on average.) In 18 years, that brings us to the year 2040 where the projected value of the home would be about 202k.
To take things a step further let’s say we reached our goal paid the home off in 18 years. We can now do a cash out refinance of up to 75% of the appraised value (202k) which equals a cash out refi of about $151,500.00 for our son’s college. On top of that this is a rental property so we’d still have a tenant paying the new mortgage and would have had cash flow from all the years we owned the home outright. This is just one way to experience the power of real estate, for more tips and tricks feel free to visit The Thrive Vine or do a simple google search on real estate strategies to pay off student debt. There are so many out there and lots of options!
Security Backed Lines of Credit – It wasn’t until recently that I discovered the power of security backed lines of credit so I definitely wanted to share this as a method for saving and helping with your child’s student debt. A security backed line of credit is essentially a line of credit against your stock portfolio holdings. It’s important to note that usually you can’t use retirement savings as collateral for the line of credit, but instead you need to have your assets in a taxable account. What’s great about this type of strategy is that although you are borrowing against your assets you aren’t withdrawing them. Which means your assets stay invested and you pay back your line of credit with a minimal interest rate. Another great aspect about this method is that since it is a line of credit it works like a credit card so it’s revolving. Once you pay back some of your line of credit it opens up again for you to use.
Let’s look at a real-life example. Say by the time your child is ready to go to college you’ve amassed a 150k stock portfolio. Say you’d like to take out a security backed line of credit for 60k. You can use this 60k line of credit to pay for your child’s tuition while your entire 150k is still invested in the stock market gaining returns. When it comes to paying back a security backed line of credit lenders usually have their own terms, however the general consensus is that you have flexible repayment terms, a low interest rate on your line of credit, and your funds remain invested; which is a great deal while helping with college debt.
Conclusion – There are many ways to help save and invest for college debt and while it can seem intimidating starting early seems to be the best choice we can make for our kids. One thing we do know is that markets take time, so by investing early we give our assets the time to mature and grow; just like our kids! What are some ways and plans you have for saving for your child’s education? We’d love to hear from you!