PFFAP-PYP-24-0207-Physician College Planning EP 66-v1
Voiceover: [00:00:00] This show is for educational purposes only and is not personalized advice. Consult your tax advisor before taking action. All investments involve risk of loss. Past performance is no guarantee of future results. Read show notes for full disclosure.
Welcome to the Physician Family Financial Advisors podcast, where physician moms and dads like you can turn today's worries about taxes and investing. Into all the money you need for retirement in college.
Nate: Welcome to the Physician Family Financial Advisors podcast. I am Nate Reineke, certified financial planner and primary advisor here at Physician Family.
Ben: And I'm Ben Utley, certified financial planner and service team leader here at Physician Family.
Nate: Today's episode is all about physician college planning and what your colleagues are saying right now. About preparing to pay for their children's college education. So, Ben, preparing to send your children to college is In fact, expensive surprise, right?
Yeah. [00:01:00] So depending on when you start saving, we see an average savings rate of about a thousand dollars a month for a public school and 2, 000 a month for private. And even more if you're a physician who maybe went to an Ivy league school and are anticipating the same for, for your children, um, physicians can afford.
to do, to do this, to prepare for college, but I'm seeing a rising wave of physicians who simply don't think they should pay for all of it. So I want to know, is that a new thing? Like when, when you were writing college plans for physicians 20 years ago, did you ever hear someone say they don't want to pay for the whole thing?
Ben: I think it was pretty rare. I don't hear it as. I didn't hear it as much back then as I've heard you say we're hearing about it now. And I maybe that's because the cost of college in what we call real terms and inflation adjusted terms has certainly increased. I mean, you [00:02:00] talked about saving a thousand for public.
Well, I started saving when my daughter, my first daughter was born. Uh, 22 years ago, and at that time, the required savings rate was 250 a month, and I'm actually writing checks for those college bills now, and I, I have my, my fund fully funded. So you know, the fact that you have to save a thousand today for an equivalent education tells you that, in fact, it, college is, really has gone up in real terms.
So what are people saying about, uh, college, or what are, what are clients and prospective clients saying about the cost of college?
Nate: Yeah, there's really three things when we start going down the road of, uh, I don't want to cover the whole bill. Uh, the, there's, there's three things I'm hearing. The first is.
I just don't want to, or I, or I don't want to prepare for the whole thing. And I think the translation there is really, they don't know how they're going to do it. Yeah. It's daunting. Really? Yeah. They can't imagine a world where two, three kids, they're saving three, [00:03:00] 6, 000 a month for college. Yeah. It's like a payment on a sweet house,
Ben: right?
Nate: Yeah. Pretty sweet house. Or it's like a half
Ben: a trip to Hawaii, like. Every month. Mm-Hmm. .
Nate: Yeah. Exactly. Every month. And so when they say that, a lot of times they kind of catch themselves in what the kind of, the next line of thinking that comes outta their mouth is, maybe I'll just pay out of pocket for it later.
Mm-Hmm. . Um, and when I hear that, I, it kind of pains me because there's a lot of money left on the table. If you decide to pay for college later, right. And the reason I say that is you and I both know, well, while physicians are saying this, we've never actually seen a physician not pay for college, so they do pay
Ben: for it.
Absolutely. Yeah. Well, as a person who's writing those checks right now, it freaks me out to think that I wouldn't have saved for college, right?
Nate: Yeah. And [00:04:00] so the money being left on the table, uh, comes in the form mainly of returns and taxes. So imagine writing all those checks without, uh, investing for it.
Obviously investment returns help and imagine paying all the taxes required to get that money to, you know, the college.
It's like,
Ben: uh, it's like moving into a headwind instead of having a tailwind.
Nate: Exactly. And where this lands, or I guess, uh, the money that you pay out of pocket for college if you're not prepared really comes at the expense of retirement. Mm. Mm.
Ben: Right. Right. Because they're gonna pay for college one way or another.
And the minute you start to pay for that out of your own pocket instead of savings, then that's money that you can't save for retirement. Or, if you're already saving as much as you can and you still have to pay for college, then you take money out of retirement. Either [00:05:00] way, you know, that, those two goals compete.
So I see what you're saying.
Nate: Yeah. And, and for the, the folks, the physicians in this camp, they sometimes will say, You know that they think their child to get merit based aid, I wanted to encourage, uh, physicians to kind of ignore that, not because it can't happen. In fact, it often does happen, but you can reimburse yourself out of these college accounts if your child does get merit based aid.
It's not like the money is lost. Uh, so if, you know, if you're a physician considering kicking the college can down the road, just remember that by the time you get to your children being 18 years old and off to college, you will probably be in a much better financial position at that point. But if you continue to sort of drag on.
The expenses of children all the way until they're 22 rather than 18 you're [00:06:00] putting a great retirement in jeopardy. Right, right. You can't retire when you want to if you have to pay six figures
Ben: for a college degree. Yeah, I don't think anybody would would bother to. Think that they're gonna pay for retirement out of pocket.
You know, everybody knows that you've gotta invest for retirement and, and that having the, you know, the returns on your side makes retirement more doable, right? Otherwise, we'd all be, you know, putting our retirement money in checking accounts, right? So, uh, you know, by the same logic, it makes sense too.
Invest for college at the same time. Agreed.
Nate: Yeah. Okay. So the second things physicians are saying is they want their children to have skin in the game.
Ben: Skin in the game. That sounds very male basketball game to me. Yeah.
Nate: Yeah. Skin in the game. And, and I think you and I have discussed this at length because it skin in the game for your children goes beyond college.
Really what these parents [00:07:00] are saying is they don't want their children to become entitled. Right. Could you tell me your thoughts on this one?
Ben: Yeah, I'm not quite sure how to keep them from feeling entitled. I think that I did that with my kids. They don't seem entitled. Um, you know, I guess the way that I handled it is, is I told them that we were going to pay for, um, uh, undergraduate in state.
School and that if they wanted to go someplace else, they might have to borrow for it or get scholarships. And that if they did that and there was money left over that we'd split the difference with them. So, mm-Hmm. , we made them stakeholders in their college accounts early on and we communicated with them regularly from an appropriate age about how much money is in their college funds.
Um, and my wife made this really wise comment about. About her college fund. We were watching, uh, Ann of Green Gables one night, and, uh, there was a, a character on there. It was a female and she [00:08:00] wanted her endowment so she could go off and be on her own. And her dad refused. And my wife looked at me and she said.
She said, this endowment thing she said, we have like the modern equivalent of that. We have a college fund, college fund is intended only for college. You only get it if you go to college, it only has one use. And we talk about it regularly. And it's something that is required to make it in the world. So, we've talked about the college fund, including how much money's in the college fund, how far the purchasing power would go.
We talked about the cost of various schools. And, You know, we, we wound up having one child that was accepted to a private college and one that went to a public school. So, you know, it's um, just because you, you prepare for public and you save for public doesn't necessarily mean your child is going to go to public.
You know, there's, you can still pivot. But I think communicating with them about the amount of money in their college fund and how far that money goes, especially if you're not planning to pay for all of it. I think that's, that's vital. Mm hmm.
Nate: Right. And [00:09:00] I don't necessarily buy into the whole. Skin in the game thing, um, mainly because I've seen.
Kids go off to school, um, and skin in the game just means they take out a bunch of loans that they don't understand. It doesn't really drive the right behavior that you're looking for.
Ben: Yeah. If we're struggling as, you know, certified financial planners with experience to kind of wrap our heads around all this public service loan forgiveness and Pell Grants and, you know, hope scholarships and all that good stuff.
I don't know how on earth. You know, an 18 year old kid who hasn't had a finance class and probably barely has a checking account is going to be able to understand that they're signing on the dotted line for, you know, 150 worth of debt at 7%. That's going to double in 10 years. They can't conceive of that.
So I think that, you know, too much skin in the game can be rough on kids. And then you wind up with those [00:10:00] kids back in the same boat that most of our clients tell us they don't want to have their kids be exposed to. They, you know, they're strapped with debt in some cases, and they don't want their children to experience that.
You know, it's the old soft, I want my kids to have it better than I did. Well, I think that, you know, paying for college is not a better, I think it's a, it's table stakes. In the modern economy, at least in the United States.
Nate: Yeah. Part of our culture, a huge part of our culture is shifting to needing a degree.
But on top of that, a huge part of our culture is accepting that everyone, all students are going to have a massive amount of debt. So young kids now, um, 18 year olds, they just think that's normal.
Ben: Yeah. That makes me sad because it's, there's a lot of freedom to be had by not, not having the change, the student loans.
And there's some ways around that. Um, But, you know, if you have your kid who's got their eye on the brass ring, they want to go to an expensive [00:11:00] school, whether they're going to go there and get an engineering degree or a psych degree, um, you know, you either have to tell them no or you have to save for it, right?
And, um, I think not saving for it may seem like a way to go, but in the end, you know, I've just never seen a physician say no to paying for college for their kids. Never say 25 years. We serve 200 physicians in 170 families, and I think that the headcount on children is over 350 children that are kind of in our census, and I've never seen a parent refuse to pay for college, not once.
Yeah.
Nate: The other thing here is that when I hear physician physicians say they want their Children have skin in the game, they tell this story as though their child cannot get debt. Like they say, they say, well, they can work a job or they can do this or that. Um, that's what I did when I was in school. And that assumes that you're trying to eat that You still [00:12:00] have control over your child.
And if you're not paying for their school and they're off to college, you really are, you've lost any control you thought you may have over them. Yeah. So the thinking that they are going to continue to make. good decisions, let's say, with money in college. It's just flat out wrong.
Ben: I could tell you that the financial services office, one of my kids, schools will not allow us to talk with them on her behalf.
There's nothing, I don't think there's anything that we could sign. In fact, there's two factor authentication on the login. So we have to call her every time we want to look at the bill. I mean, they're, they're treating these kids as adults and they walk in the door and they're expecting them to make these decisions.
I guess if you started with them early on and you have a good communication with their kids about money, then, you know, you got a leg up, but yeah, it's. It's pretty rough. You know, um, maybe we're going to talk about this, but I hear some parents say that they want their kids to earn their way through college.
I think, um, you know, having kids [00:13:00] have maybe an ultra part time job, particularly if it's a work study, something that's on campus, that can make sense. But some Folks who maybe paid their way through have the expectation that their child will be able to pay for college by working for college. But I want to, I want to put this in perspective.
So at the bottom end, a public degree costs about 25, 000 a year. And let's, let's look at a figure that's probably more like 30, 000 a year. Okay. So if I put that in perspective. 30, 000 a year, if I was going to make that money, uh, 30, 000 on a pre tax basis is closer to 36, 000 a year. Okay? So, that comes out to about 3, 000 a month.
It's actually about 18 an hour. Now, uh, a lot of the entry level jobs are making 15. And so it wouldn't be reasonable to expect a person who does not have a [00:14:00] degree to work an entry level job to earn that kind of money and go to school at the same time. So full time job plus full time school at a pay rate that.
I mean, a long time ago, I put my way through college by working in the lab and grading papers and my folks paid for about half my degree program. And so that was doable back then. But, you know, the real cost of, of college has risen as we talked about at the top of the show. And so it's not practical for a student these days to work their way through college and expect to get out in anything near four years, maybe eight, maybe 10 years.
And then you have to consider like the, kind of the, the value of their time if they were out of college and not to mention the cost of living that they're going to have to pay over eight years rather than a four year period. Right? So there's. There's some costs to doing it that way as well. Right.
Nate: [00:15:00] Yeah.
It's hard enough on, and by the way, 15 an hour, that's in state like our states like ours where minimum wage
Ben: is higher. Yeah. The deep South, you know, it could be 10 bucks an
Nate: hour. Yeah. And so, uh, living off of 15 an hour is hard enough. Living off of 15 an hour and paying for school. Sure. It, it really is essentially impossible.
Yeah, exactly. So, and you mentioned the inflation rate, college for the last decade has been, the cost of college has been rising at almost double or more than double of whatever
Ben: inflation is. So I'm going to interrupt you. I've got a question. This is like shooting from the hip, but yeah. Where is this thought coming from that kids can pay for their own college?
I mean, that, uh, given what we talked about here, it doesn't, it doesn't seem like it even rhymes with reality. You know, what, what do you think is behind that? Why are we, why are we hearing more of that? Where is it coming from? I mean, these are really smart people that we deal with. And I know it's finance, and that's not every physician's [00:16:00] first line of discussion, but, uh, this, this seems like, uh, it's a level of Uh, I'm going to say carefully use the word ignorance where they're choosing to ignore it, ignore it, that I just, I don't see, you know, like, well, where's that coming from?
What's behind it? This is
Nate: exactly the third thing that physicians are saying. Okay. They had to pay for college themselves. That's where it's coming from in the level of ignorance. I don't think it's choice. They are, their head is in the sand when it comes to this because they, um, have so much debt themselves.
Oftentimes when they have a one year old, they have been climbed out of the multiple six figures of student loans. Hard
Ben: to imagine paying for somebody else's college when you haven't finished paying for your own college. Exactly. Much less three other people. Right?
Nate: Yeah, exactly. And so there is a harsh reality.
For physicians in this situation, um, yes, you have a ton of student loans, [00:17:00] and while that is true, it is also true that your situation is not. going to be the same situation that your children have when they go to college? I guess the real,
Ben: the real sneaker here is that, you know, college costs have outstripped inflation.
So, if we didn't have inflation, it might be reasonable to expect someone to pay for all or a big chunk of their college, but that's just not practical anymore, I guess. So, maybe that's, maybe that's the thing, because, you know, I've seen physicians who start to run their own retirement plans and spreadsheets and that kind of thing, and most of the time they've kind of gotten everything You know, close to right, but the thing I see left out when it's not taxes is inflation.
And that really takes a bite out that can cut out the numbers by half over a longer period of time. Maybe that's what's going on. It's just, uh, I call it inflation blindness.
Nate: Yeah. And. And. And. And. When I bring that up, they don't want to accept that the cost of college is going to continue to rise as it is now.
And Ben, [00:18:00] you and I have our own thoughts about this. We've shared it in the past. It has risen that much over the last decade, so why would we think it would stop? Now, let's just give it to them anyways. Let's just say that it wouldn't go up. Even if your child was in school right now. Right. The numbers you just quoted is their situation.
They cannot pay for their own degree without debt. Well,
Ben: okay. So let's, let's hold on just a second. So let's, let's say that there, there is something that comes along that is, that makes college costs go down, which I'm not seeing, or, uh, that is a viable alternative. So, given the long history that physicians have with education and that, you know, our culture here has with people having college degrees to even get an entry level job, if that thing that's cheaper than college, it would have to be materially different.
Than Mm-Hmm. College is today in order to be able to be that much [00:19:00] lower of a cost, and if it's materially different, it probably doesn't look a whole hell of a lot like a college degree. Yeah. And as a result, you could expect that people would not receive it, uh, as, as openly like it, it wouldn't have the same weight or cachet that a, you know, a degree has from.
You know, a, uh, name brand public school or an Ivy League school or just a bricks and mortar school, right? Uh, not to mention the fact that some of the private, uh, the private colleges, the fly by night ones, have really given the for profit college industry a bad name. So, I would say that something that comes in in that space is even less likely to be accepted.
And, culturally, Um, we may accept those alternatives at some point, but it's probably going to be a generation before that, that's the case. You know, we, we might be talking about 30 years, well, well into your child's adult years before those things become acceptable. And I, I don't see physicians as early adopters on these things.
So I'm, I'm thinking that there's not going to be anything that comes along and bends [00:20:00] the cost curve short of a handout from the United States government, which I'm, I don't see many handouts for physicians from the government. So I'm, I'm, my money's on it continuing to go up and if for no other reason, you know, college is a service business the same way that medicine is a service business and the cost of healthcare has risen steadily and will continue to rise steadily.
So it might be reasonable to expect that college costs will continue to go up, which again is the inflation blindness that makes people believe that their kids can pay for it because they paid for it.
Nate: Yeah. Yeah. And I do, I do feel for physicians that have had to pay for their own school and they, they have a ton of student loans and they're trying to figure out how they could bear the weight of their own student loans and their children's degrees.
Yeah. It's no joke. You know, I have a.
And so while we're saying, Hey, start doing [00:21:00] this, get this done, that's, that is a harsh reality. I mean, it's even hard for me to say sometimes because I do see them struggling with their student loans. And that's hard to admit for physicians because everyone looks at them as these. Rich doctors. And it's just not the case when you have thousands of dollars flying out the door towards student loans, especially all the
Ben: deferred gratification, right?
You went and got in school for all those years and you get out and you just want a house and you find that, you know, your student loan bills are competing with that. So it's
Nate: tough. Yeah, so when I talk to physicians on the phone about their student loans, the pain I hear in their voice is, is palpable. I mean, it's a painful conversation many times, but in a society where a college degree is table stakes, like you said, it's table stakes to pay for your kid's college is table stakes for them to have a degree at this moment.
Um, I believe if you are able to pay for your child's college. Then you [00:22:00] should, and I hate to should anybody, that's a bend line, uh, but it's your responsibility to help your child prepare and pay for college if you can. And the last thing I want to say is a lot of times physicians will say their parents didn't help them, but that's because they couldn't.
Right, right. So this is a short term thinking in a long term world. And. If you are able to successfully prepare your child for college, pay that bill, there's a huge chance that they won't need mom and dad's money later on down the line. Exactly. And that is the huge win here. You're setting them up for the real world and they won't need your money.
This is the money that they're going to get and it's going to set them up for success.
Ben: Okay. So what's the big, the big takeaway here? We'd like to wrap things up with a nice bow.
Nate: Yeah. Whether you want to or not, you are likely going to pay for your children's college or at least the lion's share of it.
So [00:23:00] prepare now. Um, and save a ton of taxes along the way.
Ben: Okay. Thanks, Nate. So, uh, I appreciate everybody who, uh, listened in today and, um, it's been great to get your comments. If you have any questions or feedback, uh, feel free to email us at the address that's in the show notes. Um, until next time, remember, you're not just making a living, you're making a life.
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