060 PFFAP-PYP-23-1115-Physicians Planning for College
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 and college.
Nate: Hello, physician moms and dads. I'm Nate Renneke, Certified Financial Planner and Primary Advisor here at Physician Family Financial Advisors.
And
Ben: I'm Ben Utley, Certified Financial Planner and the Service Team Leader here at Physician Family. Nate, uh, we, we like to do a little college planning up in here, uh, because we serve, uh, countless physicians. And I think we counted the Over 250 children are in our census and most of them under college age.
So today we're going to be talking about the cost of college vis a vis the [00:01:00] college board's 2023 study of trends in college pricing. So I know that you've read this. I know it's something that you follow very carefully because of all the countless college plans that you put together and help people strive toward.
So I guess the question I have for you is what does college cost
Nate: today? Yeah, so, uh, they, they, they send out these numbers every year and, um, there's a few different ways to look at it, but what it actually costs, like the sticker price, the average sticker price of private school is currently 42, 000 per year for tuition and fees.
Okay. Tuition and
Ben: fees. Got it. Tuition. Forty two K. Yep. Forty two K. I checked the other day. That's uh, that's about precisely the price of a, of a Tesla Model 3 right now. In the base level, base level Tesla Model 3. Yeah.
Nate: Every year for four years. So, spending.
Ben: You could have a little fleet of Teslas. [00:02:00]
Nate: Yeah.
You could get. A couple of Teslas for the price of public out of state, that's 29, 000. And then, uh, public in state is 11, 000. Wow,
Ben: so that's, that's a bargain. Yeah.
Nate: Yeah. How do those,
Ben: how do those prices, how do they look versus, versus last year?
Nate: Yeah, so, um... We'll try to make this as straightforward as possible, but it's Directly from last year private is up only four percent.
Uh huh Okay, public out of state is up only three percent and in state is up two and a half percent
Ben: You know when you think about it, I mean, that's not That's not that bad, right? Because I mean the rate of inflation we typically use in our plans I've seen you use like somewhere between six and seven is typically I think that's what the long run Growth rate has been in that [00:03:00] number and you know, if you look back over the last 12 months Things have gone up more than three or four percent, right?
I mean, we went through that period where inflation was like nine point six percent year over year. And I think it's cool a lot lately, but still went through a big bump in that time where it sounds to me like the cost of things went up faster than than the cost of college during that time period. Is that right?
Nate: Yeah, this is actually really good news. Um, great news because the cost of college has been going up on average, like you said, 6. 8 percent per year, which is a really high number. If milk went up 6. 8 percent per year, we'd probably all be drinking almond milk by now. Um, but we keep paying for college and I think this, you know, the price of anything is a reaction to things going on in the world of college.
You know, when you were reading this, you pointed out that, uh, enrollment is down. [00:04:00] And there's a few other things going on here, but basically the price of college is going up, but not by more than anything else in life, including people's wages. So it's a, it's good news. A range 4 percent for college is great.
Yeah.
Ben: Well, so that's the, uh, you mentioned the word sticker price, right? And if I were buying a car, which guys got to say paying for college or shopping for college is a lot, a lot, sometimes feels like buying a car, like there's a price and then there's the price, right? So what, what is the price? What, what, what do people actually pay for these used cars?
I mean, uh, college experiences,
Nate: right? Well, um, rather than negotiating the way you get the cost down in. College is actually, you know, financial aid or grants for physicians, the free stuff, right? For the free stuff. Yeah. Yeah. Physicians aren't going to get any need based aid, but they can certainly, or their [00:05:00] children won't, but their children certainly can get merit based aid.
So the actual amount that was paid, this is on average was 16, 000 a year for private. Wait, wait, wait, wait, wait,
Ben: wait, hold on. That number, when you said 16, 000, I was thinking that that was more like a public number. So that number is far less than the, than the Tesla sticker price that you gave me of 42.
Right. 16. Wow. Yep.
Nate: Okay. All right. This is, this is harder to, uh, explain sort of the math on this, but, uh, this is a even more exciting number for people preparing for college because as adjusted for inflation, the average. Price that people were paying before way back in since 2006 It's about 19 000. This is after aid once adjusted for inflation So technically the net price the [00:06:00] average cost of college has gone down
Ben: Wow.
And like in real, in,
in
Nate: real terms, like in real terms, hard to figure that out with inflation and with how much grants that people actually get. And it's also just the average
Ben: dollar amount that we're paying now, the dollar amount we're paying now, like what we actually write a check for maybe higher than it was like years and years ago, but like versus inflation, it's actually.
Come down. Is that what I'm hearing? Come down.
Nate: Yes. Yeah. Wow.
Ben: Yes. Okay, cool. So that is
Nate: good news. Yeah. Yeah We've sort of we've sort of been waiting for this because the cost of college is just getting so high Like how are we gonna do this? How are we gonna lower the price of college? Well, the answer so far to this point has been grants.
Uh huh.
Ben: Yeah,
Nate: you want to hear public?
Ben: Of course, I want to hear public. That's what I can afford.
Nate: Yeah. Public's actually really good. Average after grants and everything is 3, 000. Now, [00:07:00] that is such a low number that I actually need to Make sure people understand that this includes everybody and this includes people with with, you know, lower incomes That are getting their school paid for this as a physician You probably aren't going to pay 3, 000 a year for your child's public school But just it just goes to show that there are grants out there And if your children are performing well in school, and you're on top of it, and you're actually going for these grants, um, you can get the cost down quite a bit.
Down from 11K to 3K. I
Ben: have seen physicians, uh, with kids who go to, You know, public instate for your colleges, where they do get, uh, what's known as grant aid. They get, they get the free money and, you know, you, you've used the word merit aid, right? Um, so that does actually happen and, you know, it's not based on, you know, whether you're earning a little bit or earning a lot of money, it really has to do with your, Your student, [00:08:00] how good their grades are in high school, you know, what their record looks like and my understanding from talking with college entrance counselors is that, uh, the, the people who make decisions about who gets to go to college, you know, the, the entrance people look at this and they will see the student and if they really want that student.
Then they'll, they'll offer more aid in the form of grant aid or merit based aid or scholarships so that they'll be able to shape their class. You know, if they, if they want that particular style of student, uh, maybe everybody has purple hair and this particular student is just bald or has pink hair and they want to adjust, adjust for that trait, select, right?
So they may, they may give the, uh, bald student scholarship and, and see if they can bring them in.
Nate: Yeah, I like that too, because I think that, um, your college experience has a lot to do with the people around you. Yeah. So, uh, more power to them. Get, get those unique thinkers in the room [00:09:00] and, you know, you'll have a good college experience too.
Ben: Yeah. You want an interesting class, right? Yeah. You want a memorable college experience. And I, I think that the, the college admissions people keep that in mind. So, uh, yeah, your, your kid needs to be cool. Uh, not necessarily have the highest grades, but that certainly helps.
Nate: Yeah, so these seem awfully low, don't they?
Yeah, they do
Ben: seem really low to me. I'm like, because, you know, when we, when we write these college plans, now I'm used to seeing like 60, 000 or 70, 000 a year for, like, Private and gosh, I mean, I'm, I'm paying bills right now for a kid to go to college and I know it's in like the, you know, the 30s or so for public out of state.
So what gives? I mean, how, how are these? Are they really this low?
Nate: Yeah, I think that they, they obviously are because, um, College Board does not lie. [00:10:00] Yeah, they do not lie. Um, but what's not included in these numbers is what's really expensive about college is you have, uh, You know, an 18 year old that isn't really working and they still have to pay their bills.
So there's still room and board here that we haven't
Ben: included. You mean we still have to make sure our kids eat once they leave the house? That's
Nate: correct. Yeah. And usually that's in the form of dorms in the first couple of years. So you can't, um, at a lot of colleges, it's, it's even hard for students to stay home with their parents, but especially if you're going out of state, that's not a possibility.
So, um, It only includes tuition and fees, room and board, the, the rough number that I see, and I kind of, I've rounded it just because, uh, to make it simple, but they're not living on much on a, and I think it's about 1, 000 a month. So imagine yourself living off of 1, 000 a month, um, [00:11:00] they might be calling home for more pizza money, but, uh, it's, it's.
12, 000 a year or more if you're depending on what part of the country you're in and that does not Get impacted by grants or get impacted by that just the direct cost of college. That is just straight up inflation Yeah, so this year it took, you know The cost of college went up on that side because inflation was really high the last couple years Yeah,
Ben: and housing costs, you know, I've gone up particularly, you know, when we have a housing shortage right now and that You know kids in college still have to have a place to stay And so I think that that's got a lot to do with it, too If I was a landlord and I was all leased up and I still had kids banging on my door I'd probably be raising the rates if I could so You know, it's I guess that piece still goes, you know, my understanding of this is that Uh, you know, there are some, there are Ivy League schools, and then there are private schools.
And in terms of [00:12:00] like the planning costs, you know, the amount that you're going to pay for tuition, fees, room, and board, the actual tickets you're going to lay out, a lot of the cost of those schools has to do with where they're located. Uh, you know, so if, if it's, if your kid's in a major metropolitan area, like if they're San Francisco or, you know, going to some school in New York or something like that, then the overall cost is going to be higher just because the cost of living is, is higher there.
Nate: And the thing that I hear from physicians all the time is that they want flexibility. For their child to go to the school that they choose. Maybe they give them some parameters like it needs to be a state school or something. But they still want them to go potentially where their friends are going or just go into the school they get into.
So, the hard part about this for, for the saving physician, uh, Is that you need to be prepared and have built in some flexibility into your plan, which means you don't, [00:13:00] it's probably not a great idea to save for 3, 000 a year for public school. No,
Ben: not as a physician.
Nate: Yeah, and if you get those grants, you can always, um, be reimbursed for some of the aid that your child has received.
Yeah. So, um, you know, a good college plan prepares for the unknown. Uh huh. And gives you flexibility. And, um, if you end up spending less than what you've saved, there's quite a few ways to get the money out. And, um, you know, you won't be only talking about money. When it comes to time to choose a school, which kind of sours the whole situation for a child when they're trying to figure out what school is best for them.
Ben: Right, and I would say the opposite, the opposite bad is, is never talking about money, you know. Right. Oh, just go, go anywhere you want, you know, cause at the end of the day, you know, that, that degree takes us someplace. So, uh, what, what is it in your experience, cause you're, you're our, our, [00:14:00] our in house on team college planning specialist who.
Who usually has all the answers for at least for, you know, paying for college. What, what is it that you find that, that our clients and prospective clients often misunderstand about college paying for college and all that good stuff planning?
Nate: The biggest thing that I see people misunderstanding is how critical it is to start early.
Okay. Okay. College tends to be the one thing that many physicians Think as sort of a secondary goal. But in reality, paying for college, you're going to pay for it one way or another. So whether or not you save for it now, or you're paying out of pocket later, it, no matter what, it is a goal that is in the way of saving for other things like retirement.
So competing goal. So the best way to do this is to start early. And, um, [00:15:00] especially, like I cannot emphasize enough how important it is to start early if you're saving for private school or private plus medical school. Okay? So, um, I like to call this the prepared for private college fund plan. Got it. Okay?
Prepared for private. The PPCFP. Yes. So this is how you do that. You start. Saving for college the day you get a social security number. Wow. The day you get a social security number. Um, and I want to talk a little bit more about that in a second, but you also start with just 529s. Okay. There's a couple ways to save for college, but 529s early on is a good bet.
And then watch the cost of college closely so that you can continue to have confidence. That you're saving what you need, but you're not saving more than you need. Okay, that gives people, [00:16:00] um, when, when they, when I talk about these numbers every year with physicians, it continues to give them the motivation to save so much money for college.
Okay. So, you know, in one of the shows, but usually it's
Ben: bad. Yeah. Okay. So one of the shows that you and I recorded recently, and I think it's going to be released soon, but anyway, it was about whether or not physicians should depend on, uh, an inheritance or they should plan on an inheritance. And, you know, many of the docs we talked to are not comfortable with that.
And yet there are, I would say, And my estimation, my understanding is about a fourth to a third of them are kind of banking on some grandma money. So what's been your experience with that? Is grandma, like, generally way out of touch with the cost of college and doesn't know what she's bidding for? Or is it grandma usually checked in and actually covers everything?
Like, what's been your experience with that?
Nate: You took the words right out of my mouth. Uh, out of touch. [00:17:00] Okay. Okay. So this is what always happens. Um, baby on board, there's one cooking in the oven, right? And grandma calls and says, we want to help pay for college. And everyone gets really excited and they think, oh, we don't have to save that much.
Then the time rolls around to start saving. Grandma's a little bit behind because they made the promise, but they didn't, they don't know what the prepared for private college fund plan looks like where you start day one. Yeah, and then they say I put 1, 000 into the 529 and I'm gonna do that every year Wow yippee
Ben: now We have books yippee.
Nate: Yeah,
Ben: I mean, I mean, thanks grandma, but really,
Nate: you know and in the good situations like the kind of the overachieving grandparents, maybe it's 10, 000 Mm hmm. All right? And what I see normally is if grandma's paying for 10, 000, college goals get more expensive. Well, if grandma's paying, we should save too, so let's do private.
Ah. And so even with 10, 000 a year, there's probably, at [00:18:00] least, 1, 000 a month that needs to be saved from the physician to just pay for undergrad private school. Got it. Okay? Okay. Um, and here's the other big one. I, this happens more times than I could count. Uh, grandma or grandpa says they're saving for college.
They do that for several years, but then they retire. That's about the time that grandma and grandpa end up retiring is when their grandchildren are maybe entering middle school. And now they're on a fixed income and they start saving less or they stop saving.
Ben: Uh, gotcha. That one is a sneaker for me, because I've not ever seen that, but evidently you've
Nate: gone through it.
Yeah, I actually see it a lot, um, and I think that the out of touch part is that they figure saving 10, 000 a year for four years, that probably pays for school. And we just know that that's not the case. Yeah,
Ben: so it paid great pay for school back [00:19:00] in 1935. Why we didn't pay for school now
Nate: Right, exactly. Got it.
Okay, so I wanted to add one more thing to this prepared for private college fund plan That is this strategy of switching away from 529s If you have an expensive college goal, you should start with just 529s But at some point, you, you don't know for sure what college your child's going to go to. And you don't know for sure if they're getting into medical school.
So if you have an expensive college goal, you should probably consider shifting to a taxable account further on down the road, maybe around middle school time. And the reason that's important to get the money in the 529s early is the 529s grow tax free until you use the money. Right. And early on when you're investing for college, you're investing in mostly stocks and those will grow quite a bit compared to middle [00:20:00] school, high school years when you're in a lot of bonds.
And so that 529 is getting a ton of value by growing tax free. And then later on you can take your foot off the gas in the 529 and go into a taxable account where the growth is more moderate.
Ben: Okay, so in the prepare for private college financial plan, you, you use the word shift and I just want to, I want to be clear.
So when you talk about shifting, you don't mean taking money out of the five to nine plan to put it in the taxable account,
Nate: right? Correct. Yeah. You cannot do that without paying penalties. So I just mean
Ben: we're talking about shifting your savings, your contributions, right? Yes,
Nate: exactly. Okay.
Ben: So if it looks like you might have too much in the five to nine plan.
Versus the uncertain college goal, then at some point you, you can kind of consider your five to nine contributions done and then maybe move over to saving for into your taxable account.
Nate: Yeah, and that takes some careful planning. So if you're doing this all on your [00:21:00] own, the risks are that you simply saved too much or you don't shift on time.
And for that, you just need to, I mean, you should probably read. The trends in college pricing and do some calculations. Yeah, but you're the risk really ends up being you just have too much money in 529 and you end up having to give that to grandchildren or something, which isn't all that bad when I was also
Ben: thinking if you if you live in a state that gives a 529 contribution tax break like New York does, uh, Oregon does not much Colorado gives unlimited.
Uh, you know, and you and you Go call Turkey on the 529 and you start saving everything in a taxable account, then, you know, you're going to be living tax money on the table. So I guess you have to kind of have a carefully considered plan to transition from one to the other so that you still wind up saving some.
Get that break. Yeah, to get that break every
Nate: year. Okay, cool. Yeah, the, the perfect inflection point is where you, you're putting still the, it's usually between 5 and 10, 000. But you're getting [00:22:00] 5 into your children's accounts. If you have three kids, it's really easy. Yeah. Um, and then, and then get that break.
And then the rest is in a taxable account. So there's some careful planning that comes with college in your late in your children's like years as they get closer to, to college. But, um, you know, pretty good is better than nothing. So if you don't have that perfect plan, 29s, uh, at a reasonable rate. From beginning to end.
And the real risk is either, if you've done your calculations right, the real risk is just having a little bit too much if they choose a less expensive
Ben: school. So this, this begins to beg the question, like what, what should physicians do or, and really like, I guess, what does it, what does it cost or how much should, should physicians be saving and kind of how should they.
How should they be saving? I mean, let's assume that, uh, I mean, it'd be really hard to answer that question for, for kids that are in their teens, right? Because [00:23:00] A too late and b, too late. So what, what about if you have a, a newborn or a, you know, one, two year
Nate: old? Yeah, so there I, I'm just gonna give the numbers.
This is really rough cut numbers. Imagine you start at day one. You can probably pay for public school if for 18 years, the day they set foot on campus is the last day and the day you get a social security number is the first day. Public school can be paid for with 1, 000 a month into a 529. Whoa. Still a lot.
That
Ben: used to be my house payment. Right. Yep. Yeah. Okay, so and that's, I guess. That's the news. So I mean, you know, we serve some, some families with a lot of kids here because we're, we're, we're family oriented, but I mean that I've seen families with five kids in them, right? Easily, easily to write. So that's, you got to double down on that, right?
Or [00:24:00] triple down. And that's, that's public. Okay. So hit me with, uh, I guess this would be the bad news part of our, our good news show. So what would it be for private starting at, uh, got, got SSN moment. Yeah.
Nate: Yeah, I'm going to get to the, I'm going to make that bad news, this bad news into slightly better news in a second, but, uh, private is double.
It's about two grand a month. So if you've got three kids, it's 6, 000 a month. I mean, it's a hard goal to save for. Yeah. So I just had a family very, very, um, Educate, you know, educationally motivated, let's say, um, they want to send their children to private school. And when I ask physicians why, because I want them to really understand, you know, this is a big goal.
So don't just pick a, you know, school out of a hat and go with that one. Um, they said, because we went to private school and look what it's got, where it's gotten us. [00:25:00] Uh huh. And, um. You know, I think that's a very reasonable reason to want to send your children to private school. A lot of times, too, their parents paid for their school, so they feel like they should pay it forward.
But in that situation, you know, they had, because they hadn't been saving for college yet, they said, Hey, we want to get ahead on retirement. We have an extra 5, 000 a month we could save for retirement. We want to retire early. And I said, we haven't done your college plan yet. And I had to give him the whole spiel about you probably need 6, 000 a month for college.
Yeah. So, taper your expectations for how fast you can get to retirement. Because if you don't, the day you want to retire early, your child will step foot on campus and you won't be able to retire anyways because you're going to have to pay, you know, 40, a year out of your pocket. Right. Just to pay for school.
So, this is holistic financial planning. It's [00:26:00] all about looking at your long term goals and making sure you're set for all of them. And you can save for, that same family, rather than retiring at 55, could relatively easily retire at 60. And that just happened to be the time, around the time where their oldest, or youngest child was going to graduate school anyways.
Isn't it funny how that
Ben: works out? I've seen that work out
Nate: so many times. It's so funny. Every time. Every time. It's like perfect. So, you should probably plan on retiring about the time your child is done with school. And if you're going to do that anyways, you might as well start saving all this money for college.
Because here's the best thing about it. Every physician wants to figure out ways to save on taxes. But, unfortunately, the way the tax code is written, there's not a lot of deductions that they can get if they're a W 2 employee. But when you look at your lifetime tax bill and how to lower it, for a physician, it tends to be how they save and [00:27:00] invest money.
And this is such a huge tax saver. If you can save early, see all that growth happen, and pull it out completely tax free, you're not only tax free. Getting prepared for college with the growth in the accounts by investing, but you're also limiting your tax bill by a ton So the day that they go to school rather than paying 50, 000 a year, which you probably had to earn Eighty or ninety thousand just to pay the bill Yeah, you get to pull that fifty thousand out of your five twenty nines and pay no taxes on it
Ben: Yeah.
I got to say in my household, you know, with two kids in college, my bills have actually gone down because now they're not eating here and there are things that we're paying for out of their 529 fund. So it's, uh, rather than going up, I know that's surprising, but I did all my saving early, literally started saving when my kid had a social, like you said, so, yeah.
All right. Uh, so what is the big takeaway today in the good news, bad news, [00:28:00] uh, physician saving for college podcast?
Nate: So the good news. is that costs of college are moderating. And everybody has been waiting for that. The bad news is, it's still expensive even though they're moderating. So the big takeaway, you need to start saving early, and consistently check your plan to make sure you're on track.
Okay.
Ben: Great. Now, before I wrap us up here, I just want to remind all of our listeners that we have this really cool thing called the Overtaxed Doctors Retirement Investing Checklist. Nate was talking about saving money, saving taxes. This is something a lot of physicians want. There are over 21 ways to save taxes just while you're planning your retirement and the combined value of those for the average physician runs into the hundreds of thousands of dollars of tax savings over the course of a lifetime and these are not hinky.
There are some of them are kind of obvious. Some of them are a little bit sleepers, but those are all packed into the [00:29:00] giveaway that we have just for listening to this podcast. And by the way, there are people who are buying this from us. that don't listen to the podcast. They just go to our website. They see it and they pay for it.
So it has real value. And you can find a link for that in the show notes, or you can visit our website at physician family. com slash go. So with that said, until next time, folks, remember, you're not just making a living, you're making a lot.
Voiceover: Thank you for listening to the physician family financial advisors podcast.
Are you getting all the tax breaks you really deserve? To find out, get your copy of the Overtax Doctor's Retirement Investing Checklist, available at PhysicianFamily. com forward slash go.
