Speaker 2 (00:02.018)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads turn today's worries about taxes, investing, and extra money into a comfortable feeling of financial security. I'm Ben Utley.
and I'm Nate Reddecky. Today's question is, what are most physicians doing about college?
Right. So Nate, I'm happy that we're tackling this topic. You are our in-house college planning slash college investing specialist and I was working on our database the other day and I noticed that we serve families with about 250 children age 22 and under. So these are college age kids, about a fourth of a thousand kids and you do the college planning for all of those kids. So, you know,
Question I have for you is like what what are physicians doing to prepare for paying for college today?
you know, they're doing a lot, lot of worrying. That's for sure. but it's, it's not worried that they won't get to the goal. It's, you know, when children are young, and you then physicians start to plan for college, they really have it really laid out on their mind. They want to pay for all of it. That's, that's the big thing. You want to pay for all of college and they want to give their children.
Speaker 1 (01:24.462)
The I guess they really want their options to be open What leaves a lot of ambiguity into like how do you do this? How do you approach this goal that I don't know exactly what it is because I don't even Really know my child when they're two years old or you know any any time before before they really start getting into the thick of it in high school in high school They just don't know what's gonna happen. Mm-hmm
By that I mean they don't know. Private school, public school, Ivy League, they don't know.
Or at all, right? Lots of brain changes happen between the time a child's born and the time that they turn 19 and then they turn 25, you know? Lots of changes. So what you're telling me is that all the physicians that we talk to are like, want to do something about college. So when we have somebody come in new for us,
are they pretty much all doing something about college? Are there people that are doing nothing and are just clueless? What's the general condition or state of college readiness when someone comes to us?
Generally unprepared.
Speaker 2 (02:39.432)
Okay, how so? Like, unprepared, like I don't know what to do, I don't know what my options are, I haven't saved enough, or I don't even know what the options look like. I know that some people that have immigrated here from other countries where they have different college systems may not even really grasp the whole nature of our college degree system here. So like, where on that state are we unprepared?
Well, certainly most physicians just have really no idea what it takes to fully pay for college and be prepared for college. Let's say the day their child sets foot on campus. So to have all the money set aside the day, you know, freshman year starts is foreign to most physicians. And I believe the reason that is the case is that if their parents paid for their school,
many times they just paid for it out of pocket. Something that may have been possible, you know, 10 years ago or 15 years ago.
What about the physicians who kind of borrowed and saved and scrimped and worked and did it? they, do feel like that they have a solid appraisal of what college costs today or not?
I think they do and it's when they come to us at least, it is the reason they're worried and they have fears because they, many physicians have a ton of student loans so they know exactly how much college costs because they're staring at it. Right. You know, in the form of a student loan balance. So they're getting started real early but they still are unaware of exactly what it's going to take to avoid those student loans for their children.
Speaker 2 (04:23.694)
Right. Well, you know, you, you mentioned student loans for, for their kids, for their students. So I have heard some parents say, my kid to have steak. You know, I want them to have a skin in the game. Uh, I expect them to pay for most of their college. So, uh, I know that that's not, that's not remotely realistic. So tell me, tell me about that. Tell me about the facts so that I can be more of a.
of a prepared college consumer as a parent. Tell me why that is kinda crazy.
Yeah, well, it's crazy mainly just because it's not not generally possible going the traditional route. So you kind of have to ask yourself as a parent, how much how much is this lesson worth the skin in the game lesson? if your child could pay for college, working a part time job a couple of days a week and still going to school, maybe that would be a lesson worth teaching. So I'm not going to pay for your school. You need to go to work.
But that's just not how the numbers run out. mean, the bare minimum you would need to pay for college today is maybe $30,000 a year split between tuition and fees and then room and board.
Uh, cause I mean, I've been seeing things occasionally as I'm shopping for colleges with my child. Uh, and I'm seeing, you know, college tuition, 10, $12,000 a year. Right. So what's wrong with that number? That number is different than the $30,000 figure you laid out for me. What's the, what's the Delta there? Why is there a difference?
Speaker 1 (06:01.582)
Well, you know, if you live at home, then that's the difference. mean, but if you think about living out on your own, you're not living a glamorous lifestyle as a student if you have $1,000 a month.
So what you're saying is the difference between the $10,000 $12,000 in state tuition that we hear about and the $30,000 price tag that you just quoted, the difference is housing.
Mm-hmm. You know, Exactly, it living expenses and that's really the expensive part. It's interesting when I hear people say the whole skin in the game thing. They want their child to have skin in the game, but they also have this vision for what their child's college experience should look like. oftentimes having that...
view of what your child's college should look like. You're spending their money. You want them to pay all this themselves, but you also want them maybe to go to a different state to become their own adult. And that's expensive. So many times what happens is their college experience, if they're paying for it themselves, kind of in a way devolves into just staying home, going to a community college, because that's all they can afford. And many times they just haven't built up.
the stamina or the work ethic to go to school and have a full-time job to pay for all that. So how much is this lesson worth? mean, is it worth your child going to school an extra two years because they had to pay their own way? Is it worth the feelings that the physician I'm speaking to may have about their own $400,000 pile of student loans? And to me, that's just, if you have the ability to save for college,
Speaker 1 (07:51.416)
which most physician families do, it's just not a lesson to me worth teaching. Not to mention, you want them to go to school and in today's day and age, it's a necessity to go to college for most people. Most people, not everyone, but for most physician families, they expect their children to go to college. So if you have that expectation and you want any say in how that experience goes, most of the time you should probably pay for college.
Yeah, personally, I believe that college is not a privilege. I believe it's something that's more or less required. mean, to live in the United States, to be part of this economy, to be able to afford housing and food and access to healthcare. I mean, you a job, right? And the kind of jobs that provide those things typically require a college degree. And so, you know, by, by not paying for that, I think that we're, we're really,
we're putting our kids in a really tough spot. We made these people, right? We need to support them. It's so, so I don't know that our, I don't think that there's, there's anyone listening that is says, college isn't worth it. Cause that's, you know, many degrees it takes to make a physician. so I wanted to talk about, about that first. So, let's say that we're, we're in the camp of, yeah, of course I'm here for college for my kid, you know? But the question is,
You know, what is the average physician doing about paying for college when they come to see us first? Like, what's the condition that they're in in terms of what they're doing tactically?
Yeah, well most physicians have heard about the types of accounts that you need to save for college and that's not all but maybe three-fourths have heard about that they should be using accounts like you know the the types of accounts that I hear are 529s they might ask me about minor accounts they might ask me about grandparent 529s you know that's really the majority of them.
Speaker 1 (09:58.798)
or maybe covered all savings accounts. usually they know, you know, they've gotten a good idea. They should use a 529, state sponsored, and they're putting in a couple hundred dollars a month. That is usually what I see anywhere from two to $500 a month. And maybe grandparents are giving the birthday gifts into 529s. That's generally what you hear.
I get a chuckle when I hear a client says, I'll say, well, what are you thinking about college? I go, you know, I want to make sure I send my kids and I'll cover the cost of it. And I say, okay. And I say, well, how are you saving? Well, we're not saving a whole lot because grandma said that she's going to pay for it. And I say, okay, does grandma know what it costs? Yeah. You know, does grandma know what it costs? Because most people don't know.
what college costs and it's really hard to know what college costs of course, but grandma is like the last person to truly know what college costs. So tell us, give me an idea about, know, we have public and we have private and I don't want to get into the difference between those, but tell me what college costs right now in both of those scenarios and kind of what's behind that. Cause I know that that's an eye opener for a lot of people as they begin to approach this conversation. Let's imagine that I'm a physician and I have three children.
And my kids are, you know, maybe they're, I have a newborn, I have a three year old and I have a five year old. So what's, what's college likely to cost me if I sent them to the best school that I can afford and you know, the, local, the local state school.
Yeah, so the average cost of private school is about 60,000 a year per child and that's today. And the average cost of public school is it's in the 20s but we'll say 30,000. It's a little less than 30,000 a year. So it's about half
Speaker 2 (11:53.83)
That's the ticket I'm seeing when I'm, when I have a kid who's just about to go to college and that's the ticket I'm seeing is about 30 grand for in-state public. I'm seeing 60s, 70s for private.
Yeah, the adjusted a plan for Williams College yesterday. And so these the more expensive East Coast even I. Yeah, that's seventy five thousand for those. I mean, the goal can get can balloon up really fast with three. And we have a we have family with five children. Usually we see two, but.
of the liberal arts.
Speaker 2 (12:19.0)
Okay.
Speaker 1 (12:32.11)
A family of three, if you're sending your kids to a private school, average private, 60,000 for four years per child, three children, 720,000 bucks.
Today though. That's today. Today. So these kids are going to be going off to school in 10 or 15 years. So how fast does the cost of college grow? I know that it's something crazy. Like what's the rate?
Yeah, the rate, I actually know the exact rate because I've seen it so many times, the average is 6.8%. So 7 % per year.
So if I do the rule of 72, which if I take 72 and divide it by about 7%, that tells me that the cost of college is going to double every decade. if my kids are, if my oldest kid is 5, and they're going to be 15 in 10 years, so that tells me that the cost of college is going to more than double. So it's going to go from 720 to about, let's say conservatively, 1.5 million all in for private. Is that right? That seems like a lot of money.
It's close. I believe it all in for that family of three. That'd be two and a half. It's about two and a half million.
Speaker 2 (13:46.188)
Whoa. Cause those last five years of compounding, like, yeah, it really amps things. Right. So grandma, grandma better be rolling in the dough. She's going to cover that bill. Right.
Yeah.
Speaker 1 (13:57.662)
Yeah, that's never really an acceptable plan unless grandma is right in the thick of planning and I don't ever usually talk to grandma, but there are times where we'll pause just pause the whole planning for college until I really well thought out conversation has had with grandma and if grandma says yes, then okay, but Usually that's just not the case. Uh-huh. One of the issues with college even when you get started early is is the time horizon
You know, with investing, the longer the time horizon, kind of the more flexibility you have. But I mean, these kids are going to school in 18 years. Yeah. That's just it. There's no work in an extra year, like in retirement, if things aren't going as planned, it's pretty strict. So on average, the cost is going up 7%. And it's hard to keep up with that if you start too late.
You know you you compare this to retirement where if you're not quite ready to retire you can you can keep going and I mean this is gonna be obvious as soon as I say it but when you think about retirement you retire and then you you continue to spend your money for 30 more years if you're lucky right but with college It's kind of us. It's a stop like you spend your money over a course of four years and you're done
You can't really drag it out. And I guess the thing about that is you can't really take a lot of risks in those last two, three, four or five years of college. So you're investing pretty conservatively, which means that you're getting a low return relative to the rising cost of college. I have to be careful because it's very different than planning for retirement. mean, it's a, it's, it's kind of all or none once college arrives. mean, you kind of either have the money or you don't, you're either have safe forward or you're going to be paying out of pocket. So I don't want to put the,
the fear in everyone, but I mean, you just laid out a number that's like 2.5 million. So help me, help me tamp that down. like, okay, fine. I'm grandma. That's, that's way too much for me. That's pretty much everything I would say for my own retirement. What's it look like on the other end to the end of the scale? The, say that I want to send all three of my kids to the in-state public school. Like what am I looking at there in terms of ticket?
Speaker 1 (16:08.462)
Yeah, I mean, it's going to be so 30,000. I actually have my calculator out. So 360,000 right now. Yeah. And in 18 years. So that's about 1.2 million. Wow. Yeah, still a lot. And you you did the rule of 72. We're not talking about performance or anything here, but just roughly the math is that cost of college is going to double and
maybe if you're starting early enough, you know, could say that half of that is your own contributions. Yeah. In about.
Maybe some of its growth, maybe.
Yeah, yeah, maybe. the key is here that there are ways to kind of get a hold of this elusive goal. And that is by starting early and, you know, contributing often. And if you can do that, then this amount of money seems more reasonable, mainly because there's vehicles that you can use, these accounts that I was talking about earlier, where the
your investments can be pulled out and you don't pay taxes if there is growth. Right. Right. So that the taxes are huge for physicians trying to pay a million dollars or two million dollars, you know, for college is very difficult when you're paying 40 % in taxes. Yeah. You had to go earn three to pay two.
Speaker 2 (17:36.526)
Yeah. And some, you know, in the blogosphere, you'll hear that doctors don't pay 40 % taxes. And that's true. But when you look at the top marginal rates, you know, that they do pay at the 40 % rate for the next dollar that they earn, even if their, average tax rate is maybe in the thirties, right? Okay. So speaking of savings vehicles, um, one of the things that I've been getting a lot of questions about lately are
So.
Speaker 2 (18:02.558)
UTMAs or UGMAs, which stand for Uniform Transfer to Minor Accounts or Uniform Gift to Minor Accounts. One of those is more common than the other and it's set at the state level, which one you have. So we're not going to go into the difference between those two because there's not a huge difference. But this is a savings vehicle that we sometimes see, particularly when we inherit clients from, let's say, online stockbrokers. know, this is, UTMAs were around.
might have a saving for my college years ago, right? We have more modern vehicles than that now, but tell me about how UTMAs work and why this is probably not a great savings vehicle for college.
Yeah, Utmas and UGmas are essentially accounts to, to gift money to children. So the way that they work is that when your child, becomes of age 18 or 21, depending on the state, could be 25. Essentially they get the money that's in the account. And so this is a tool, sort of a dated tool that had been used for college.
in the past, but the reality is the parent is putting money in this account and potentially investing it. then when the child becomes 18 years old, it's theirs to do with what they please. And if that happens to be college, good, but you have no control of whether or not it's for college.
So it's like it's their money, even though I've saved this with intention of college, it's like it becomes their money.
Speaker 1 (19:35.842)
That's right. Wow.
So, I'm finally gonna get that truck I've had my eye on.
Yeah, I mean, I think about some people I went to college with, I don't think it would have been spent on books. Not to mention it's an irreversible decision.
One way gift.
One-way gift and that's kind of how they're designed I mean that is how they're designed on purpose because many people use these accounts to truly make a gift a real gift that gets the money out of their name
Speaker 2 (20:08.716)
But isn't there a tax break that goes with these? mean, isn't that why people do it? Cause there's some tax advantage.
There actually is not a tax advantage Much of a tax advantage. Yeah, it a very small a very small amount Potentially could be advantaged and the way that it works is essentially the these accounts have invested In a security that produces income, let's say the very first bit of that income
tax-free and I bet I mean like thousand dollars. I think the exact numbers one thousand really low number the next $1,050 is taxed at the child's Which the child doesn't have any earned income. So it's a really small number as well. So For the income produced inside that account you get a tax break on $2,000 of that income
Low number here.
Speaker 2 (21:05.742)
What about the next money? we know that you can't send a kid to school on 2000. We know you can't send a kid to school on enough money that would earn 2000. like, about, tell me about the rest of the money.
The rest of it's tax at the parents rate. So this is what's called kitty tax. And that the parents rate, just talked about how bad that is for doctors. mean, the top, the top bracket there's 40%. You know, so if it earns $10,000, let's say, just for an example, 2000 is taxed at a very low rate or nothing and 8,000 is taxed at a very high rate.
Yeah. Not, much of a tax break in exchange for putting the money within line of fire of the, of the car dealers in town.
Yeah, right and The reality is that when this was the only vehicle then maybe it's okay because it's something it's a somewhat of a break Let's say and you're investing but a Much better vehicle was created. I think it was in the late 90s was created and that was the 529 account 529. Yeah the 529
E-529!
Speaker 1 (22:17.846)
So the 529 is great because you don't oh there's one more thing I wanted to add Okay, I'll get to it here in a second with when I'm comparing to the 529 Yeah, the 529 is Great because you don't pay taxes on income in that account. It's a tax protected account, right? Right And then the the very best part about it is that assuming you do have
How excited you are.
Speaker 1 (22:45.728)
some growth in that account. you pull the growth out, you don't pay taxes on it, which is not the case for UTMAs and UGMAs.
As long as you take it out and you spend it on qualify, higher education expenses, also known as QHE.
You got it. You got it. So if you're using this money for its intended purpose a 529 just blows an UTMA or a UGMA out of the water Yeah, just not even close. Yeah, and people like you said not only Let's say seasoned advisors being they use these these UTMAs because they're used to them
beats the pants off of.
Speaker 1 (23:25.646)
It's also difficult for an advisor in many states to make any money by having you invest in a 529. Right. They just, they're state sponsored plans. So sometimes they'll have you do a little bit of both, but the reality is UTMAs and UGMAs, they're a, I see them as somewhat of an estate planning tool for very, very affluent people who need to get money out of their state. That's just not usually a physician situation. They're trying to get
college at the best deal.
I've seen, I've seen speaking of five two nines and kind of dirty tricks. I've seen, I've seen dirty pool of five two nines where I had a client, well actually not a client. This is a staff member, staff member, grandma lives in a state that offered.
a state income tax break for contributions to the five to nine plan. So grandma put money in this five to nine plan and grandma could have gotten a tax break. Okay. Grandma's broker could not get any money out of that account. So grandma's broker put grandma's five to nine plan and a whole different state. Cause that's where the broker got paid. And so not only grandma pay the broker, but grandma also missed out on a tax break. And I.
Yeah.
Speaker 2 (24:36.054)
I can't guarantee, but I'm pretty sure there's somebody who's listening right now who's going through this. They're in the wrong state with their 529. And they're missing out on tax breaks. That is something we do see all the time, isn't it?
It is in less for young physicians because they're just getting started and more of the situation you just described. I am shocked by how many physicians know about 529s and yet their parents are not using them correctly. they could easily get, I mean, these accounts are as easy to open as a savings account. Investing while you're inside may not be as easy to some people, but getting them open and funding them.
and getting the tax break, it's really not that difficult. And I do it over Zoom, you know? And most parents are living in the same state and they have this broker that they've had forever. And the broker has told them to put the money in a 529 they can make money off of. And so, yeah, they miss out on a break. And it's unfortunate.
Yeah, it's thousands in lost tax savings I see. cray cray. That's the way a cookie crumbles, so you gotta watch out a little bit.
Yeah, so these 529s are awesome and on that grandparent note I wanted to say while most I'm going to compare them back to the the utmas one more time just in case I haven't made my case well enough, but it's really not a great idea It's best practice to keep money out of your child's hands and in the eyes of the irs. Let's say when you're filling out any
Speaker 1 (26:22.392)
FAFSA or anything for college. Most physicians families will not qualify for need-based aid, but just best practice is to keep money out of your child's name, which is not, you're putting money in your child's name in these UTMAs. And when you put money in a 529, well, for the benefit of the child is still in the parent's name.
Yeah, and if you point to later, can, you give the money, right? You just keep your options open.
Yep. And better yet, if if grandparents are contributing, that doesn't show up on the FAFSA at all until the money is spent. So you spend that money junior, senior year, it may never show up on a FAFSA form. So this is just best practice. But the point is that the way that the system is structured today, 529s are just the best bet pretty much for everybody. Grandparents, parents, if the money is for college, right?
which gets into the more complicated part about planning for college. So you gotta save, you know, quite a bit, contribute to your college fund a lot, families who value education a lot and they sometimes can overdo it. And they can save in these 529s for let's say Ivy league school and medical school. And the hardest part about planning for college is not choosing a 529. It is,
trying to set your child up to, let's say, go to these expensive schools, hard to get into schools, and then seeing them not get in. And at that point, you're in a bit of a pickle when it comes to that money that's stuck in a 529.
Speaker 2 (28:02.158)
So the hardest part of planning for college is not knowing where your kid's gonna actually go. You know, you're talking about need-based aid and, you know, filling out the FAFSA and whether or not that's a good idea. So I have some experience with this. I've had two kids that have applied to college and they've gotten scholarships and that kind of stuff. I've written about this in the newsletter. I may have mentioned on the podcast before. I'm gonna mention this again. So I have a friend, not a client, but a friend who's up in Portland.
Yes.
Speaker 2 (28:30.154)
And we're talking about our kids the other day. And I said, how's your daughter doing? And she said, well, she's getting ready to go off to college. And I said, where, where she want to go? And she said, well, we haven't really been able to talk to her, but she's applying to a local state school. And I said, okay, that that's cool. Is that where she wants to go? And she said, no, we haven't really looked around. That's just what's available. And I said, okay. So I said, how's your, are your daughter's grades? And she said, they're great. She's got like a three, nine. said, really three, nine. And they said, yeah. And I said, well,
how are you set to pay for college? And they said, well, we can definitely afford to send her to the state school. And I said, has she looked at private schools? And her mom said, no, there's no way we could pay for private schools. And I said, I don't think you'll have to. I said, there's merit aid. She's like, we wouldn't, we never get that. We don't qualify. And I'm like, no, no, this isn't need-based aid. I said, this is merit aid. It's money you get for having a smart kid. She said, really? And I said, yeah, you should go look at a couple private schools and apply to one and just see the money that you get.
So we talk about once every month or two. So I just talked to her last week and she said, hey, I just wanted to thank you for something. I was like, what? I totally forgot about this. And she said, well, my daughter went down to Lewis and Clark and checked it out. It's a small private liberal arts college that's out here. And she said, she went down and she applied and she got a really robust merit aid package. Like she has good grades. And so they gave us a really solid scholarship for her to be able to go.
I was like, really? And she said, yeah, and she loved the place and she's, she's applied, been accepted and that's where she's going. So, I mean, it was a, I think that might've been a five minute phone call that had with my friend a couple months ago. that's made the difference between, you know, taking general chemistry with 300 students versus taking general chemistry with maybe 30 students. And you know, after the merit aid was included, the cost of the private college was pretty much in line with the cost of the public school.
Yeah.
Speaker 2 (30:26.454)
I'll probably say that again. I've experienced the same thing. I've been through it with both of my kids. So before you throw up your hands and you say, know, we really can't private or we really don't want to pay for private. You if my kids want that, they can borrow for it. I don't think that's the choice. If your kid has decent grades, and I don't mean, you don't even have to have a 3.9 to get merit aid. I mean, 3.5 plus begins to get you in a merit aid territory.
I think you owe it to yourself to look at the private colleges because there's a lot of value there and the price tag in some circumstances is really not a whole lot more than what you'd pay otherwise.
Mm-hmm. Yeah It's very true. My spouse had a similar experience and I think that at going to a small Private college with small classes and it turned it changed her life meaning she needed those small classes and it's really You know really changed her as a person. She talks about it quite a bit and yeah, you know once again that that is the difficult part about all this You know, we don't know what our children are gonna need when they're 18
And some of them may need a state school and may need to spread their wings and see 300 people in a class. Some of them may not be able to do that.
Yeah, if I had a social butterfly or somebody who's maybe introverted, I'd look at sending them to a smaller college, maybe not private, but just a smaller college. And sometimes those does cost more than your big state flagship schools.
Speaker 1 (31:53.548)
Yeah, this brings up a good point. Another question that I get a lot from physicians is this question of over-saving. And I just kind of put in a warning for that. We spoke briefly on a, or not briefly, we had a whole episode about the danger of overfunding of 529. In that scenario that you just described, let's imagine you did save the full boat. You saved 60,000 a year for private school and then you got scholarships or a child got a scholarship for half.
you can refund yourself out of a 529 for a scholarship that you received. So it is difficult to overfund these accounts and I don't want that to be the fear really. You could probably err on the side of overfunding because I've yet to see a bunch of money left over in 529s. But it's those really expensive goals like the Ivy League school plus medical school that you have to be a little careful. Other than that,
You you have many years to reshoot your approach to college as you learn more about your child. And getting ahead is, you know, your best bet here. So 529s, save early, save often, do a real plan. And, you know, if you're giving your child the love and attention that they deserve and you really understand them, you will know as the years go on.
what they're in for and what they need. And that is the song I would want to sing here on this episode is give your child what they need. And most of the time they need college. So don't be unprepared for college.
Right. So before you actually start singing, Nate, I think I'm going to take us out. Is that okay? Okay. If you want to hear Nate sing, you can just ask us and we'll record it in a voicemail to you. But the way you contact us is to send email to podcast at physicianfamily.com. You can send us your questions, your comments. We love hearing from you. You can
Speaker 1 (33:44.245)
Yeah.
Speaker 2 (34:06.018)
Visit us on the web at physicianfamily.com slash podcast or physicianfamilypodcast.com. And of course you can call the physician family answer line at 503-308-8733. Again, physician family answer line where you can leave a question that we'll try to respond to 503-308-8733.
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