15 Creative Ways to Save & Pay for Your Kids’ College Education
To say that college costs have skyrocketed is an understatement. After adjusting for inflation, CNBC notes that average tuition for private colleges rose from $15,160 in 1988 to $34,740 in 2018. Both of those figures are in today’s dollars, marking a 129% increase. For public universities, average tuition rose from $3,190 to $9,970 over the last 30 years, a 213% increase in inflation-adjusted cost.
Those numbers are a bitter pill for parents, especially when many 18-year-olds are not mature enough for college. Some flunk out; others drift their way through four or five years of a parent-paid paradise, then graduate without the first clue what they want to do with their lives. Parents should think long and hard about whether to pay for their child’s college education.
If, after some soul-searching — and perhaps wallet-searching — you decide you do want to help with your kids’ college expenses, the next question you face is, “How the heck will I pay for it?”
Here are 15 creative ways to pay for your kids’ college education, many of which you can combine for maximum effect.
1. Create a Bond Ladder
While bond ladders sound complex, they’re actually quite simple.
When you buy a bond, you lend money interest-only for a certain number of months or years. Upon maturity, you get your initial investment back. So, if you invest $10,000 in 5%-interest bonds for 10 years, you get $500 each year for 10 years, and at the end of 10 years, you get your original $10,000 back.
The idea behind a bond ladder is that you buy a series of bonds scheduled to mature one after the other. That way, you receive a series of large payments on a schedule that meets your needs. For example, you could buy one set of bonds that mature just before your child’s freshman year, another set that matures before their sophomore year, and so on.
Bond ladders are often used for retirement planning, as a low-risk investment to cover the first few years of retirement and mitigate sequence of returns risk. But nothing says you can’t use them for college tuition instead.
2. Buy Rental Properties
Rental properties can help cover your child’s college tuition costs in several ways, the most obvious being income. Rental properties are income-generating investments, and that income can put a dent in tuition bills or even cover them entirely.
But real estate also tends to appreciate over time, even as the mortgage balance dwindles. Imagine you buy a rental property for $100,000 when your child is 8 years old, and you borrow an $80,000 mortgage. Ten years later when your son or daughter is ready to enroll in college, your mortgage balance may be only $55,000, but the property may have appreciated to $160,000. That leaves you with $105,000 in equity. You can sell the property to realize that equity and pay for your kid’s college costs, or you can refinance the property to pull that equity out in cash.
Just remember that rental properties are not completely passive investments like equities or bonds. They require some education and work to buy, and they require ongoing labor to manage. Before deciding to buy a property, read up on some of the pros and cons of owning and managing rental properties.
3. Draw on Your Roth IRA
Among the incredible benefits of Roth IRAs is their flexibility; account holders can withdraw their contributions to pay for college tuition penalty-free. But you can only withdraw contributions, not gains. If you invested $30,000 in a Roth IRA, and your account balance has grown to $40,000 based on gains, you can only withdraw up to $30,000 without invoking an IRS penalty.
Another perk of using your Roth IRA to pay for tuition is that it’s invisible for financial aid purposes. Colleges and other need-based scholarship and grant committees don’t consider your Roth IRA when reviewing your child’s application for financial aid. But after the first year or two, they may notice the extra influx of cash and revise your child’s financial aid downward, so consider this before you get too smug about sheltering money.
You can find more on maximizing your financial aid eligibility here
4. Capitalize on the Lesser-Known Benefits of 529 Savings Plans
Parents can use 529 plans as tax-advantaged accounts to save and invest for their children’s college costs. Like Roth IRAs, the gains are tax-free if used for college tuition. Where 529 plans get a tad hairy is that they’re operated on the state, not federal, level, so the tax benefits vary by state. In some states, account holders get a small tax deduction on contributions, and some states even offer a tax credit.
What parents may not know is that they can participate in multiple states’ 529 plans if they like; they’re not locked into one state’s plan.
Another perk is that you can change beneficiaries at any time. If you have three children, and your oldest scores a free ride to Harvard based on their impressive pole-vaulting abilities, you can switch their 529 plan to benefit one of your other children.
For that matter, you can capitalize on this rule to invest in 529 plans even if you don’t have children yet. To do this, set yourself as the initial beneficiary, then later switch the beneficiary to your child — or to your niece or nephew if you don’t end up having children.
Speaking of nieces and nephews, your family members and friends can contribute to your kids’ 529 plans too. Depending on the state’s 529 plan rules, these donors may or may not receive the tax benefits. But for those ever-practical family members who don’t want to bother with toy fads or shopping, 529 contributions can make a great birthday or holiday present — even if your kids don’t fully appreciate the value of it when they’re 11.
If you need to set up a 529 plan for your child, you can do this through TD Ameritrade.
5. Buy Prepaid Tuition
Many states offer a prepaid tuition option in their 529 plans. Instead of a savings and investment account, you pay the state a preset amount when your child is young, and the state locks in your child’s tuition costs. The idea is that the state invests the money, and the returns cover the growing cost of tuition over time. That’s great in theory, but it comes with some tricky caveats.
First, what happens if your child doesn’t want to go to college in that state? That nearly happened in my family. My parents invested in prepaid tuition for my sister, but in her teens, she started making noise about how she wanted to go to school out-of-state. My parents bribed her by offering her their old car if she stayed in-state — a deal she accepted.
States do have rules in place for this, most commonly that the student will owe the difference in tuition costs if they attend school out-of-state. But a more disastrous scenario could strike if the state’s fund doesn’t perform well enough to cover your child’s tuition costs. In the fine print, most states include clauses that there are no guarantees for your prepaid tuition. If the market crashes, you could be left with a worthless piece of paper and an indifferent state government. While it’s not likely, it’s a risk to research before buying into any state’s prepaid program.
6. Find Niche Scholarships & Grants
Scholarships and grants can get weird. For example, the National Potato Council offers a $10,000 scholarship for students bound for agricultural college who persuasively declare their love of potatoes, while Duck Brand Tape sponsors a $5,000 scholarship for students who accessorize their prom outfit with duct tape.
There are scholarships for students of all kinds, from those who live in mobile or manufactured homes, to those with red hair, to those with dwarfism. In short, there are likely scholarships for your child, no matter what their hobbies or personal attributes are.
For details on how to start your research, here’s how to find college scholarships and grants.
7. Take Advantage of the AOTC
The American Opportunity Tax Credit (AOTC) allows you to knock up to $2,500 off your tax bill, per student, per year. It can be applied to you, your spouse, or your dependents. The first $2,000 of your college expenses earn you a dollar-for-dollar tax credit, after which you get a credit of $0.25 for every dollar you spend on tuition, up to another $500 in tax credits.
Keep in mind that a tax credit is far more beneficial than a tax deduction. Deductions come off your taxable income; credits come off your actual tax bill. You can find more details about the American Opportunity Tax Credit and other college tax deductions and credits here.
8. Take Advantage of ROTC
Each branch of the armed services offers ROTC scholarships, which stands for Reserve Officer Training Corps. The premise is simple: The military pays for some or all of your child’s college tuition, and in exchange, your child commits to a certain number of years of service upon graduation.
When students graduate and begin their military service, they enter as officers, receive additional training, and specialize. In many ways, it’s a win-win; the student gets a free or deeply discounted college education, a guaranteed job upon graduation, and additional career and leadership training. They also receive some structure and personal value instruction to boot — which some young adults need more than others.
Beware, though, that ROTC scholarships are far from guaranteed; students must apply for them and be accepted into the program. And like all scholarships, they’re contingent on performance. If your child slacks off and earns Ds, don’t expect the military to keep paying their tuition.
As a parent, you can sweeten the pot for your kid by offering to invest some of the money you and they are saving on tuition. You could put it aside for a down payment on their first house or invest it in an IRA for them. For that matter, you can invest it in your own retirement so your kids aren’t stuck supporting you when you’re old and broke!
9. Co-Op Education or Employer Reimbursement
The military isn’t the only employer willing to cover some of your child’s tuition in exchange for work and an employment contract upon graduation. Some employers— such as Starbucks, IBM, and UPS — offer partial tuition reimbursement for full- or part-time employees.
An alternative route is cooperative education, in which students can take advantage of partnerships between their university and local employers. Co-op education models vary widely, with some offering parallel employment and education, either full- or part-time. Others involve alternating semesters between work and study. Depending on the university, students may get academic credit for their work experience and receive a salary from the employer to boot.
For more information about co-op education, check out the Cooperative Education and Internship Association (CEIA).
10. House Hack With a “Kiddie Condo”
Before going into what the “kiddie condo” program is, it’s worth explaining what house hacking is. In its simplest form, house hacking is finding a way to have other people pay your housing payment. The classic model is buying a small multifamily home, such as a duplex, and moving into one unit while renting out the other. Ideally, the tenants’ rent covers your entire mortgage. Another common model is buying a home with many bedrooms and renting the others out to cover the mortgage.
The average annual room and board costs for the 2018 to 2019 school year are $11,140 for public universities and $12,680 for private colleges, according to The College Board. As an alternative to shelling out $1,000 per month to your kid’s college to house and feed them, why not buy a property for your kid and a few of their friends to live in? The roommates (or their parents) pay you rent, which ideally covers your mortgage payment.
Upon graduation, your child can either continue to live there, or they can move out and you can sell the property or keep it as a joint investment property. If you sell it, you profit from any appreciation. If you keep it as a rental, you earn a monthly cash flow.
Many lenders offer “kiddie condo” programs that allow you and your child to jointly buy and finance a property, according to FHA guidelines. In addition to the financial benefits, you also get the tax benefits of writing off expenses such as mortgage interest, closing costs, and repairs.
That sure beats paying the college for room and board.
11. House Hack Yourself
Life is a lot easier when you don’t have to pay for housing.
If you’re struggling to figure out how you can afford to help with your kid’s college costs, one place to start is by eliminating your own housing payment. You don’t have to move into a multifamily home or bring in roommates; you can house hack with your current home and trim or eliminate your housing payments.
12. Flip Houses With Your Child
One way to pay for your kid’s college tuition while still making them chip in for it is by having them work on joint real estate investment projects with you.
Together, the two of you can scour listings, walk through homes, buy them, renovate them, and sell them. You get some quality one-on-one time with your son or daughter while teaching them valuable skills ranging from real estate investing to renovations and home improvement. They learn the value of hard work and have a real stake in their own education. And, of course, the two of you make some money to cover their tuition.
13. Start a Side Hustle With Your Child
I love real estate investing as a side hustle, but it’s far from the only option you can do with your kids. You could buy and flip antiques or vintage cars. You could start a landscaping business or teach them day trading and equity investing.
The ideas are limited only by your imagination. Try these 18 side business ideas to get your creative juices flowing, and remember that the more invested your child is in their education, the more likely they are to take it seriously and graduate.
14. Make Your Child Earn Their College Tuition
Perhaps you give your kids an allowance that’s tied to their household chores. One option is to deduct a portion of their allowance and invest it in a 529 plan for their future tuition. Even better, give them the full allowance, then make them hand back a portion for their tuition to make their contribution more tangible.
If you like, you can give them a “raise” to cover the extra “expense” — although you may also want to require extra chores and work from them as part of the deal.
And there’s no reason you have to stop at their college tuition when charging them for expenses. One way to teach kids how to save money is by giving them a higher allowance but requiring them to pay back expenses like rent, groceries, and utilities. Ultimately, the goal of an allowance is not merely to give your kids money in exchange for chores, but to teach them how to create and live on a budget.
15. Offer Conditional Loan Reimbursement
Are you open to paying for your kid’s college tuition, but only if they take it seriously, get good grades, and actually graduate?
I’ve known parents who had their kids take out student loans to pay for college, with the understanding that the parents will partially or conditionally pay off their student loan debt upon graduation. One way to approach this is tying the reimbursement to the student’s grades. Imagine how much harder your child will work if they know that a 4.0 will mean 100% tuition reimbursement, but a 3.0 will only yield a 75% loan reimbursement?
Besides being an excellent incentive for studying hard and earning good grades, this gives parents some extra time to put together the money to cover tuition. Four extra years of compounding can do wonders for your 529 account. Of course, you’re competing with the interest racking up on the student loans. But if your child doesn’t graduate, or only qualifies for partial reimbursement, then that’s more their problem than yours.
Whether you or your child pays for their college education, always keep costs in mind. Does your child really need to attend a tiny private college that charges $55,000 per year? Or can they get a comparable education for $15,000 per year?
It’s also worth looking into combined-degree or accelerated programs if your child knows exactly what they want to study. At the very least, make sure they graduate within four years. My father told me in no uncertain terms that he wouldn’t chip in a cent after my fourth year of college. I graduated on time.
Look for multiple ways to lower your child’s college tuition costs and combine them with as many of the ideas above as possible, and you might just escape your children’s college years solvent.
Written by G. Brian Davis 5/7/19