College is expensive, so you should never pay full price. Hosts Michael MacKelvie, wealth advisor, and Daniel Sharkey, senior wealth advisor, discuss ways to reduce college costs. They’ll cover more well-known strategies, like 529 plans, and some lesser-known tactics.

Transcript

Michael MacKelvie: College is expensive, but that’s why you should never pay full price for college. And that’s what we’re going to talk about here today. This is Your Life Simplified. My name’s Michael MacKelvie, certified financial planner with Mariner. I am also joined by our new host, Daniel Sharkey, certified financial planner with Mariner. Welcome, Daniel.

Daniel Sharkey: It’s great to be here, Mike.

Michael: Yeah, excited to have you. And again, I think really excited because you have shared kind of a passion to talk about these different subjects, and you have a great delivery, a great way of talking about them. So very happy and thankful, grateful to have you here with us and moving forward.

So the first subject for today is education planning. How can we maybe pay less for college? What are the ways that we can save on taxes, tuition, different ways that we can just pay less for college? Because parents are obviously concerned with it. One of those first ways, the first education account at least that people think of is the 529, right?

Dan: It is. And as a father of three, it’s one of the key issues that keeps me awake at night. I know it’s going to keep my wife awake at night. But the good news is is that there’s a lot that you can do now proactively to ensure that, to your point that you made earlier, that you don’t pay full price for college. And what do we actually mean by that?

So just a couple of quick definitions so we kind of set the table on what we’re actually going to talk about. So a 529 plan is a savings account that’s tax deferred and then ultimately becomes tax free if those distributions from that account are used to pay for qualified education expenses.

Now, there’s some nuance there that we’ll go through about how you can use it for K through 12 as well. But focusing on college today, imagine a distribution from this account that goes directly to pay your college tuition, books, room and board, special needs services, things like that. If that distribution is made from this type of account, there’s no tax on any of the investment appreciation in that account. Very similar to an IRA or I should say a Roth IRA. But this is specifically for college education expenses.

And for parents, it’s a wonderful way to save because if you think about funding these when your children are young, you have 15, 20 years of appreciation that could occur in this account all for the explicit benefit of reducing that tuition bill. And a dollar today can turn into three, four, five dollars tomorrow, which again, to your point, is making a significant dent in the total cost of tuition for all families across the country.

Michael: Definitely. And I think people get confused on the contribution part of it, right? So there’s these limits you see from a state standpoint.

Dan: Sure.

Michael: You might see a $2,000 limit for Oregon. And maybe just to clarify what that means, that’s typically the amount you can deduct maybe from your state income tax, for example, that’s Oregon’s benefit. Other states are going to have different benefits, different ways of maybe providing a tax break if you stay with your state-specific plan. But you can actually invest in different state plans. There’s also a gifting limit that you might see out there. So, for example, the annual gift, that’s how much you can give, each person can give to the 529 per beneficiary, right?

So, if let’s just say, for round numbers, it’s not this amount, but let’s just say the annual gift exclusion was 15,000. That’s 30,000 that you guys could give to that child before it starts eating into that exemption. However, and this is a question that comes up a lot, parents that are behind on savings.

Dan: Right.

Michael: First off, that’s everybody, right?

Dan: Exactly.

Michael: I don’t know about you, I have yet to meet somebody that’s oversaved for college.

Dan: Exactly.

Michael: I’m sure they’re out there. There’s somebody out there, feel free to write in. But I feel like everybody is behind on this. And so you maybe have some money and you’re like, “Okay, well how can I catch up? What are some ways I can catch up?” You can superfund from a contribution standpoint and accelerate that contribution.

So you can go beyond that gift exemption. There’s some nuances to it, but I just wanted to highlight that from a contribution standpoint is the ability to maybe give more and also just be aware of their state deduction limits and gift limits. And then there’s also kind of this exception from a superfund role where you can do up to five years of gifting at one time.

Dan: Exactly. And a key consideration when you do that superfund planning strategy, it’s one of the better elements that you can do to really supercharge that account. Additionally, what we’ve seen in the past is that those limits continue to rise, typically on an annual basis. So even if you do five years’ worth of annual gifts, as those limits grow, you’re able to kind of basically catch up the catch-up, meaning that you can continue to add to whatever that new amount is.

So if you’ve done five years and then the next year as they raise it by a thousand dollars, you can contribute another thousand dollars to make sure you’re kind of staying on track. So having that ability to not only put in this year’s amount, but next year’s amount and up to that five-year limit is really powerful. And that’s per person, per beneficiary.

So if you think about other people in your life that may want to help fund a 529 plan for your children, there’s no limit on how many they can have. So it’s a wonderful planning strategy. And let me just make one comment on the state specificity of these 529 plans. And you alluded to it directly. You don’t need to be a resident in the state that you live in to fund that 529 plan.

So for example, if you look at Morningstar, Barron’s, some of the other financial publications, Utah commonly is ranked at the very, very top for their 529 plan. In the state of Massachusetts where I live, there’s very little benefit for using from a tax deduction standpoint on the state plan. So again, make sure you really understand your options. You’re not bound by the state that you live in, and that’s a crucial component because not all plans are created equal at the state level.

Michael: Yeah, that’s tough because a lot of schools out there aren’t cheap. There’s a lot of private schools in your neck of the woods there that aren’t exactly inexpensive.

Dan: And you just hit on something that I was going to talk about that it’s really, really important about funding a 529 plan. Questions that we often get and that parents stress about is, “What level do I actually fund this 529 plan to?”

And this is where the planning element and really understanding how these things come to fruition is important. Because if you look at, just take my neck of the woods, right? Take Boston University, Boston College, those tuition rates are somewhere north of $80,000 a year. I mean, just hearing those words come out of my mouth is painful. Whereas if you look at UMass Amherst, which is a terrific, highly rated state school with an excellent business program, those tuition rates are in the mid-30s. If you project that forward and you’re looking to fund these accounts, you really have to have a sense about what you’re comfortable, what your limit is, what your target is.

Because if you do this, let’s say on an annual basis, the amount that you would need to save to send your daughter or son to Boston University versus UMass is going to be markedly different. So this is where having the conversation with your financial planner is really helpful to figure out what amount you’re most comfortable with and what are we actually working towards.

Michael: Yeah. Yeah, I think that’s a really good point. And the other point I want to make is this is not the only vessel, right? Although it is quickly thought of as the only solution, and people feel kind of paralyzed and powerless as they get closer to college, because they’re like, “Well, how much am I really going to save if I put it in when the kid’s 16?” You’ll save a little bit, but maybe not a huge amount.

There’s other accounts you can save to, but I also, when we get back later in the steps, I want to talk through some last-second things that can be big game changers. But the other account that gets looked at for folks at least a minor account, a custodial or UTMA, Unified Trust Minors account. The benefits and the cons to this, right? I could never understand why somebody would want to use this.

Dan: Right.

Michael: In comparison to a 529. Because when you make that gift, it’s an irrevocable gift to a UTMA account, a custodial account. That kid is going to get it regardless of who the heck they are when they’re 19 or 21, depending on what the age of majority is in your state, regardless who they are. That can be terrifying as a parent. Here’s why it’s ended up being a lot more powerful account than I ever would’ve expected.

The fear I had is the exact same one that probably parents do. “Well, what are they going to use it for?” Here’s what actually happens. My experience, kids get to that age, they look at that account and they say, “Wait, I have 20,000 in that account and it’s my account?” “But you have to use that for college. But if you get a job or you have a scholarship, then you can just have that for your first house, your business, whatever on the other side.” It doesn’t have to be used for higher education expenses like a 529 does.

Dan: Correct.

Michael: That’s the big benefit, right? So, in that scenario, it has this way of empowering a kid, which ultimately for most parents, I would assume is the goal here. “How do I hand off that baton from a responsibility standpoint?” It is weird how money motivates all of us, including teenagers.

They look at that account and they think, “Well, there’s a little loss aversion here. I don’t want to use that 20,000. Wait, if I have a job and I make like 10 bucks, 15 bucks an hour, that’s maybe 10 hours, 15 hours a week, and I could keep that entire account. That sounds a lot more attractive than graduating and not having $20,000 in 11 months.” Right?

Dan: Mm-hmm.

Michael: So that’s a big benefit. Obviously, the tax benefits of it, because it’s going to be at the kid’s rate. I’m guessing your child is making less, I don’t know. The three kids you have, I’m guessing they are not …

Dan: Not fully employed as of yet.

Michael: Doesn’t mean their earning potential isn’t there.

Dan: That’s right.

Michael: Right? But the income as of today maybe isn’t what yours is, right? The benefit is the UTMA is going to be taxed at the kids’ rates. So, it kind of steps up along the way. And you can also do some gifting strategies. If you’ve got some highly appreciated stock, you can say, “Okay, let’s move that $10,000 gain over to that UTMA and then we’ll have the kid realize it over five years underneath the kiddie tax.”

Now it’s tax free versus if it was in your name and you’re going to have to pay all these capital gains rates. So, there’s other benefits beyond that, but that is the one account that I was surprised by over time. Behaviorally, the benefits of it were the opposite of what I was afraid of. The other thing, getting your kids to work. So, we talked about this UTMA, right? This benefit of an account that you can set up for them.

Now, if the kids in this case, if you own a business or you have a side business of sorts, that is something to consider is if they’re making income and you’re paying them $10,000 a year, they’re probably in a lower tax bracket than you are. Now this could have some financial aid ramifications to where it’s not beneficial if you’re qualifying for financial aid. If you’re not qualifying for financial aid, it doesn’t really matter where the income is, if it’s in the kid’s name or if it’s in your name.

So, if the income is with the kid, they’re in a lower bracket, they can maybe get that tax free if they’re underneath that standard deduction amount, whereas you’re going to have to pay taxes. Now of course, there’s going to be payroll associated potentially with this. You have to kind of work out and see if it’s right for your situation, but it’s something to consider. So those three kids of yours, Daniel, maybe kick that around.

Dan: It’s also, Mike, what you’re speaking to, too, is a level of financial literacy that is important to have kids understand as they go through. That’s everything for how they pay for college, how they utilize the funds that they have, the value of a dollar. And I don’t mean to sound like my grandfather explaining to me money back in the 1980s, but it’s a very similar idea. If you look at any of the studies that show that financially literate children, they make better decisions.

And while we don’t want that college tuition sticker price to be the defining reason you decide on this institution versus that, it should have a seat at the table. And my belief is, and what I’ve tried to do with my own boys and what I advise clients to do is, make sure that your children have a very clear understanding of what the implication of their college choice is. It doesn’t mean they need to be shamed, it doesn’t mean that we need to turn it negative, but it’s an irrefutable fact that …

Michael: Totally.

Dan: … having that conversation ahead of time ensures a much, much better outcome. I have a client who was a schoolteacher in Los Angeles, and she felt like she never really understood the implications of taking on debt and those types of things. So, the strategies that we’re talking about today can help alleviate that, but also ensuring that you have that conversation proactively before a decision is made will definitely lead to a better outcome.

Michael: Definitely. And the sticker price can be alarming for a lot of these colleges. Which gets into our next point of conversation, the difference between the sticker price and the net price. This is a deep subject, which is why I wanted to invite you to a deeper dive into education planning, why you should never pay full price for college.

I used to give this presentation to different local high schools, and I want to give that exact presentation to you. We’re going to be doing it August 29th, 3:00 p.m. Central. Make sure to attend this webinar, especially if you’re curious how you can pay less for college.

I went to a private school that had a sticker price in the 60 thousands. I did not pay anywhere close to that. In fact, I paid less. Granted, I had some scholarships that were a part of this than I would have if I just became a walk-on basketball player at Oregon State in in-state college. The way that was possible is the merit scholarships that were there. Now, depending on your situation, again, you might also have financial aid that’s available at some of these schools.

So these private colleges will have different pricing mechanisms in the public. The public is basically going to be following federal guidelines, financial aid guidelines. They’re not going to really have as many scholarship opportunities, nowhere near. The private schools adopted a pricing technique that follows a whiskey, the Chivas Regal Effect. They found that with this whiskey bottle, they could change the packaging of it.

They moved it to this really nice glass bottle, didn’t do anything to the product, and they raised the price. And when people can’t really tell the difference as far as the benefits or the product, they’re willing to pay more. If they see the price is higher, they’ll use that as a barometer, right? So, the pricing becomes more of a barometer. It’s like, “Okay, well that costs $30 and that costs $20. That must be better.”

Well, that school costs 50,000 and that school costs 30, it must be better. That is the exact pricing technique that these schools found started to work. So, everybody bought into it on the private side. The question is what do you pay at the end of the day? And that’s what’s so hard to figure out. But there’s different ways that you can figure out what’s my net cost could be with these different private universities, what opportunities might be there.

But it’s definitely something to understand is that sticker price, the $80,000 schools that you mentioned, for example, some of them will be that much. Some of them could be 20, 15, 30, 40, and there may be five, 10,000 more than UMass, but it’s the exact place that your kid wants to go. So that’s where that exploration is really important. And just understanding that you’re going to be kind of deceived in a way.

Dan: Sure.

Michael: And just kind of walking into it like, “Okay, I got to remind myself it’s not necessarily better because it’s got a higher price.” And that might not be the exact price, so you got to do a little research to figure out what you might pay at those different universities, right?

Dan: Absolutely. And you have to look at factors that impact tuition beyond what the academic core offering is. And I’ll give you a very clear example, just going back to my backyard here. Boston College is in a wonderful part of town. Its acceptance rate is exceedingly low. It’s for kids that grow up in the Northeast. It is a very desirable place to go. Another school, Bucknell, which I know several of our colleagues here a Mariner …

Michael: Oh, yeah.

Dan: … have attended, is another fantastically well-defined and excellent academic school. They don’t have the application rate that a place like BC does, while the quality of the education, the alumni base are all just as good.

So what I would also encourage, again, speaking to the private institutions that you were alluding to now, having a broad-based approach and making sure that you’re having the conversation with the bursar are and just asking the questions, “What flexibility do you have here?”

There’s a tremendous amount that you can do to ensure that you pay the lowest rate possible, and there’s no reason to not ask those questions. Because what you see on U.S. News & World Report is not the price that you should ultimately expect to pay.

Michael: Definitely.

Dan: And if you utilize some of these things that we’re mentioning today, you can really move that price significantly downward. And I’ll just give you one more example on the public side, even though this technique has become harder over time. So I went to the University of Colorado as an out-of-state student for my freshman year. Through a lot of hard work and a significant amount of implementation and changes to my personal life, over time, I was actually able to get in-state tuition. Changed my driver’s license, changed my permanent address, filed my own tax return.

Michael: People will say you couldn’t do that for Colorado. I will tell you that people believe that that is a state that you just can’t do that with. So, I want to make that note. So keep going.

Dan: Absolutely. And again, states have made this increasingly harder, and this is all above board. This is not some sort of technique that you can utilize that is kind of skirting the rules. This is actually physically moving your body to Colorado. And this is back in when I graduated, which seems like a long time ago.

So, if you’re willing to dig into these things, merit scholarships, grants, all the things that we’re suggesting, having those conversations with private institutions, there’s so many avenues that you can take, and we would really suggest that you take an all approach. It’s not this or that. The cumulative impact of all these different decisions that you can make to help your family, help yourself lower that tuition bill is really what’s going to lead to your ultimate success.

Michael: Yeah. And there’s the two pieces of the equation, the funding, the savings, right? Of, “How do I best save from a tax-efficient way and set some money aside?” Which we’ve touched on a little bit. And then there’s the paying for college and the paying for college strategies being, “Okay, I can maybe get in-state residence. Okay, I could maybe improve my GPA by 0.2.”

And the cutoffs a lot of times are cliff for some of these merit scholarships. The automatic ones where it’s like you have a three seven versus a three six, you get $6,000 more a year. That’s 24 over four years, cliff falloffs like that, right? So, funding and paying for college strategies, two different things. There’s other funding. Real quick, the Roth can be used potentially as a funding strategy. That’s something worth exploring. The last piece I really want to spend some time on today as far as the paying for college strategy is the negotiation phase.

So just as background, I worked with probably 200 different families over two, three years or so, just doing this, negotiating college tuition with these colleges. And so, I get a lot of questions about this. It was typically the area that parents were the most curious. Because they’re like, “Okay, well, I still want to figure out if I can pay less, even if I’m paying 30 or if I’m paying 40, if I’m paying 80, how do I get this thing down?”

And so the way it works is you’re going to apply to these colleges. The kid will get in, and let’s just say they get accepted to five of them and they got one that they’re maybe kind of leaning towards, but they have the other four that also gave them an acceptance. How do you negotiate with all of them or maybe that one that they really want to go to? Definitely depends on a lot of variables, like where somebody’s at. But I’ll just give you one example of a way that you can do that.

It’s typically through what’s called an appeal. So how do you appeal this offer? If the student received, let’s say, $10,000 of merit aid from SMU, but they got 20,000 from a competing school, let’s say TCU, those two schools compete for the same student, typically. You can use that offer from TCU in your appeal to the merit aid department.

You have to write this letter and you kind of want to follow some rules and guidelines, where their parents do it wrong a lot of times. That would be the area that I, a lot of times, was helping out folks. But you can write this letter to the merit aid department. And we would win three-quarters of the time, we would win more money. Just and this was a 30-minute time commitment with the parents. Okay?

So, you’re at the school’s discretion. It’s not like they have to give it to you. But Daniel, let me ask you a question professionally, is it easier to negotiate before you go to a new job, before you take the offer and when you have other offers on the table or after you’ve been there for a year and they know how much you have to go through if you were to go to some other company? It’s easier to do it up-front.

Dan: It’s all about having the optionality before a decision is ultimately made.

Michael: Exactly.

Dan: And having those chips in hand, and the SMU, TCU example is perfect because they’re in the same town. And as you alluded to, there’s the same religious component. There’s all the things that are exactly similar in those two institutions. And so, having that ability to have multiple pathways in front of you and just figuring out which one makes the most sense for me, for my family, for my children, and communicating that to the institution. All of these things that we’re talking about are about optionality.

The different pathways that you can walk to ultimately get this bill lowered, and that’s one of them. But make sure you do that work ahead of time. I can’t emphasize this enough. This is not intended to cause panic or that the few people that they’re behind, but there’s little techniques that some people just aren’t willing to do. And I think those that are willing to take that extra time, be strategic, have a detailed conversation and help and get guidance from someone who’s gone through this process before, the results will yield themselves many times over for that.

Michael: Yeah, I don’t know what your hourly rate is, but if I stood to make $6,000 in the form of a scholarship over four years, 24,000 with 30-minute time commitment as a parent.

Dan: It’s pretty good.

Michael: That’s more than my hourly rate, certainly, right?

Dan: Right.

Michael: There’s probably a handful of people that are competing with that out there in the world. Just a few. But so, I think it’s totally worth it. There’s a lot of money on the table. There’s two different types of appeals where you negotiate. There’s a financial aid type of appeal, and there’s a merit aid type of appeal. Completely different departments, completely different ways that you approach it. But just one example would be if you use competing institutions’ offers, “Hey, I really want to go to this school.” One of the hardest days of my life was realizing this is going to put a lot of financial stress on my family if I do this, right?

Which it would, probably. And then working through that letter, crafting that letter around that to ask essentially for more money, which is the part of a lot of job interviews, right? It’s kind of the same thing. So, that is a huge part of all these private schools’ initial phase to where they just, they have appeals departments, now they’re ready for this.

Public schools, not as much. Not as much because they’re just operating under stricter guidelines. So, it’s more, “Okay, is there an error?” Which, by the way, there’s a lot of errors. You should expect you are receiving less than you probably deserve with those first offer letters that come back after you apply and go through this.

So anyways, thank you for this conversation here, Daniel. That was great, great input. And if you’re listening to this on YouTube, Spotify, wherever you might be listening to this, Apple Podcast, make sure to hit that ‘Subscribe’ so you don’t miss out on any industry insights from industry professionals here at Mariner. Thanks again, Daniel, and you guys take care.

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