Speaker 1 00:00:08 What's up everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Rin. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. What's up guys. I, um, I have a topic that seems to keep coming up in my day to day that I wanted to talk about today. Um, and I think it, it's gonna catch a lot of, a lot of us off guard here. So I think this is an especially important topic, um, you know, to think about ahead of time. And so we're gonna be talking about funding your, your children's education, uh, or future children's education, or maybe, you know, how they fund it themselves. Um, and, and what that looks like. And ideally, you know, try to help you guys, you know, go in with eyes wide open, um, and not, not get caught off card.
Speaker 1 00:01:09 Cause I think a lot of people, as I mentioned are in for a, a pretty big financial surprise when their children start undergraduate. So we'll jump into that now. Okay. So common scenario we see, and I've even kind of thought this direction myself, or I guess this is more of an idea. So the idea is that, um, you know, I, I paid for my own college, so I'm um, 38, I guess I just turned 39. Oh man. <laugh>, I've gotten to the age where I forget how, how old I am, but, um, so I'm 39 when I went to undergraduate, I paid for my college. Um, and the part that I couldn't pay for, or this amount that was not covered through scholarships or whatever, or aid, uh, I was able to cover through student loans. So I was good to go. So they, this idea is that I paid for my college.
Speaker 1 00:02:04 So, you know, it was good. It was a good experience for me. Uh, and so therefore I want, I want my child to also have that experience of, you know, taking responsibility for something themselves and, you know, go that same route. Like I said, I've kind of felt that myself that's the tendency for everyone is to kind of want, you know, the same, I guess not always, but a lot of times people want the same for their children. Um, cuz they kind of think, you know, that's was a good experience for them and you know, whether that's right or wrong, that's more of a personal preference. So that's, that's not the issue here. We'll talk about it more. But I think the issue is just kind of not quite understanding how things have changed. So, um, so maybe that's the idea that you have, or maybe more commonly is that you're just not sure.
Speaker 1 00:02:50 You're like, you know, and maybe that's your fallback. So you're like, I'm not sure how I feel about that or maybe you and your spouse differ on how you feel about it. And you're like, well, you know, worst case scenario, they kind of just go that same route I went and that was fine. Uh, I, and I didn't, I only, so I'm talking about me again. I only ended up having, so I went to university of Florida and I only had to take out, um, I think it was 10,000 or 11,000 of student loans in total. So that was like the leftover expense that I couldn't cover through scholarships or, or financial aid or um, you know, grants or work study or all that stuff. And, and my parents didn't pay any of it. So that was the remaining balance that I was funded through student loans.
Speaker 1 00:03:39 So it was not a, it worked out fine. That was not a huge, uh, amount. I mean it was definitely not awesome, but it was a, uh, re uh, an amount that I was able to pay off, you know, relatively quickly. And so we're just talking about undergrad today. So that scenario, uh, seems very reasonable. It makes sense to only to kind of start there with your children. So the challenge or the problem, first of all, um, that doesn't work out the same is things have changed and your circumstances are very likely different than your parents. So that's not how, it's not how it works. Doesn't, it's not as simple as, you know, every student gets the same setup. And so, and so we talked about this quite a bit in a prior podcast with Joe messing messenger. Who's a buddy of mine, uh, that really focuses on education planning.
Speaker 1 00:04:36 And we'll link to that in the show notes where we, we talk about like how to help your child kinda maximize their college experience or college costs or efficiency there. And so we talked about kind of this whole pricing of college and how it's not as simple as just everybody pays the same, what I did today. Um, I, I thought it might be helpful to run the numbers on university of Florida for myself and just kind of see, so you can, so first of all, you can run the numbers on any school now, uh, and just, they call it like university of Florida calls it like a net price calculator or something like that, but they have a calculator. All these schools now have calculators where you can input your financial information and, you know, sometimes even like the students academic information and they'll spit out like a sticker price, that's personalized for you.
Speaker 1 00:05:28 So I went through that process just now and kind of like did a hypothetical, assuming, you know, I had a 11th grader or something like that about to go to school and they're looking at UF. And so we were I'm outta state. I don't live in Florida. So, um, anyway, what this calculator spits out here is, so based on all my stuff it's like, and I'll, I'll include this, um, breakdown in the show notes, like the full numbers breakdown, but the, the calculator spits out that the estimated cost sticker price for us would be 37,328 per year. So that's the estimated net price for academic year 21, 22, 20 21, 20 22. So that number varies, you know, by your based on your personal financial situation. So that is a much bigger number than for sure when I went there also this calculator, you know, assumes that, uh, there's zero financial aid.
Speaker 1 00:06:25 So we would get no financial aid. They assume the parents pay all of that or, or I would be paying all of that. Um, and so there is, you know, it does mention that there's a, you know, they can do a work study program for 3000 a year. So, you know, that is not voting well for that situation. I just talked about, you know, they're gonna kind of take care of it themselves, cuz um, they're gonna have to get a student loan of, you know, $35,000, but so that even more so they can't do that. So, so let me back up a minute. So a lot of times people are thinking, okay, well my child they'll get some grants, some scholarships, some whatever. And some student loans, what a lot of people don't realize. There's a pretty modest cap on how much they can get in student loans.
Speaker 1 00:07:17 So with direct, as of this recording, they change every year. But as of this recording in 2022, the direct student loan cap for undergraduate for a student, uh, that's still a dependent is 5,500 for first year 6,500 for second year, 7,500 for third year. So basically, so going back to tho that example, I just did with university of Florida for outta state. My estimated net price is 37,000 a year in change. Uh, and you know, the student, you know, my child is only gonna be able to get 5,500 a year of student loan money plus 3000 for work study. And that's them working the cost after that is still 28,828 per year. So who, so the question is like, what so well, first of all, this example I've thrown out so far does not include all grants. I mean, there's some other state specific or situational grants or scholarships or those kinds of things.
Speaker 1 00:08:23 It definitely doesn't include 100% of everything. Um, but it does include like the big federal grants out there or financial aid. So there, you know, depending on circumstances, there could be other available, uh, resources from, you know, that are not coming from the parents, but they're not super common. And so anyway, that is a pretty big nut to crack 28,000 per year. And the question then becomes, okay, well who pays this? So what the universities are assuming is it's on the parents. And even if you wanted it to be on your child to kind of work through it themselves, how are they even gonna get that much money? Because the student loan people are gonna cap them out at 5,500. Um, you can't really earn that much or it would be difficult, I guess you could maybe earn that much if you worked throughout the year, but it would be a challenge.
Speaker 1 00:09:15 You'd have to have a pretty good job. Um, so it, that's gonna be very challenging for them, if not impossible, you know, if they truly do, and this is university of Florida, this is not like a high priced, uh, educational institution. So I think what happens is a lot of people don't realize how this works and they assume that their child's gonna be able to do the same sort of thing or have the same sort of experience or opportunities they did. And then their child gets old enough to where they have to get serious about it. Um, and at that point it's kind of like too late. So, you know, if I have a junior and I'm doing these numbers and I'm thinking like along the lines of what I experienced, and then I see these numbers, I'm like, what in the world is, I know education went up, but like this just doesn't even work.
Speaker 1 00:10:03 And they're putting all the responsibility on the parents to, to take care of this. So a lot of times what happens with the parents, um, if they have, you know, a, you know, hopefully they have a decent financial situation, but even then they're typically having to like take from other buckets. So like retirement accounts or whatever, uh, cuz you know, that was already earmarked money. So they don't have a lot of times with this scenario. They're like, you know, if, if you wanted to your child to take care of education themselves, you don't have that bucket, uh, ready. And so you're, if, if you get into this position, if you do want your child to go to UF, odds are you're gonna have to throw in some money. So you either take outta some other bucket and deplete like retirement funds or you take out student loans as a parent.
Speaker 1 00:10:50 So that's probably fairly common. Uh, a lot of people don't like, that's not a fun dinner conversation. Like people are not gonna brag about taking out a student loan as a parent, but it's pretty common. Uh, so the parents can actually take out a lot of money in student loans. So in this whole example, I just threw out back to university of Florida. You know, if I'm, if the net price is 37 K and if my child gets the max student loans and then they do the work study program, that leaves me with a, you know, 28 to 29,000. On my end, as the parent, I could get out, I could take out parent loans or plus loans they call 'em, uh, and cover that difference. Um, you know, so I could take out the student loans as the parent, but that is completely the parent's responsibility that is not a student loan for the child.
Speaker 1 00:11:41 And that's a pretty big number, um, you know, to be taken out each year after, you know, four years you're gonna be over a hundred K um, you know, no problem. So, um, so big thing, big takeaway today is at a minimum, you don't want to get caught off guard with this when it's too late, there's a ton of different things you can do ahead of time, um, and avoid this situation. But like, don't assume that it's gonna be the same experiences you had don't assume even that your child is gonna be able to take care of it themselves, even though that's what you want. Uh, the biggest issue here, one of the biggest issues here is that these universities take into consideration income. So a lot of you have above average household income. Um, whereas me growing up, um, my parents had very low income, uh, below average income.
Speaker 1 00:12:42 And so they got all, you know, they basically maxed out the financial aid or I was able to get, you know, maximum financial aid. So, um, that, that, that swung the pendulum quite a bit in itself. And so these things are, it's gonna change for everybody's situation. So don't assume it's all gonna be the same it's I would say it's completely worthwhile to do this sort of example scenario, like I just did with yourself, look at the school you went to for undergrad and just plug in your numbers now and you'll see kind of, you'll kind of get an idea of what I'm talking about. Um, and that, that can be your starting point, or maybe you already have an idea of what school you'd like your children to go to and you can kind of start getting a rough idea of what those costs might be like the actual sticker price for you.
Speaker 1 00:13:29 But the, the biggest challenge, like I said is for a lot of you, if your income is higher, you know, is high enough, you're gonna get little or no financial aid or grants. So in other words, you're gonna pay the full sticker price. And so that's a much higher, uh, starting point. Um, plus on top of that, there's a cap on student loans for undergraduates that's relatively low. And so it becomes difficult or even impossible for the children to actually even be able to do it themselves. And it ends up falling on the parents. So what are your options? So we'll talk through, you know, some of the options, ideally, you're kind of getting ahead of this, but the surprise situation is worst case. We don't want that to happen where you're just kind of scrambling and maybe E I mean, I guess even worse, the worst, worst case scenario is that you've already kind of promised your child.
Speaker 1 00:14:18 You're like, well, yeah, I went to UF, you know, I'd love it. If you went to UF and the child already has it in their head, that they're going to UF university of Florida and, and you know, they're counting on it. And then all of a sudden you do these numbers and you're like, uhoh so that's worst case scenario. So hopefully you're hearing this before. You've kind of already told your children about what education might look like, and you have some time to kind of potentially utilize all these other options that are out there. So we'll talk through some of these other options, you know, and so that you can start thinking about that. So, so what are the other options? Well, first of all, um, you know, the best possible option is the 5 29 plan. So a 5 29 college savings plan. We talked about this a little bit more in depth in another, another episode will link to which is, uh, it was called, are you saving enough for education?
Speaker 1 00:15:11 So you can listen to that to kind of understand, uh, a little bit more detail about why the 5 29 is such a good plan for saving for college. The reason it's so good is the tax benefits. If you use it for education expenses, uh, it works very well and you know, it's gonna be the best place to tuck away those money, those monies for future undergraduate or graduate school even, and actually really even private school K12. Now you can use 'em up to 10,000 per year, but the 5 29 is definitely the best route to save ahead of time for that amount you're gonna be funding. So the, the downside of 5 29 is you need to be using it for education, for it to be efficient. Otherwise you end up having to potentially pay a penalty in taxes. So it kind of loses its deficiency. Uh, so going back to those numbers, I was talking about, ideally, this is additional reasons to kind of think about the numbers for you.
Speaker 1 00:16:08 Ideally you are, you, you already are starting to get an idea of what those numbers are gonna look like for your situation. And you're starting to fine tune that over time so that you can start to zero in on what the cost is actually gonna be. And the 5 29 is gonna kind of follow that. So ideally, and maybe you're not even funding a hundred percent of that expected cost for you out of pocket, depends on the situation, but you can kind of like start to adjust that 5 29 so that it kind of, uh, uh, is on track to fund that, uh, parent responsibility most likely. And so, as you progress, you know, say your child is, you know, very smart and you can start, start to incorporate that that's typically in a lower the, or, you know, add to, to scholarship responsibilities and, you know, lower the need for out of pocket funding.
Speaker 1 00:17:07 Um, you can kind of tweak that over time. Most of the time the 5 29 is not, or it's difficult, I guess, to pinpoint it where the 5 29 funds exactly 100% in a perfect world, like the 5 29 funds to the last penny, and then it zeros out like that's in a perfect world, but that that's not possible really. So most cases you have, like you have to have backups and a lot of cases, there's multiple backups just cuz either you didn't save enough ahead of time or you were not things changed or whatever. Uh, so another good option is just to have investments or cash accounts. So maybe you have investments, uh, that were probably for retirement, like a taxable investment account. So not a retirement account, but just an investment account in your name or just a savings account. Those are good places as like a backup to potentially draw funds from, to help pay for this parent responsibility.
Speaker 1 00:18:00 Um, and then, you know, maybe you're using some of your income in at the time, your funding undergraduate costs. So this is especially common. I think for people that send their kids to K through 12 private tool, cuz they're already used to paying tuition. So a lot of times they just kind of keep paying the they're already used to that amount. They just kind of keep paying that. And so they pay it outta cash flow. Uh, and in, in some cases probably less likely for physicians, but like if your income is low enough, there are some tax breaks to funding it with your income, uh, or funding, tuition and education out of income, um, that, that are out there as well. So that can make that a little more appealing. And then of course there's scholarships and financial aid and that sort of thing. So scholarships, yes, completely like those are great, obviously fantastic things to do.
Speaker 1 00:18:52 Now you gotta be proactive with those as you all probably know, like you gotta go seek 'em out and do the work to put in to get 'em now financial aid, that's gonna be less, uh, related to, I mean, most of you all probably have a high enough income to where it's less likely or even not an option. And so that's, that's gonna kind of be a challenge there, but it, you know, sometimes it is. So it's worthwhile to look into that and then, you know, if you are, if all those resources are unavailable or depleted, um, that's when you start talking about like student loans, I think in an ideal world, you're planning ahead for this and you have the available resources through all those things I just mentioned, but oftentimes things don't work out as you hoped, or you maybe didn't think about this till a little later and snuck up on you and that's, it is out, you know, sometimes things shake out that way.
Speaker 1 00:19:48 In those cases, you know, the backup would be getting student loans or, you know, if you do want your child to take out student loans and kind of go on along the lines of what I said at the very beginning, like you want your child to kind of take responsibility for a lot of this. Maybe you go ahead and have them pay or take out the max student loan and do work study. And then you kind of back into cuz those, those are not bad programs. They're the direct student loans for the students have, you know, relatively decent interest rates, um, and flexibility. And then the work study, you know, that's just a good program, learn hard work and that sort of thing. So that's a route to take with your child, um, and have, and kind of work that into the equation and that's gonna lower the amount that you're gonna have to be responsible for.
Speaker 1 00:20:38 And then the last option I would say would be the parents getting student loans that would typically be the least preferred partially because it's at a stage in life when you're probably not excited about taking on more debt. And also the interest rates are not great on them. They're bad. They're, they're very poor interest rates. So I guess some people decide to take out different types of debt. Maybe they take out a home equity loan or something like that. But debt is just not the, the best way to fund education for the parents, especially because you're kind of in that stage where you're trying to reduce, uh, debt. And so ideally you're able to avoid that. But I think the key is to think ahead on this stuff, uh, like anything, uh, planning wise, think ahead on it. And um, as I've mentioned, several times, don't assume things are gonna work out exactly how they did for you, especially if your income is higher.
Speaker 1 00:21:33 I think it would be worthwhile to go through one of those cost, uh, calculators for the school you went to or the school you think your child might go to that. I'll start to give you a rough idea. If you work with us, let us know. As you know, more specific information. Uh, we are always running numbers for people we work with. Uh, we typically start out with more like general numbers for schools overall. Um, but as you start to kind of fine tune what that specific educational institution might look like, we can, we can start to fine tune those numbers with you. But, uh, main thing is thinking about this ahead. Um, and uh, ideally not getting caught off guard, so hope this has been helpful. And um, as always look forward to catching up again next time as always, thank you so much for joining us today.
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[email protected] for all sorts of additional content. See you next time. Finance for physicians is not an investment tax legal or financial advisor. All content included in this podcast is for informational purposes only and should not be considered financial tax or legal advice. Material presented is believed to be from reliable sources and no representations are made by finance for physicians as to another party's information, accuracy or completeness, all information or ideas provided should be discussed in detail with an advisor accountant or legal counsel prior to implementation. If you don't have an advisor or like a second opinion, feel free to check out our website for recommended advisors.
