College Planning...529 or Real Estate?

Good afternoon,

An interesting thing occurred to me this week in talking with a few of my clients.

Have you ever considered how to fund the rising cost of college for your children's education? Last night, I was posed this question, "No one funded my college. Is it wrong for me to make my children fund their own college?"

Wow! That is a big question. One worth looking into.

There really is no right or wrong way to plan for our children's educational costs in the future. There are only many different choices. For example the Buzz word for College Funding these days is the 529 Plan offered by many financial advisors across America. I have many friends invested in these plans for their children's future education. Congratulations to them for taking action.

The 529 plan is simple. Save a set amount with tax free growth as long as the money is used for education costs. You get the tax deduction on the front side and grow the fund tax free for all intensive purposes. Similar to the old traditional IRA set up for our retirement. This is very easy to set up and beneficiaries can be changed any time if your child does not use the money themselves.

In this type of funding plan, a person can set up monthly allotments that can be automatically invested without having to think about it. Very nice feature. The investment is tied directly to the stock market in the vehicle of your choosing. If you have the stomach for the up's and downs of the market, this is a great vehicle for you.

Example: You have $2000 today and your child is 3 years old. You've got 15 years until the money will be needed. You have an extra $150 per month you can invest. With an 8% return on your investment, this account will grow to $58,520 over the next 15 years. Estimates show that a year of college in 15 years will escalate to $30,000+ per year for a state school. There is a gap and need for other types of funding to help with this rising cost.

Another option for funding education costs is Real Estate. Take for example a $200,000 home today that can rent for $1,250-1,500 per month near the university. A mortgage lender will require a 10% investment of $20,000 to buy the home. Over the next 15 years the same $200,000 home with a $180,000 loan will appreciate using 6% to $490,800. The mortgage balance (paid by the renter) is $132,000 leaving a net equity of $358,800. It is quite a difference from the other plan.

Neither plan is right or wrong. Keep in mind that with Real Estate comes other responsibilities, so it may or may not be right for you to help fund your child's education. It is meerly an option to consider.

If you would like to sit down to look at your personal scenario, please feel free to call me to schedule a time. 505-884-8600.

Have a great day!
Joshua