This month, Peter Mallouk and Jonathan Clements discuss what factors help make a college degree “worth it,” when parents should pay for their children’s educations and whether students should get a job while in college. Plus, get tips for 529 plans and learn why you should always look into travel medical insurance when going abroad.
Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jonathan Clements: Hi, this is Jonathan Clements, Director of Financial Education for Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle.
It’s back to school season, a time when many families’ thoughts turned to college, including how to pay the cost involved and whether the expense is worth it. So Peter, is college worth the cost? And is the answer so different if we’re talking about those high-end private colleges that can now cost more than $300,000 for four years?
Peter Mallouk: It’s interesting because people have very, very passionate opinions on whether or not college is worth it. And it’s as if they look at college as just one thing, like everyone’s doing the same thing and it’s a clear yes or no. And the answer is it’s 100% worth it for the vast majority of people if you do it right. So if we look at a group of people that have a college degree versus a group of people that don’t, the probability of making a lot more money is very, very significant if you have a college degree. That does not mean that you can’t be super successful in a lot of different ways. We have multimillionaire clients that went to trade school and that never went to college and some that didn’t even finish high school. There are exceptions to every rule. But if you say, “I have got a hundred people over here that went to college and graduated and I have a hundred people over here that didn’t,” as a group, the hundred people that went to college did better off.
So if you’re talking to a kid and saying, “Does college matter?” It’s really bad advice to say it doesn’t matter. It really increases your odds. I think though that the big issue becomes what college and what degree. Certain colleges, it doesn’t matter what you do. The network that you make, the group that you’re around, the connections that you have are going to help you succeed in life. So if you’re going to one of those top 1, 2% of schools, doesn’t matter, it’s probably worth the cost.
Once you get past that, you have to look at what you’re paying. So there are a lot of schools in the country that they don’t have a stronger reputation than your local state school, but instead of being $15,000, it might be $50,000. Those are usually a big mistake. Now, you might have a personal reason for really wanting to go there. Maybe it’s faith or family or you like the campus or this number of people. That’s great. Then you have to make sure you get a degree that translates into the money that you’re spending.
So you have to look at the degree as an asset, like an office building or a duplex that you’re buying and you have to look at that degree and go, “I’m going to invest in me and this degree. If we put X amount of dollars in, what am I going to get out of that later?” So if you go to a school at $60,000 a year and you’re getting a history degree, it’s going to be hard to translate that into justifying the cost of school and paying off the student loans. If you go there and you get a degree in math or science or medicine or law or whatever, of course it’s going to pay for itself.
You also cannot just look at the debt and say, “Well, it’s good or bad based on the debt.” If you have a hundred people that have a medical degree and they each have $250,000 of debt and you have a hundred people that have a degree in human development and they have the same amount of debt, or they even have only $50,000 of debt, I’d rather have the doctors with a lot more debt, they’re going to have a much more successful future economically. So you have to look at that return on the degree against the major you’re getting and the school you’re getting it from. And if you can do that intelligently, how’s that for yes or no? The answer is yes with all those qualifications.
Jonathan: Yeah, I think when we think about mistakes people make when going to college, it’s really twofold. One, spending a lot of money to get a degree that isn’t going to have a big payback. Like for instance, social work. Like for instance, dare I suggest, journalism. If you’re taking out big college loans in order to get degrees in journalism or social work, you’re never going to make that money back. And then the other big mistake, and this can affect everybody, is taking on a lot of loans and then not actually graduating. I mean, that is sort of the pointy edge of the student loan crisis. Those people who borrowed the money and never got the payback because they never actually graduated and got that higher paying job.
And just one caveat I want to throw in here, don’t go solely by the price tag of a college. So some of those private colleges out there that seem expensive until you go through the financial aid process and you see how much aid you’re going to get, the net cost to you may be substantially less than going to the local state university. Not always, but just because a college has a fancy price tag doesn’t mean that’s the price you’re going to end up paying.
So Peter, next question for you. I mean, over the years we’ve seen all these tweaks to the financial aid formulas, and we’ve seen private colleges changing their approaches including some offering aid packages that include no loans. Given all the uncertainty over financial aid formulas and whether a family will qualify for aid, should parents still go ahead and fund those 529s?
Peter: So for those that don’t know, a 529 plan, you can put money in it — after tax dollars in it — and some states will give you an income tax deduction in their state for putting money in it. In all states, it will grow tax-free. And in all states, if it comes out to fund education or supporting education and sometimes some other exceptions, it comes out tax-free too. So it has a lot of tax advantages. Your question about, “Well, if I put money in there and then it turns out that there’s all this aid and I don’t need it, should I still do it?” The answer depends on the person’s situation. If you are stretched to accomplish other goals like retirement or paying for a wedding, well then the answer is no. Don’t kill yourself for something that we’re not positive about. But if you’re capable of investing in different things to accomplish different goals, I would encourage people to still open and fund 529s. You get tax advantaged investing.
And if even just one of your kids goes to a school, you can redirect the 529 between different kids. If one of them goes to an expensive school, you can redirect there. You could even take it out for room board. You can start to stretch the reasons you’re taking money out of the 529. And then ultimately, you can even transfer it to somebody else, a niece or a nephew or even yourself if you wanted to go back and pick up some education. So you still retain a ton of flexibility and you retain all of the tax advantages. How do you feel about it, Jonathan? Because it’s not a clear yes or no.
Jonathan: I think the point you’re getting at, which is, one, the flexibility, and two, the tax advantages do help to overcome this question of, “Should I fund the 529 or not?” But the other issue you raised, which is, “What if I’m struggling to save enough for retirement? Should I still fund the 529?” Well, if you’re struggling to save enough for retirement, probably your financial situation is such that you would qualify for aid, so you don’t really want to be stacking dollars specifically against your children’s college education. You can always redirect dollars from, say, your regular taxable account or even from your retirement accounts towards college if needs be. But if you’re struggling to meet your other goals, then yeah, you’re probably going to qualify for a lot of aid. So setting up a 529 shouldn’t be a priority.
Peter: And there are a lot of ways this really differs, and you need to make sure you talk to a financial advisor or a CPA, but oftentimes people will have 529s be owned by grandparents or other relatives so that they don’t necessarily count on the financial aid form against what the parent’s bringing into the household. There are a lot of strategies around that that are probably beyond the scope of this podcast, but you definitely want to sit down with your advisor and make sure you’ve got the titling correctly.
Jonathan: It seems a lot of parents have very strong views about paying for college. Some insist their kids pay part of the cost because they want the kids to have skin in the game while others are happy to shoulder the full burden. Peter, do you think there’s a right answer on this one?
Peter: I think that for people that can afford to pay for school, it doesn’t really send a generational message that’s not good by paying for it. I do see issues when parents just give kids money directly and it’s too much money and it kind of robs them of the joy of accomplishing things — it makes it too easy. But paying for education, people do it generationally. I’ve noticed that families that their parents pay for theirs, they’ll pay for their kids and so on. I’ll also tell you, of my clients that are immigrants, I cannot think of one. I literally cannot think of one that will not pay for their kids’ education. There is just this belief that it’s like shelter. It’s a prerequisite to investing in your kid. And so, you really see a lot of people that are successful particularly really, really, really invested in doing that. I’m a big believer in that too. Now, I don’t know about supporting a kid going to a school with a degree that doesn’t matter and all that stuff, but definitely overall in general, I’m on board. How do you feel about it?
Jonathan: Yeah, I’m really with you on this one, Peter. With my kids, I did not want them paying for college. I did not want them working during the academic year because as I said to them over and over, “Your job is to get good grades. Your job is not to work some work study job and make 10 bucks an hour. That’s not a valuable use of your time.”
I realize that a lot of parents think, “Well, the kid doesn’t have good financial habits. This will give them some discipline, and so on and so on.” When I hear parents say that, what I want to say is, “Do you remember what you were like at that age?” Yeah, we were all pretty wild when we were in our late teenage years in our early 20s. We weren’t as prudent as we should have been, but that’s part of growing up. And I think that one of the great things about going to college is it allows kids to grow up without parental supervision to find their own way and to learn mistakes in a relatively safe environment.
So do I want my kids making financial mistakes? No. But would I like them to figure out their way on their own and learn those lessons? Yes. And I want them to have the time to enjoy that period of college, which is why I didn’t want them working during the semester. I was happy for them to take summer jobs, but when they were at college, their job, as far as I was concerned, was to get good grades.
Peter: Yeah, my oldest son is the only son that’s been to college and he definitely went and got some jobs on his own and I think he learned — like I did — probably more from those jobs than he did from his degrees, so I’m glad that he did them for sure. But the priority is definitely to get the grades, definitely to get the education. That’s your one shot, you’re going to work your whole life. This is your only shot to get the grades, to build the community, to establish the memories, and so that’s the priority.
Jonathan: So, now that you’ve fessed up that you have a kid who’s gone through college and you’ve got another two who are heading that way next year, right, Peter?
Peter: That’s right. That’s right. I know you’ve been there.
Jonathan: So what financial advice have you given to your kids about their college years?
Peter: Well, I mean I talked to them about the things we just talked about here. “Be thoughtful about your major. There’s no pressure to figure out what you want to do in life.” I mean, I didn’t know until I was at least five, six years out of college even what I was going to do when I stretched out college. I went to grad school because I hadn’t figured it out. So number one, no pressure. If you don’t have strong conviction about something, try to get a major that’s flexible. Obviously, you’ve got to have conviction to do medicine or something like that. But otherwise, try to pick a degree that can translate into some optionality for you and some strong economic income and that you’re going to enjoy. You’ll be doing it for a long time. My real emphasis was on those things. I know you’ve had kids go through. What have you talked to them about?
Jonathan: So the piece of advice that I offered to my kids was, “If something’s going off the rails, let me know early on. You don’t want to know two months into a problem that there is a problem.” So if they had a financial problem, if they were struggling at school, if it was a big social problem, whatever it was, let their mother and me know early on so that we could step in and help out. I think the problem comes when these problems are left to fester and you arrive at it late in the game, at which point fixing it may be a much bigger issue. All right, Peter, that’s it for this month except, except our tip of the month. So what have you got for me?
Peter: So for me it is make sure you’re in a good 529 plan. You don’t have to use the one in the state that you’re in. Sometimes you’re in a state with a great income tax deduction. Sometimes your state has great funds. So just make sure you chose the best 529 for your family. Make sure the titling of it is correct so you don’t disqualify your family from financial aid. And if you’ve still got money in a 529 plan and the kids are up and gone, determine what we’re going to do with the beneficiaries of those 529 plans, should they be redirected.
Jonathan: And so Peter, because I’ve got a trip to London coming up in order to actually go and visit my son, my tip of the month is this: if you’re heading abroad, look into getting travel medical insurance. You may have coverage through your current insurance. You may have it through your Medigap plan or your Medicare Advantage plan. But if you don’t, seriously consider buying the insurance no matter what your age and no matter how healthy you are. And unlike people who come to the U.S. and get travel medical insurance, if you’re going abroad and you need to get travel medical insurance, as long as you are not 70 or older, you may actually find that the cost is not that expensive.
So that’s it for us this month, Peter. This is Jonathan Clements, director of Financial Education with Creative Planning. I’ve been talking to Peter Mallouk, president of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
