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Investing for Your Child’s College Education
Investing for your children’s college education seems like a daunting task at first. The price tag of most universities is staggering. This is a major talking point in my own family, since our two girls are now teenagers and college is right around the corner.
When I came to America for a better life, that included the educational opportunities of my children. My husband and I didn’t realize at first how much that cost was estimated to be. It was only after we heard our friends with older kids complaining about the high cost of college they were paying, that we realized what we were in for.
Henry and I were shocked at the amount of loans our friends were taking out for their children’s college education, because they hadn’t started saving early enough. Henry and I knew we needed to become familiar with college funds and investment strategies for our girls as early as possible.
WHY invest in your child’s college education
College is very expensive, so it’s imperative you start taking steps now to secure your child’s education.
According to Mark Kantrowitz of Saving for College, LLC, the average cost of a 4-year in-state college will soon break six figures, and in another 17 years some universities are on track to charge half a million dollars. If your child was just born, it’s estimated their education cost will be triple the current price by the time they’re ready to enter college.
Spreading the cost of your child’s college education over time can make such a staggering cost manageable. Waiting to save too late, or not saving enough by the time they’re grown, could force you or your children to take out large amounts of student loans (and these alone cannot cover the entire cost of a college education). For high-income parents, financial aid is often not an option for their children.
HOW to invest for your child’s college education
The ⅓ Rule
Split the total estimated college cost into three equal parts. One third is paid by “past income,” one third by “current income,” and the last third by “future income.” Past income is what you’ve already earned and put into savings. Current income is what you’re currently making now. Future income is what you expect to make, and can reasonably take out loans for.
Education Savings Account (ESA)
ESAs were created by the US Government to assist college education savings. You can contribute up to $2k per year, per child, in an ESA account invested in growth stock mutual funds. Your savings grow tax-free, just like a Roth IRA account.
529 College Savings Fund
529 funds also have the advantage of growing your savings tax-free. Some states offer additional tax credits for 529 fund contributions.
Be wary: not all 529 funds are reputable. If a 529 fund you’re interested in has you locked in to prepaid tuition and fixed investment options, turn it down. You should have the option to choose how much and what you invest in within the fund.
Savings in a 529 college savings fund also reduces the need-based financial aid that would be available to your child.
Special Strategy: Investing Passively in Real Estate Syndications
With an internal rate of return (IRR) of 15-20% per year, plus other tax benefits like depreciation and cost segregation, the return on investment for a real estate syndication is even higher than a college savings fund.
If your child is in the first grade, and you started investing passively in real estate now, the compound interest would be very powerful by the time they are ready to head off to university.
Investing passively in real estate for your child’s college education
Meet Harry, a first grader with savvy parents. When Harry was seven years old, his parents began passively investing in a real estate syndication. They invested only $50k into a syndication for five years. Their return on investment was 17% per year, so after five years, their investment has earned them $42.5k.
$50,000 × 0.17 × 5 years = $42,500 profit
$50,000 initial investment + $42,500 profit = $92,500 total
In their sixth year, Harry’s parents now have $92.5k to invest. They reinvest the total into another five year cycle at 17% return on investment per year.
$92,500 × 0.17 × 5 years = $78,625 profit
$92,500 initial investment + $78,625 profit = $171,125 total
By this time, Harry has turned 17 years old and is ready to head to an in-state college for his Bachelor’s Degree. His parents decide to split their investment in half: one half to reinvest in a syndication again, and the other half in a savings account for Harry’s college expenses.
The half that is reinvested in a syndication grows at 17% return on investment for another five years, making $72.7k in profit for a total of $158k.
$85,562.50 × 0.17 × 5 years = $72,728 profit
$85,562.50 initial investment + $72,728 profit = $158,290.50 total
By this time, Harry had finished his Bachelor’s Degree, and had taken out a few student loans to pay the costs that went beyond what his parents had put in the savings account for him. Now the profit that his parents made on the third cycle of real estate investing is enough to pay off those student loans. Harry is fresh out of school, and debt-free!
BONUS: If Harry had earned enough in scholarships to start off college without excessive cost, his parents could have reinvested the entire $171k from their second investment cycle. Putting the full amount back into a real estate syndication for five years at 17% IRR would have yielded $316.5k.
CYCLE 3 (alternate)
$171,125 × 0.17 × 5 years = $145,456.25 profit
$171,125 initial investment + $145,456.25 profit = $316,581.25 total
Not only would Harry’s parents have enough money to pay off any of Harry’s student loans, they could even put a large down payment down on a house for him.
The Power of Education
One step beyond investing for your child's college education is teaching your children about investing itself. Henry and I have been teaching our kids about real estate investing and they’ve even started to help us in our business. They are soaking up the knowledge and experience of how to make sound financial investment decisions
After all, preparing your child with the knowledge and practice of financing is the best investment of all, right?
ARE YOU READY FOR FINANCIAL FREEDOM?
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Delphine Nguyen, Investor
Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.
Co-living spaces have a higher revenue per unit than traditional one unit per family/tenant rentals.
When people ask me, “are there safety concerns with a shared room near me?”