Bogleheads® Live 32: Robert Farrington on saving and investing for college

Ep>Episode

Su>Summary

Robert Farrington is the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt and start investing.

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Transcript

>Transcript] Jon: Bogleheads® Live is our ongoing Twitter Space series where the do-it-yourself investor community asks their questions to financial experts live on Twitter. You can ask your questions by joining us for the next Twitter Space. Get the dates and times of the next Bogleheads® Live by following the John C. Bogle Center for Financial Literacy on Twitter. That’s @Bogleheads.

[00:00:22] For those that can’t make the live events, episodes are recorded and turn into a podcast. This is that podcast.

[00:00:29] Thank you for joining us for the 32nd Bogleheads® Live, where the do-it-yourself investor community asks questions to financial experts live. My name is Jon Luskin, and I’m your host. Our guest for today is Robert Farrington of The College Investor.

[00:00:46] Let’s start by talking about the Bogleheads®, a community of investors who believe in keeping it simple, following just a small number of tried-and-true investing principles.

[00:00:56] This episode of Bogleheads® Live, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy. A 501(c)(3) nonprofit organization dedicated to helping people make better financial decisions. Visit our newly designed website at boglecenter.net to find valuable information and to make tax-deductible donation.

[00:01:16] Before we get started on today’s show, some announcements: For the next Bogleheads® Live, we’ll have Colleen Jaconetti, Senior Investment Strategist at Vanguard, returning to discuss rebalancing your portfolio.

[00:01:28] Before we get started on today’s show, a disclaimer: this is for informational and entertainment purposes only and should be relied upon as a basis for investment, tax or other financial planning decisions.

[00:01:37] Let’s get started on today’s show with Robert Farrington. Robert Farrington is the founder of The College Investor, a personal finance site dedicated to helping Millennials escape student loan debt and to start investing and building wealth for the future.

[00:01:50] He regularly writes about investing, student loan debt, and general personal finance topics. He’s been quoted in major publications, including The New York Times, the Washington Post, Fox, ABC, NBC, and more. He’s also a regular contributor to Forbes.

[00:02:03] Robert, thank you for joining us today on Bogleheads® Live. Let’s start with Bogleheads® Forums users ‘Thedaybeforetoday’, ‘warner25’, ‘nohbdy’, and ‘Wings5’ who all asked questions about costs. I’ll go ahead and I’ll read one of them.

[00:02:18] “What does your guest recommend to determine, as near as possible, a family’s true net cost to attend a particular or a handful of schools to obtain a four-year degree?”

[00:02:28] Robert Farrington: So first off, what do we mean by net cost or net price of college? Well, that is the cost of attendance – so this is tuition, room, board, books, all that jazz – and then we subtract out any financial aid that a student will receive for college. And that aid could include scholarships, grants, tuition waivers, those scholarships could be private grants. It also could include institutional grants. So, these are gifts from the college, whether it’s from their endowment or scholarships and stuff.

[00:02:59] And, as a result, that aid is almost a black box except for, Pell grants and student loans, which are very clear cut from the federal government. Everything else is a mystery box that the school can dole out. It’s a question of who they want to attract and retain for their numbers, metrics, and student population set up. That’s how they leverage that box gift aid.

[00:03:24] Jon: Ron Lieber digs into that in his book, “The Price You Pay for College.” He was our guest on the 21st episode of Bogleheads® Live. Folks can check out that. I’ll link to that in these show notes.

[00:03:36] Robert Farrington: How can you figure out what you’re going to pay? Well, every college is required to have a net price calculator on their financial aid website. Now some of these schools are really savvy and they have a great net price calculator.

[00:03:50] And how do you know if it’s a great one or a really bad one? Well, a great one is going to ask you a lot of questions about your income, your assets – but it’s also going to ask you some other questions like your SAT scores or your ACT scores, your GPA, things like that. Because those other metrics go into that black box formula that the school will use to offer you different types of merit aid. And if you’re not seeing that on there, well you’re not going to get the best calculated results of what your net price is going to be. But I’ll tell you, even the bad ones are usually within 10% of the range. They’re pretty close.

[00:04:27] And then realize that colleges do two things. One is they raise their price every year. I promise you that your tuition in year two is going to be 5%-10% higher than your year one tuition. It’s just what happens.

[00:04:43] Part two of that is that most colleges also front load all that aid we talked about. They try to paint a rosy picture to attract you and retain you at this college, but you might not get as much of that aid in years two, three, and four or five if you’re there still.

[00:05:01] So realize that your prices will go up 10% to 20% as a result every single year. You can’t just take that net price calculator of year one, multiply it by four. You should do that calculation year one, multiply it by four and then you should tack on 20% to 25% to the total so that you can have an accurate four year price of college picture.

[00:05:24] Jon: Robert, let’s go to a related follow up question with respect to estimating the cost for college. ‘Nohbdy’ from the Bogleheads® Forums writes: “Can we please clarify what we should expect regarding the FAFSA and how need-based aid is evaluated?

[00:05:40] Robert Farrington: So, first off, everyone should apply for the FAFSA if they’re going to college. The FAFSA is the free application for federal student aid, and this is the ticket to unlocking scholarships, grants – both federal grants like the Pell Grant and most state grants. So, if you qualify for any grants specific to your state, the FAFSA does it. And many schools also leverage the FAFSA for deciding institutional grants and scholarships as well.

[00:06:11] What should parents expect regarding it? It’s going to ask you for your income, your assets, the student’s income, the student’s assets, and then at the end of it, once you enter all that information, it spits out a number called the expected family contribution.

[00:06:26] And this is the number that you’re expected to pay for college. It’s not necessarily accurate. It’s usually very high. It’s kind of shocking when you see it, but that’s what it spits out. And that number is used to calculate your aid.

[00:06:38] Parents incomes and assets are treated separately from student incomes and assets, and so it’s really important to know that distinction for how you set up your portfolios, who owns what, things like that. Especially when it comes to the FAFSA and financial aid.

[00:06:54] In general, if the student owns it, it’s going to count very heavily for the expected family contribution, typically 20% to 25%. 20% on the FAFSA, 25% on the CSS Profile. So, if it’s a student asset, these are accounts like UGMA, UTMA, these are student checking accounts, savings accounts, anything that’s in the child’s name. Those count very heavily.

[00:07:19] As does student income. Student income can count up to 50%, towards that. And these are things like your child working. Also, things like distributions from retirement accounts, things like that. So, while the retirement accounts don’t count, the distributions count as income for calculating this.

[00:07:38] So when people are thinking about different approaches, a 529 plan is a popular approach, but every now and then someone throws out, “I’m going to use a Roth IRA or I’m going to use rental real estate” or some other form of vehicle. Remember that they will still count some way on it and it might not necessarily be as advantageous.

[00:07:56] When it comes to the parent assets, parent assets count at roughly 5.64% for the FAFSA calculations and retirement plans are excluded 100%. So, they are not counted for calculating this expected family contribution.

[00:08:12] As a result, it’s better to have things in the parent’s name than the student’s name. And 529 plans specifically for dependents count as a parent asset even though it’s for the benefit of the student potentially. They count as a parent asset because the parent is the account holder.

[00:08:28] Other people’s assets that could be benefiting the student don’t count on the FAFSA. Starting this year, grandparent owned 529 plans don’t show up on the FAFSA. Things like that can be very advantageous from a tax planning perspective, estate planning perspective, and of course a paying for college perspective.

[00:08:48] And then there is the CSS Profile which about 300 schools use. It takes all the same information, plus it asks you a little bit more about your assets, even things like business assets. And it spits out an even more specific number. If your child is looking at a CSS Profile school, you’ll have to do the FAFSA and the CSS. It’s not an ‘either or’ question. It’s a double the workload question.

[00:09:15] Jon: David has a question for Robert.

[00:09:18] David (audience #1): If you pay full sticker price for a so-called elite college, this is turning into serious money. It’s getting to the point where you really need to question the value proposition. Do you feel that this dynamic is going to start to have an impact on the whole way colleges market themselves?

[00:09:40] Robert Farrington: A lot of people thinking of the paying for college conversation, they skip the first part of the question. It’s, “Is college worth it? Should I go here? How much should I spend?”

[00:09:50] I always like to frame the paying for college conversation in a very clear ROI framework just like we do with any other investment because college does have some bonus features like social and friend groups and experiences.

[00:10:08] But at the end of the day, you go to college because you are looking to boost your future career earnings as a result of your education. That’s why you’re doing this. You’re not doing it for Kumbaya. It’s a monetary investment. 10, 15 years ago it was very clear. The Social Security Administration data said college graduates earn $1,000,000 more over their lifetime than non-college graduates. This is from 30, 40 years of historical, Social Security Administration data.

[00:10:41] That could be a good investment, right? If I spend $30,000 or $50,000, I could earn $1,000,000 more over my career. I might want to do that. That makes a lot of sense.

[00:10:52] But here we are today, in this age of data analytics. And guess what? We have really refined what that model looks like.

[00:11:00] For example, today the average college graduate earns anywhere from $300,000 to $1,000,000 more over their lifetime on average. That top end of the range is still there, but we’ve actually quantified that on the low end of the range, people are only making $300,000 more over their lifetime.

[00:11:21] We can do some general math of the net present value of earning $300,000 to $1,000,000 over 45 years of your life after college. And then how much should that cost you in today’s dollars? The answer is $30,000 to $80,000. It’s somewhere in that range, right? If you’re men to make $300,000 over your lifetime, you probably shouldn’t spend more than $30,000 today to achieve that result, because you go past that point and you start seeing a negative ROI.

[00:11:52] And of course we’re taking averages. There’s always going to be someone that just knocks out of the park, and there’s always going to be someone that’s on the low end of that spectrum as well.

[00:12:00] I like young adults and families to go into this saying, hey, if you start spending more, then let’s just say the top end of that range – $80,000 for a four-year degree – you really run the risk of it not being worth it.

[00:12:14] And so you should really have some conversations around that because to me it also is like buying a car to get to work. If you need to get to work, going out and buying a used Honda Civic and spending $8,000, it could work for you, right? You get to work, you’re making money, it works.

[00:12:30] But if you have a ton of money in the bank and you want to go out and buy that really nice Mercedes G Wagon and spend it, if you have the money, go for it. But you shouldn’t be borrowing it to get to work if you don’t have that money. And that’s really the crux of the issue. How much are you spending for college and what that ROI is going to be.

[00:12:48] Will we see innovation? I think the challenge here is that colleges operate like businesses, and they’re just going to chase where the money is.

[00:12:57] Most of our student loan debt problem and cost of college problem isn’t necessarily with undergraduate education. Sometimes undergraduate education is very expensive, especially at some Ivy League and private colleges. But for the most part, undergraduate education is relatively inexpensive.

[00:13:13] Most of the problems we see is graduate school education. Those are the profit centers of higher education institutions. These are graduate schools, even some vocational schools, things like that. And the reason those are profit centers is because unlike undergraduate student loans, there is no cap on graduate school student loans.

[00:13:36] Any good economist will know if the customer can pay anything and I can charge anything, I’m going to maximize what I charge. And that’s where we see a lot of people struggling is in that graduate school arena.

[00:13:50] Jon: Robert, is the appropriate takeaway from that, “Engineering degree? Yeah, sure. Go for it. Fine arts degree? Maybe not so much.”

[00:13:57] Robert Farrington: It’s a solid takeaway. So again, some of the data suggests that too. Undergraduate engineering degree, almost 90 plus percent of circumstances, is ROI positive. When you get into some of the obscure liberal arts degrees – art degrees – a lot of them have like a 99% failure rate on the ROI calculation.

[00:14:18] It’s not just the school or the degree, you want to look at the program inside the school. Every college has 40, 50 majors these days. Some of those majors can be ROI positive, some of them can be ROI negative. You’ve really got to do a lot of homework on that front.

[00:14:32] Today, you can go on Glassdoor, you can see the salaries for pretty much every career field. You can see the ROI data for all these colleges. There’s a really good website called collegescorecard.gov. It’s an obscure Department of Education website. And you can type your college in, and you can see all of the data that the Department of Education has on the graduation rate, the cohorts, how much people are defaulting on their student loans that went to any specific school.

[00:14:59] So if you’re looking at this school and you’re like, “oh my God, 38% of borrowers can’t pay back their student loans that go here” maybe it’s a red flag for you. But you’ve got to go and look for that data and we have it. We have to teach our kids and families to make informed financial decisions and not just go there from a behavioral or psychological perspective that might not make sense.

[00:15:21] Jon: This one is from username ‘Wings5’ from the Bogleheads® Forums who writes: “What are some of the most often overlooked avenues for bringing down the total net cost of a four-year degree?”

[00:15:33] Robert Farrington: The number one overlooked avenue for bringing down the cost is applying for merit-based private scholarships. There are so many scholarships out there, and I believe there was a study done by financialaid.org a few years back – so, it’s outdated – but it highlights the problem that $6 billion in private scholarships go unclaimed every year.

[00:15:57] On average, for a private scholarship that is not listed on one of those scholarship search engines – I’m talking your local community, your car dealer scholarship, maybe there’s a union organization in your town, those private scholarships – your children probably have a 5% to 10% chance of winning these scholarships if they follow the directions because the amount of entries are relatively low, and the amount of entries that actually follow the directions are even lower.

[00:16:28] That is the number one best way to lower the cost of college. Spend the time to find these scholarships. It’s hard. It’s not easy. I recommend going to your high school guidance counselor and finding local scholarships in your community. Go to your parents’ companies. A lot of large Fortune 500 companies offer scholarships to their kids. Union trade labor organizations, religious organizations, things like that that are in your community. Volunteer groups, charities. These are the types of organizations that offer scholarships that you’re not going to find on these big scholarship search engine sites.

[00:17:02] The second tactic is if your financial situation has changed, call up that financial aid office and ask them. Remember that when you’re applying for the FAFSA, for example we’ll use right now, we are recording this in October of 2022. The students that are using this FAFSA are filling it out for the fall of 2023 into the 2024 school year. So next year. And they’re using the tax return and data from 2021.

[00:17:34] If your financial situation varies significantly by the time you’re actually applying for college, you need to call that financial aid office up and say, “Hey, my financial aid situation has changed.”

[00:17:44] For example, you might be using your information from last year and come next spring when your child is making that final decision, maybe your assets have declined, maybe the 529 plan value declined. Maybe your income has changed significantly.

[00:17:59] If it’s really significantly varied – and I would say significant usually means 5% to 10% variance – I would call the financial aid office and see if they can recalculate things for you. See if you potentially qualify for more aid.

[00:18:12] Part two of that is when you’re talking to them, the springtime is the best time to see if any other scholarships have become available. Schools send out their admission offers with that financial aid offer to students and then some of them accept it. But students also start rejecting them.

[00:18:31] The students that reject financial aid offers, well guess what? That money becomes available again at the financial aid office that they can redistribute it to students that they might need. Financial aid could potentially become unlocked that you now could get access to.

[00:18:47] So between scholarships and talking to that financial aid office, those are really the two best ways to see a significant difference in the potential for your net price of college.

[00:18:58] Jon: This question is from username ‘warner25’ from the Bogleheads® Forums, who writes: “How can we best plan to be equitable with multiple kids with overlapping years of attendance?”

[00:19:12] Robert Farrington: My answer here is going to be half behavioral psychology and half some practical tips. The behavioral psychology standpoint of this is that you need to be having clear and transparent conversations with your children, starting from their early teens, about what mom and dad have, what they have in their names, and what your plans are for how this could potentially work in the future.

[00:19:33] And what I mean by that is it shouldn’t come as a surprise how much money the child has for college. That could be zero. But, be transparent with them so that each child is given the opportunity to make informed decisions as they go into their high school years.

[00:19:50] And by informed decisions, I mean like if they know there’s zero, maybe they’re going to try for athletics, maybe they’re going to spend a lot of time doing scholarships or volunteering in the community or doing things that might unlock more potential financial aid for them.

[00:20:04] But, if you don’t give them that opportunity, if they don’t know and all of the sudden their junior year of high school, they’re like, “Guess what? Your older brother got a ton of money and we used all of our money on him or we didn’t save anything for you” and it becomes a shock for him, it can be very challenging to recover from that on both a standpoint of what the child’s going to do for their college career, their dreams, their hopes, but it could really damage some relationships inside the family.

[00:20:29] I like families, especially with multiple kids, to be really having these conversations as early as possible. My number one tip for how to handle this is literally every kid should have their own 529 plan or college savings account. Just give each kid their own account. And that way it’s clear like, “Hey, Child A you have $5,000; Child B you’re at $4,000 now, but hopefully it grows to $5,000.

[00:20:54] Show them their account. A good investing lesson there. Show them what funds are available, show them how they can manage it. It’s a great teaching tool, but it also really just instills a sense of equality and equity there.

[00:21:05] And then part two is you have two options if there’s any excess or a kid doesn’t go to school or whatnot. Let’s say Child A, the first one, ended up going to a service academy or got an athletic scholarship and didn’t use any of that money, everything was taken care of. You have two choices. You can change the beneficiary of the account and move that money over to another child that might need it or let that grow for that child into the future.

[00:21:30] So one of the things I love about 529 plans is it unlocks this potential for an education savings trust, effectively, even though it’s not a trust. Because maybe that Child A could use that for grad school in the future. Maybe that is just their money and they can unlock it however they want to do it. They could use it for a spouse in the future or they could use it for their own children in the future.

[00:21:52] So there’s a lot of potential options there on how you want to handle it. But I think from a practical perspective, having each child with their own account is usually the most equitable way to do it without hurting anyone’s feelings.

[00:22:06] Jon: Certainly communication, that’s the recipe for success for any relationship, your children included. Ron Lieber makes the exact same point when asked a similar question on Episode 21 of the Bogleheads® Live show. I’ll link to that in these show notes for our podcast listeners.

[00:22:25] Robert, you mentioned that you prefer the 529 over other avenues for saving, investing for college. I’m curious, how come?

[00:22:34] Robert Farrington: The 529 plan is just very well suited for saving for education. You put the money in the account, potentially get a state tax deduction or a state tax credit in some states. And a lot of states also offer just free money into a 529 plan these days. If you have a baby in some states and they’ll give you $100 to seed that account. Or, if you open an account in the first year of your child’s life, they’ll give you $100. There’s some free money right there. Take advantage of it.

[00:23:03] Inside the account, the money grows tax-free. And if you pull it out for qualifying education expenses, it also comes out tax-free. That’s the huge benefit of it.

[00:23:14] What are qualifying education expenses? Well, for higher education, that includes tuition, room and board if you’re at least a halftime student, books, computer accessory, supplies.

[00:23:25] Higher education these days also includes vocational school. It also includes apprenticeships. It doesn’t have to be a traditional four-year college. It could be, go learn how to be an electrician at a trade school.

[00:23:37] But you can also use it for K-12 education. You can use it for tuition only K-12 up to $10,000 a year. I will put an asterisk on that. Most states allow you to withdraw K-12 education. Not all states though. So please check your state before you do that.

[00:23:55] And then you can also use the 529 plan for up to $10,000 in a one-time student loan repayment lump sum. There are options there. But again, I’ll put an asterisk on that one. Varies by state. Please check your state laws. Not all states conform with that.

[00:24:10] It also doesn’t impact the FAFSA as much as we talked about. It’s a parent asset. And if a grandparent owns the 529 plan, it doesn’t impact financial aid on the FAFSA at all. So that’s a huge benefit.

[00:24:23] It also has a lot of potential estate planning options, especially for grandparents. You can leverage that as an estate planning tool. You can gift into it. You can do a five-year super funding. It won’t impact your grandchildren’s financial aid as a result, but it gets it out of your estate.

[00:24:39] A lot of benefits there. But you always have to compare everything to the other options. I can’t just say it’s the best without talking about the alternatives. The most common alternatives to the 529 plan are a taxable UTMA, UGMA account.

[00:24:57] This is just a brokerage that you set up in your kid’s name. But as a result of it being in your kid’s name, one, it’s a taxable account. And if you grow the value of your UTMA or UGMA to a sizeable amount, you could be facing kiddie tax issues and tax complications there.

[00:25:13] Jon: Jon Luskin your Bogleheads® Live host, jumping in for a podcast edit. Here, Robert Farrington mentions the kiddie tax.

[00:25:22] That’s KIDDIE. Not KITTY. Let’s talk about what the kiddie tax is for those who aren’t tax nerds.

[00:25:34] The kiddie tax applies to unearned income of a dependent child. This means if you’ve got a UTMA or UGMA account, that kiddie tax would likely apply. Here’s how it works.

[00:25:49] For 2022, the first $1,150 of unearned income is covered by the kid’s standard deduction. So, it’s not taxed. The next $1,150 is taxed at the child’s marginal rate. And anything above that $2,300 is taxed at the parent’s marginal rate.

[00:26:15] Imagine you had $100,000 in one of those custodial accounts. That’s going to generate several thousand dollars in unearned income, with a good chunk of it being taxable at the parent’s marginal rate.

[00:26:30] To make Robert’s point, if that money was in a 529 account, all that income and growth could be tax-free. And now back to the show.

[00:26:44] Robert Farrington: And then also it’s a child’s asset. So, it significantly impacts the FAFSA and the expected family contribution and the potential for financial aid. You win some, you lose some there. Like if you grow it into a nice nest egg for your kids, well, the expectation is they use it to pay for college.

[00:27:01] I always see this one as a popular choice for those parents that think that their kids aren’t going to college anyways. Because I will say the downside of the 529 plan is if you take the money out of a 529 plan, and it’s not used for a qualifying expense, you pay taxes on the gains and you also pay a 10% penalty.

[00:27:19] And so people are like, “Well, what if my child doesn’t go to college? I don’t want to have all this money here.” And you have to realize that that is the potential downside.

[00:27:27] And I would say the third other popular choice for saving for college is a Roth IRA. I love Roth IRAs, but just not for saving for college. It’s very hard to get money into a Roth IRA and by the time you’re able to, you really don’t have a lot of time for it to grow.

[00:27:45] It’s really hard to get money into a Roth IRA for a child, especially a young child like a baby, because you have to have that earned income.

[00:27:53] How do you get money in to give it enough time to grow into the future? Yeah. Maybe by the time they’re 12 or 13 or 14 and they have some earned income and they’re working and doing that kind of stuff, that’s great. Maybe put some money in there. Now you’re also only talking about like a three- or four-year period of time for the money to grow. So, it’s not really helping it grow for college.

[00:28:15] Again, if you’re thinking about education savings accounts, the 529 plan consistently checks the most boxes in my book of a winning account for that purpose.

[00:28:26] Jon: I would certainly agree that 529 is designed for college funding. So, if that’s what your goal is, that can be a great account to do that.

[00:28:35] One note I’ll add is that yeah, you certainly can take money out of that 529 for those K-12 expenses, but if you do, you’re going to give up the value of letting those investments sit in there longer growing tax-free.

[00:28:50] So I encourage folks, be thoughtful about taking money out for those K-12 expenses because you’re giving up time and compound interest.

[00:29:02] Robert Farrington: I will say though, Jon, one interesting way to leverage these 529 plans though is for families that are using it for private school, if you live in a state that offers you a state tax deduction, it could be a way to get a little bit of a tax break for something that you were already paying for anyways.

[00:29:19] Something to keep in mind on how to leverage these accounts and save yourself a tiny bit in state taxes.

[00:29:25] Jon: I’m so glad you mentioned that because I had a related idea that I thought about with you mentioning that student loan one time repayment. Could you do the same with that approach?

[00:29:36] Put money in that 529 plan, get the state tax deduction, and then use that money to pay off student loan debt?

[00:29:42] Robert Farrington: Yes, you definitely can. But just check your plan first. One, make sure your state allows it. I would say only about half of states conform right now on the student loan debt one-time forgiveness.

[00:29:55] And then part two, there are a couple states that do require you to leave the money in the account for at least a year. So again, please check with your state first before you try to do that. But it could be a great way to save on a little bit of state taxes if you are already going to make that expenditure.

[00:30:12] Jon: John, you should be able to ask your question to Robert on saving and investing for college.

[00:30:17] John (audience #2): How do you know how much to save? How do you know when you’ve saved too much and maybe are impacting your own retirement by aggressively funding a 529 or something like that.

[00:30:26] Robert Farrington: When it comes to saving for your children’s education, I like to remind everyone that there are a ton of ways to pay for college. We already talked about a lot of them at the beginning of the show, but short of student loans, kids typically are working. They can work. They can save their own money.

[00:30:42] Parents are typically working still. So, you could also siphon off a little bit of your current earnings to help with college. There are also scholarships, there are grants, there’s work study, and then of course, students can always borrow student loans to pay for any residuals.

[00:30:56] They have a lot of options for themselves if you don’t save for college. You don’t have a lot of options if you don’t save for your own retirement and your future.

[00:31:07] Jon: One thing that may help folks make the decision with respect to funding that 529 or funding that Roth IRA: consider that in your retirement, do you want your children having the burden to support you? That can make a strong argument for prioritizing your own retirement. You’re actually helping your children in the future.

[00:31:28] Robert Farrington: Don’t do it at the expense of yourself. That’s really where people get into the most trouble.

[00:31:34] There are a lot of different middle grounds here, too. It’s not an ‘either or’ thing. You don’t have to pay for a full amount for your kids to go to school. If you can save $10,000 and now that offsets 50% or 25% of the cost, that’s a huge benefit.

[00:31:48] And then finally, I like to challenge families that you’re not alone in saving for your children’s future. I think a lot of families can benefit from working as a team for their children. And what I mean by this is that most families still have grandparents for young kids, maybe aunts and uncles, things like that.

[00:32:06] Instead of grandma or grandpa buying 10 different gifts from Target for Christmas or their birthday, encourage them that, “Hey, maybe you give to their 529 plan or give to save for college in lieu of gifts. Same thing for birthdays. So again, you don’t have to do it alone. You have options to do this as a family, as a team, and as a community as well.

[00:32:27] Jon: Greg, ask your question.

[00:32:28] Greg (audience #3): My question was about the role of the private college 529 plan that offers prepaid tuition to about 300 schools. Is that a good option to consider when kids are in high school, or is it better just to stay in a traditional 529 to have more flexibility on school choice?

[00:32:47] Robert Farrington: I personally am not a huge fan of prepaid tuition programs and the private college 529 plan that I saw referenced in the Bogleheads® Forum, it only is a prepaid tuition plan for about 300 schools. And I want to say like if you don’t go to one of the qualifying schools, you basically get like a 2% interest rate on your money. And so you could just go open a high yield savings account these days and you’re going to earn 3% and that rate’s going to continue to rise for a while, right?

[00:33:15] Prepaid tuition plans can work well if your child goes to the schools that are a part of the prepaid tuition program. They do serve their purpose. You can lock in some credit units and things at fixed prices early. But it really ends up being a worse off bet than a traditional 529 plan or even other savings options.

[00:33:39] Jon: Robert Farrington, any final thoughts before I let you go?

[00:33:43] Robert Farrington: Before you even think of all this, like “How do I pay? What’s the best way to pay? Yadda, yadda, yadda.” Please, please, please have some ROI conversations. “Is it worth it? How much should we spend? At what point in dollar value does it probably not make sense to do this?”

[00:33:58] But then again, if you’re a diligent saver, you’ve planned for your own retirement, you have lots of money for your kids’ college and they want to go to a private school, go for it. You’ve earned it. They’ve earned that G Wagon education.

[00:34:10] There are a lot of ways to do it. There is not a one size fits all. But please just don’t go into debt, overpaying for a degree that’s not going to have the ROI. I think that’s really what we all want to avoid as parents. We want to see our kids have positive ROIs on their education. As you’re planning it, please just think about that.

[00:34:27] Jon: That college decision is a financial decision, so it likely makes sense to run the numbers.

[00:34:33] That’s all the time we have for today. Thank you to Robert Farrington for joining us today, and thank you for everyone who joined us for today’s Bogleheads® Live.

[00:34:41] For our next Bogleheads® Live, Colleen Jaconetti, Senior Investment Strategist at Vanguard returns to discuss rebalancing your portfolio.

[00:34:49] Until then, you can access a wealth of information for do-it-yourself investors at the John C. Bogle Center for Financial Literacy at boglecenter.net. For our podcast listeners, if you could take a moment to subscribe and to rate the podcast on Apple, Spotify, Google, or wherever you get your podcast.

[00:35:04] Finally, I’d love your feedback. If you have a comment or guest suggestion, tag your host @JonLuskin on Twitter.

[00:35:11] Thank you again, everyone. Look forward to seeing you all again next time. Until then, have a great one.