In this month’s edition of “Money Matters,” Scott talks about the college financial planning process, including deciding whether college is the right choice, setting financial boundaries for students, and 529 college savings plans.

Money Matters: College Financial Planning Decisions Transcript

0:00:00.1 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. Scott joins us now by phone. Welcome, Scott.

0:00:24.4 Scott Oeth: Good morning, CJ.

0:00:26.3 CJ: Good morning to you. So you said you'd like to talk about college savings strategy. Now, that's gotta be a huge topic, where should we begin?

0:00:36.0 SO: Yeah, it's a really big area, CJ, lots we could talk about. And I think a lot of people are talking about it, college decisions were made on May 1st for a lot of seniors, ACTs are coming up. It's one of the most commonly things I get asked about the most in my office in terms of how do we save, how do we help our kids or grandkids with college, how to make good decisions? So it's a big one and I think a real prevalent question today that we're seeing is, is it still worth it? Is the payoff there? And we've seen this explosion in student loan debt and people struggling to get good degrees. And so it's some very good questions, I think, are being asked. And maybe I should say we're front, CJ, kinda the standard disclosure, general discussion. Everyone's situation's different, you really need to seek your own advice and talk to your own experts here. So we're just kinda having informational conversation, but one thing caught my eye: just yesterday, CJ, there's a “Wall Street Journal” article that came out about this topic. And in there it said, today the majority of Americans say they're skeptical about the value of higher education, they had numbers comparing today versus just 10 years ago, and it showed a really tremendous swing in how people viewed the value of college education.

0:01:50.2 SO: You know, 10 years ago, 40% of the people said, not worth the cost, because people often graduate without specific skills and they have a large amount of debt. Today, 56% of the people surveyed said this, almost a 20% increase. But what the article was also getting to, was a study by George town University where they're saying, what are things that you can do in your twenties to help you have a good job in your thirties? And by good job, they meant one that pays for what they consider a minimum of economic self-sufficiency provides for that and a median annual salary of $57,000 a year. And they looked at 38 different decision points, things that people could do in their twenties and pursuing a bachelor's degree made more difference than any other decision point. And kinda synopsis that the main road to a good job is still get a bachelor's degree, so the director of the study. And so in general, on average, it still seems to make sense. JP Morgan has a really great research piece, very in-depth on college planning that they put out, and I just reviewed that, and they showed their bachelor's degree on average 88% higher earnings than someone with a high school degree and a professional degree, 265% higher earnings.

0:03:07.9 SO: So, on average higher earnings, less unemployment, I think is also important. We saw that, especially during the pandemic in the last couple of years, the unemployment rate is much lower, depending on the higher level. But, I think, and I'll be the first point out, these are averages. There's all kinds of exceptions. We've seen many high profile, dropouts do it your selfers, if someone's truly talented in business or sales or entertainer or all kinds of different fields, there's many people that are able to achieve success. But on average, it seems to help. I'd say even in my work, one of probably my wealthiest client, no college education, family business, and has done very, very well with it. But those are probably exceptions rather than the average.

0:03:54.7 CJ: Alright. All right. So opinions may have changed about whether college is worth it, but those stats are probably, are they trending as they have been over the last several decades, that your earnings are gonna be better if you get a college at least a bachelor's degree?

0:04:11.4 SO: Yeah. It seems that way. So opinions changed a lot, and I think college costs continue to climb. CJ, I remember, in my firm, we did an internal study over 20 years ago and thought, okay, in our financial planning, what rate of increase in college costs should we use? And we're assuming inflation 3.5% in general, that college costs 6%. And that's what it's been remarkably over the last 20 years, about a 6% increase. Some, the more prestigious private institutions, even more, so, the cost has gone up a lot. The amount of student loans people have has really climbed. And so while the payoff on average looks good, I really think this needs to be a thoughtful decision, purchase decision, and looked at as a purchase decision and not, some people can afford to write a cheque and go anywhere, and it's not gonna impact their or their child's or their family's financial situation. But there again, that's the exception, that's not most of us. So I really encourage people to look at it, first of all, as, are you buying an education or are you looking at this, sort of like a luxury vacation? Or, when you take your kid out for a special birthday meal and say, ah, get anything on the menu. Most people can't afford to do that without a really negative financial impact.

0:05:38.6 CJ: All right. So what advice do you have for us then if we want to make a wise education purchase decision?

0:05:45.5 SO: Well, I think, so we get asked a lot about the specifics, what college savings vehicle, how to invest? That's really important. But I think first of all, you start by, take a look. I'm a big advocate of financial planning. If you can study the numbers yourself or work with a good certified financial planner and figure out how much can you afford, what can your family afford? And how will this cost impact other financial goals and priorities in your life? So that's the first step. Second, it is okay, I want to tell parents it is okay to set financial boundaries and have these conversations early so your child doesn't get their hopes up and really get attached to school with a wonderful sports team or cool colors or a beautiful campus. All those things are nice, right? CJ, those are niceties, they're great, but you know, the great news is, and this has been replicated, I've seen this in many studies, if you have a good student, if they're hardworking, if they're smart, if they're disciplined, it's a lot more about how you go to college rather than where you go to college.

0:06:50.4 SO: And there's been tests where they study and they say, okay, let's take a look at a great student who was accepted into a expensive prestigious school, how they end up, and that same type of student, If they went to sort of the non-descript, they call like middle state U, guess what? You know, 10 years down the road from a financial standpoint, which they want return to investment, they end up in about the same spot. So yes, because there's a self-selection, the expensive, very elite, prestigious type schools, sure, they show a higher average earnings, but that's because of the pool of people that go there. If you have that same type of student and they go to a more middle of the road type institution, they're gonna end up fine. Okay. So, I think that's very, very important. And I did a webinar a year ago, CJ, and it's posted in my blog, and if someone really wants a deep dive, there's a wonderful conversation with a woman named Cozy Wittman, she's an excellent college planner, that's what she does purely, and we talked about a lot of this stuff. One of the statistics, I went back and looked at this since, another call there's recent research, 28% of programs have a negative return on investment. And the thing is, we talk about there, many of them are from really prestigious universities. So there again, it's your students, what's a good fit and what degree they choose and what they do with it when they're there.

0:08:18.7 CJ: All right. So now, I've heard a term 529 plan. What exactly is that and how does it benefit us for saving for college?

0:08:33.2 SO: Yeah, it's named after a tax code section. Like a lot of our favorite financial planning tools, 529 plan, and they've been around for quite a while, and it is a type of plan where you can put dollars in there and they can be invested and the gains on those investments can be sheltered from tax and the withdrawals can be tax free. One of our favorite terms, right, CJ? If they're used for certain qualifying expenses. There's been a big part of my financial planning work for a long time. I used to caution people because the withdrawals for that tax free withdrawal used to be fairly restrictive in terms of what they could be used for, very specifically college tuition and some of the college costs. Happily, that's been loosened up a bit. And so it's worth taking a look at. These can be a great tool to help save for college. There still needs to be some caution though because if you overfund a plan, those earnings go from being tax free to come out being taxes, ordinary income and a 10% penalty. So not too many people are in that good problem, that happy situation where they might end up with an overfunded plan. But it is something I'd like to make a note of, but there's a wide variety of these plans, CJ, many of 'em are sponsored by different states, different institutions, and they can have a really wide difference in cost for the investment array, the investment menu that's offered within the plan.

0:10:03.7 SO: Sometimes residents of certain states get a tax benefit or accredit if they use their local plan. So it requires some research. My team and I, internally, we did just a big extensive review of 529 plan offerings nationwide, found quite a bit of difference. It even prompted us to go from one of our longtime favorites that we're really recommending to making a shift. So, a great tool but bears its own research and find out what's the right fit for you.

0:10:33.6 CJ: And where's the best place to start that research journey about 529 plans?

0:10:39.8 SO: Well, the if you Google, there's a really useful site called Saving for College and there's a number of other websites that help you kind of rank and filter and sort different 529 plans based on cost and availability. I'll also do a little self-promotion here, my wealth strategy team at the office on June 7th at noon, we are doing a webinar, a real deep dive on college planning strategies, and we're gonna talk about some of the updates and also some of the nuances of 529 plans. So, if anyone listening is interested, feel free to send me an email and we can get you the information, and get you on that role. We'll have a recording as well that we'll post on the blog along with that one from a year ago where we talked a lot about that decision of how to make a good purchase decision around college.

0:11:34.1 CJ: And what's your email, Scott?

0:11:37.4 SO: The email is scott@cahillfa.com, C-A-H-I-L-L-F-A.com. Probably the easiest way is if people just go to my blog, which I think you link on these recordings, but it's scottoeth.com and you can contact me through the blog and that's where I post all our conversations as well as a lot of other materials.

0:12:01.0 CJ: Okay. And that webinar again, what date and time?

0:12:05.8 SO: Oh yeah, June 7th College planning Strategies at noon. So if people want to listen to it live, that's great; otherwise, I record all these and can share them afterward as well. Someone just sends me an email.

0:12:17.5 CJ: All right. Well, Scott, that's a ton of information. Is there anything else that's useful for us to know right at this moment?

0:12:24.9 SO: Well, I think just as it relates to this planning, planning, planning makes a world of difference. I think a lot of people are scared, rightly so, you know, the cost can be just eye popping, it's frightening, and they kind of don't want to deal with it and are maybe a little embarrassed, ashamed that they haven't planned ahead and haven't made good decisions. And it gets down to crunch time. And decisions are just sort of made without a lot of forethought in terms of what can people afford, what's gonna be the payoff and what are the avenues to get there? And I think ideally, a long runway ahead of you is the best to begin planning for this type of thing. But even in the moment being thoughtful about what is that purchase and how's this gonna impact our student? Or if you are the student or the family, if you're providing support you want to give it a lot of thought.

0:13:21.6 CJ: Okay. And conversations with that student early on would be very helpful.

0:13:26.9 SO: I really think so. I think setting the expectation and not feeling bad about it. If it's a modest amount of help that you're gonna be able to provide or putting a ceiling on what type of school and say, Hey, this is the price range and your job is to go there and knock it out of the park.

0:13:44.2 CJ: Right.

0:13:44.6 SO: You can still be successful going here, and this is not the end of your education journey, this is just the next step in it. There's wonderful resources that are these days essentially free that you can continue to build on after that as well.

0:13:57.7 CJ: All right. Well, Scott, thank you so much. That was very helpful. Hopefully folks will tune in to your webinar on June 7th.

0:14:06.0 SO: Sounds great. Thanks CJ.

0:14:07.4 CJ: Thank you. You bet.