Financial Planning for College with Rick Brooks – OBHF Ep. 17
One of the things I try to do with parents of littles (I mean really little) is encourage them to start their financial planning for college as soon as possible. Is that obnoxious? Yeah, maybe. Here we are playing with their happy baby, enjoying the moment, and I’m talking about something 17 years in the future!
But some early financial planning for college can make a world of difference in what you’ll be able to afford and the choices your kid will have. In our home, I am the Mistress of Finance, so I knew it would be on me to get it started. And I also knew the magic of compounding interest. With money, time (and interest) are our friends. So the earlier you start, the better your outcomes. At first our contributions were small. But time and interest baby, time and interest.
When Paul found out how much money was in Jesse’s 529 Plan he was shocked. That is the kind of shock you want in your marriage. A happy one, thank goodness.
And it was just because of a little early financial planning for college.
Our son went to pre-K with one of the daughters of today’s expert guest, so we go way back! Rick Brooks is a financial planner who has helped many families figure out how to pay for school. He cares about his community and parenting and has written some terrific articles for our local paper, like the things you need to know when you’re kid turns 18.
In this episode Rick discusses financial planning for college, including:
- The importance of the 529 Plan
- Why you may not want to use the 529 Plan in Freshman year
- Why you should fill out the FAFSA form
- The pitfalls of using insurance vehicles for college
- Why retirement comes before college saving
- And so much more
You can listen to the pod on the blog, on Apple, or your favorite podcast platform. We’re so glad you’re listening! And if you like what you hear, please give us a top rating on Apple, it makes a difference and we’ll be forever grateful!
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- Financial Planning for College with Rick Brooks Transcript - OBHG Ep. 17
Paul Bowers: This our bird has flown podcast is proud to be sponsored by the National Conflict Resolution Center at NCRC online.com check out their programs for reducing and eliminating conflict in the workplace, relationships between businesses whatever you have. The Natural Conflict Resolution Center has a way to solve conflicts.
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From the dusty urban ham Shack studio of WB6QWD lit by a single Edison bulb hanging from the ceiling I’m Paul M Bowers [Singing:Paul M Bowers],thank you ladies and this is the Our Bird Has Flown podcast. [ World Wide!]
On this edition of the Our Bird Has Flown podcast we’re talking to Rick Brooks and Rick Brooks is a financial guy, right?
Rick Brooks:That’s correct I started life as a navy officer. After six and a half years and two trips to the Persian Gulf I looked around for something that was a little less travel. So I got an MBA in finance at San Diego State and followed that up with the CFA Charter and a certified financial planner designation and spent the last 20 years helping people figure out money
Paul M Bowers:And are you successful? Are people figuring out money?
Rick Brooks:They are.
Paul M Bowers:Was you know having a college kid, you’re a dad right?
Rick Brooks:I’m a dad, I’ve got three kids.
Paul M Bowers:Three!
Rick Brooks:Three, the oldest is two years into college.
Paul M Bowers:Yeah and how’s that going?
Rick Brooks:It’s going great.
Paul M Bowers:Yeah and the second?
Rick Brooks:Um the second probably won’t go to college it’s a long story. She’s on the spectrum and the little guy just started high school, the little guy is 5’11 and three-quarters. [laughter]
Paul M Bowers:Well how are people affording College? We just went through this. We talked about it on our blog and it’s a financial disaster the amount of money that colleges cost now are huge. And so what are people doing to be able to afford college?
Rick Brooks:So I’ve been fortunate in that my success came a little late so, I wasn’t able to save a lot towards college or towards my kid’s college. So, I’ve been paying for it out of pocket. That’s been ever so much fun.
You know we tighten our belt a little bit and we do what we can for the kids.
But there are ways for folks who maybe have some early success to put money away for college. 529 plans, education savings accounts, things like that.
There are some strategies for folks later in life, you know or you know closer to the college years. You never want to give up on financial aid. You can target schools specifically that are looking for certain kinds of students. There are certain skills they can be more generous with than other schools.
You want to definitely want to fill out the financial aid form the FAFSA.
Paul M Bowers:Yeah FAFSA we learned about FAFSA
Rick Brooks:That one’s fun isn’t it?
Paul M Bowers:Well I’m lucky because my wife did FAFSA but I was a bit astounded how deep they go. I mean you don’t even have to fill in forms because they already pulled the information from the IRS.
Rick Brooks:In that regard they’ve made it a lot easier and there are a couple of advantages from doing that now. They don’t look at last year’s tax return they look at the year before so, what that means is that things that you do this year won’t affect your students financial need for a couple of years. So, that gives you an opportunity to plan things like distributions from 529 plans.
You want to kind of work your way back from senior year in college to junior, maybe sophomore if you’ve got the money because the distributions from the 529 plans will count against financial need. Because it’s counted as income to the student so you don’t want to do the 529 distribution in the first year because that affects your financial need while the kids still in school.
Paul M Bowers:Oh, Oh, I think we might have done something wrong.
Rick Brooks: [laughter].
Paul M Bowers: I really should have talked to you! And so a 529, explain to everybody what a 529 is. We’ve heard of it, we kind of know that it’s for education. My understanding is that a 529 is an area that you can put post tax money that resides there and it earns theoretically it earns while it’s sitting there and then it’s distributed without taxes on them, is that correct?
So a 529 is a savings account. It’s got some special details but like an IRA, like a brokerage account, it is a savings account.
Now the 529 refers to the section of the tax code that created it. Section 529 plans, basically what a 529 plan is it’s a state-run plan and every state has two or three of them. The money that goes into the 529 plan it’s like you said; it’s after-tax you don’t get a deduction for it some states you do but not California.
The money grows tax-free so you invest in it early and often, and it grows over time and hopefully gets bigger. When you take money out if you’re taking it out for qualified higher education expenses which is tuition, fees, room, board, books, things like that.
You don’t pay tax on the earnings.
There’s some special situations. They offer your kid a scholarship and you don’t need the money, then so you take it back as income but you don’t get a penalty. Now, if you take the money out and you buy a Ferrari with it there’s a…you pay the tax because it’s not a qualified higher education expense. And you pay a 10% penalty just like you would from an early withdrawal from a retirement plan. You didn’t use the money for the right purpose so there’s a penalty tax on it.
But basically what they’re trying to do is incentivize people to save money.
Put it away for college now. The catch is so a 529 plan and education savings account, the Coverdell education savings account that used to be called, it’s kind of that used to be an education IRA. Before that it’s kind of the same thing but there are little different allowances for uses on those. The idea is you put money in, you grow it over time you pull it out to pay for college. Now it matters who the owner of those accounts are when you’re filling out FAFSA.
If your child has assets say a custodial account, a uniform gift, a minor account or something like that counts heavily against the child’s financial need for financial aid.
If the parent owns it it counts less so, if the child owns it 20% of the value of the account goes against financial aid. If the parent owns it up to about five and a half percent of the value of the account goes against financial need. If grandma and grandpa owned it zero because it’s not your asset
Paul M Bower: Oh.
Rick Brooks:Now, here’s the catch.
Paul M Bower: Tell me the catch.
Rick Brooks:I’m sure there’s a couple of catches right? So Grandma and Grandpa owns that they might decide that your kid doesn’t need the money and their other grandkid does. It’s not your money.
Paul M Bower: Because you don’t have control over it anymore.
Rick Brooks:RIght my grandpa’s second thing is and I alluded to this earlier.
When you do take that distribution from the 529 plan, that counts as income to the student.
Income to the student accounts very heavily against financial need. That’s why you want to kind of save the 529s for later. When it comes to financial aid now, you know if you’ve been fortunate and you’ve saved up $200,000 for 50 grand a year in college expenses use the 529 plan.
I mean it’s better than paying for out-of-pocket and better than having it sit there after graduation and have somebody having to take that as income. Now one of the reasons that I like 529 is that you don’t actually have to take it out. The education savings account that covered a (garbled) or whatever they’re called these days. That money has to come out by age 31.
With a 529 plan you can leave it in there. You can leave it in there till your kids have kids and then change the beneficiary from your kid to their kid. If your kid doesn’t have kids, you can change the beneficiary to cousins, nieces and nephews.
Paul M Bowers:As long as it’s not yourself?
Rick Brooks:Anywhere vertically in the family tree, you can change it to yourself. Anywhere vertically or horizontally out to first cousins.
Paul M Bowers:All right.
Rick Brooks:So I’d like to think of these things as an Education Trust. You put money in you save it for education and it can go for generations.
Paul M Bowers:So it could be an endowment.
Rick Brooks:Now you run it, you run it to generation-skipping tax issues and that you got to talk to a CPA about. That I’m too stupid to figure that stuff out.
Paul M Bowers:Well, let’s just say you’re not qualified, too stupid sounds really harsh [laughter].
Rick Brooks: [Laughter] I know my limitations.
Paul M Bowers: [laughter] There you go, you have to do so, get off my line [Laughter].
Rick Brooks:[Laughter] But so I like putting money into 529 plans now. You can’t spend it in retirement right? But you can save it like I said.
It sort of becomes an Education Trust for your family. That’s the advantage and the beauty of 529.
Now the tax code change in December 2017 allows people to take money out of 529 plans not just for college expenses but also for high school expenses now. That’s a change in the tax law.
Paul M Bowers: So, long time ago, there was somethingcalled an educational trust, this was before 529. So, is that not a thing anymore?
Rick Brooks: Well so I mean attorneys write trusts for all kinds of things. And you could put money into a trust and say it’s for education. But that money is going to be taxable every year. That and trusts have a ridiculously, ludicrously high tax rate. You hit the top tax rate in a Trust at twelve thousand dollars of income.
Financial advisors, insurance agents have been selling insurance policies as college savings for a long time. But cash value builds up an insurance policy, you then borrow it out of the policy to pay for college.
I always thought that was insane. It’s ridiculously expensive to save money inside an insurance policy. And you borrow against the cash value. The policy can collapse and create a whole bunch of taxable income when you don’t want it. It’s not what those things are designed for. So it’s not a good use of insurance policies.
The 529 plans were crafted specifically for college savings and are very effective at it.
Paul M Bowers:And we need it, I mean it’s that the cost of college has significantly increased over the last ten years.
Paul M Bowers:And I’m unclear why, maybe you know why, you know why? I mean what are they telling us?
Rick Brooks:Because they can! Well so, I mean that college is expensive. You can spend 30 grand a year in a state you know, in-state tuition in US. You know, if you’re living on campus room and board, you know in a state school. And I think 70 grand a year plus at some private schools. The colleges have recognized that it’s a little ridiculous out there most of them offer some merit aid sort of right off the bat.
I knew a lot of students when my daughter was applying were getting $12 – 24,000 dollars’ worth of merit aid. And that’s not even deed by State.
You still have to fill out FAFSA to get the merit aid.
But you know, you’re not $24 grand off at 78. You know it’s still a lot. But it’s, here’s the thing. That $70,000 a year cost if you go to the private school? The average increase in earnings over a student’s lifetime is about a million dollars. That’s the difference between going to college and not going to college. So, $30 grand a year is that worth a million dollars? You know in future earning potential?
Paul M Bowers:One would think, sure.
Rick Brooks: Then it’s the you know that’s why we make the sacrifices to put our kids into college.
Paul M Bowers:Well and I guess there is a theory that you learn something [Laughter] hopefully you’re learning something.
Rick Brooks:If the quarters beer-pong.
Paul M Bowers: [Laughter] We’re hoping that isn’t the case and there’ll be some quotient of that.
Rick Brooks:Social skills, social skills.
Paul M Bowers: Social skills. Some directly like training, like engineers ok. Engineers learn how to do this and how to do that. Other liberal arts stuff like where our son is going, it’s not quite as concrete. But he’s still learning something. He’s still having that experience. He’s learning to get along. He’s testing himself. All of these things, not in the first few weeks though, we know that.
So tell me a little bit about FAFSA in particular are there ways to game that system?
Rick Brooks:Not really. They download a lot of it from government records, from the IRS records. I mentioned earlier about, you know, who owns the assets. So that’s very important.
You don’t want your child owning assets.
Thirty years ago, twenty years ago, the Uniform Gift to Minors Act, you know California Uniform transfer to minor accounts. You know where you give the kid money? You’d hold it in, you know, in trust but you’d basically hold on to the money for the kid until they turned eighteen or twenty. Those were very popular for a while.
The problem is they create special tax problems. And the other problem is they become the kid’s money. So, you know it might go to college it might go to a Porsche, it might go to vacation in Hawaii you never knew where it was going to go.
The other thing is when, you know, as they’ve refined FAFSA and built it up over time those are assets of the child. UGMA you see, PMA account, is the child’s money so that counts very heavily against financial need. They assume that the 20% of that account, of that money is available for the kid to pay for college.
So, there aren’t a lot of ways to game FAFSA. Anyway, but the thing is you still want to fill out the paperwork. It’s tedious and my wife has done it a couple of years in a row now and we’ve gotten squat for it but you know, if I slow down or get hit by a bus next week, right and my income stops….
Paul M Bowers:Presuming the bus would slow down.
Rick Brooks:Presuming it would slow down right. But you know, if I’d become a speed bump next week then my income goes away and my daughter no longer has that income to rely on for college.
Well, universities have money set aside for situations like that. But often only if you filled out FAFSA. So, if you’ve been, you know, cash flowing and you fill it out and you know you’re not going to get anything but your situation changes, not having filed the FAFSA form means that you’re not eligible for an awful lot of the aid that would become available under those changed circumstances. Still very important to do.
Paul M Bowers:Well it was my understanding that everybody had to fill out FAFSA.
Rick Brooks:No you don’t have to. Now if you want to be considered for the federal aid that’s available, the federal student loans, the private student loans, merit aid need-based aid you have to fill it out.
There’s nothing in the law that says you’ve got to fill it out, it’s just that every form of financial aid out there is linked to FAFSA.
So, you don’t want to leave money on the table if you don’t have to.
Paul M Bowers:All right so, we have a generation now of college graduates who have graduated with great big fat student loans and these are onerous. These are relatively brutal things where people no longer have the luxury of taking an entry-level job at a good company right and working their way up. They can’t make their payments anymore. You have advice for people in this situation?
Rick Brooks:You know, my first thought is that if you’re going to finance college make sure you come out the other end with a skill you can sell.
Paul M Bowers:So that is that’s not advice for somebody that has graduated that’s for somebody who is considering and that’s where it all starts right?
Rick Brooks:It really does. I mean, you know, if you’ve gone through college and you get an English major and, you know, if you’ve borrowed sixty thousand a year to do it great. But, you know, English teachers don’t get paid much so it forces you into looking for, you know, work in inner cities, you know.
Some school districts will forgive student loans if you work in an inner city for so long.
Having that huge amount of debt takes away options it forces you to work for a big company when maybe you’d rather work for a small start-up. Because you’ve got to make that payment. It used to be ten fifteen years ago that if the student loans were too onerous you could declare bankruptcy. Judge would, you know, you get grilled by the lawyers for a few hours but, you know, a judge could with a stroke of a pen eliminate the debt. That also changed.
Paul M Bowers: That’s not the case anymore?
Rick Brooks:Yes Congress made it so that student loans could not be taken away in bankruptcy.
Paul M Bowers:So I hear. A lot of this is me I’m not a financial guy that’s why you’re here. I hear a lot about financial student loan forgiveness and I’m a little troubled by this. Because if we have first of all, the government has loaned out a lot of money, they’ve guaranteed this. So the government is not really in a position to absorb all this. But let’s just say they could. Doesn’t that change the fundamental nature of contracts? I mean isn’t it similar to the mortgage loan crisis when all of a sudden more forgiving in mass quantities pretty soon nobody’s relying on contracts anymore?
Rick Brooks:Well certainly that was one of the arguments against loan forgiveness.
And remember that loan forgiveness isn’t free.
If you have a hundred thousand dollars in forgiven debt, that actually is a hundred thousand dollars of taxable income now on your income tax return.
Paul M Bowers:Oh [ Cross talking]
Rick Brooks:Taxable income.
Paul M Bowers:Right, but then you’re going to pay a taxable percentage on it somewhere between 20 and 50 percent and theoretically if you are…
Rick Brooks:A hundred thousand dollars for a single taxpayer, you’re looking in the twenty five, thirty percent.
Paul M Bowers:Okay, so you’re thirty thousand instead of a hundred thousand dollars.
Rick Brooks:Plus ten or eleven percent to the state. You’re looking at a big chunk of change and the IRS is a heck of a lot less forgiving.
Paul M Bowers:[Laughter]
Rick Brooks:Sallie Mae.
Paul M Bowers:[Laughter] Sallie Mae might say don’t pay us back but the IRS wouldn’t say that.
Rick Brooks:Exactly. But you know it’s moral hazard right? It’ss kind of what you’re referring to that you know if you forgive bad behavior, you get more bad behavior. And I’m somewhat sympathetic to that but you know you’re asking an eighteen-year-old to figure out what they’re going do for the rest, for the next forty years. For the rest of their life.
And to make a very complex financial decision about what do I study to earn an income, what do I study to enjoy life? And how do I pay for it all? And how am I going to pay for it over that you know? When I was eighteen years old next week was long-term planning right.
Paul M Bowers:I understand.
Rick Brooks:So we’re asking young people who don’t have much financial education. And quite frankly a lot of parents don’t have that much financial education to make these big complex decisions about financing. And in, you know, really making an investment for the future it’s tough. I don’t, I don’t know what the policy answer is.
What I know is, for parents trying to figure out how to get their kids through college you can borrow money to pay for the kid’s college and, you know, that said it’ll be in the kids name. The parent might be the co-signer but you can’t borrow money for your retirement and you know for those of us who have put kids in college and we’re starting to look that milestone in the eye.
Paul M Bowers:What exactly is this retirement that your speaking of?
Rick Brooks:[Laughter] So, you know, I’d rather, you know, if it comes down to financing my retirement or, you know, putting money away for retirement or putting money towards kids college –
I want to make sure that my clients fund their retirement first and then we figure out how to pay for college.
So yeah, it may mean that you borrow student loans and there’s lots of different ways to do that. I had one client who had a kid in college and a kid in a private school overlapping. That was a very expensive year for the guy and you know he couldn’t cash flow that. You know he could pay for one out of his income he couldn’t pay both and so we suggested you know take a home equity line of credit. Borrow for that one year where the cash flow is kind of tight and then you know, kid graduates college.
You can use the, you know, now higher after, you know, this after expense income to pay the loan back and that worked for him. Not everybody is that fortunate and that’s where the financial aid process comes into play.
Paul M Bowers:Well Rick, it’s about all the time we have, tell our listeners how to find you if, they’d like to find you.
Rick Brooks:Sure my company is Blankenship and Foster we’re in Solana Beach I live here in Mission Hills in San Diego the website is BFadvisors.com B as in boy f as in Frank advisors.com or you can call me at [858-7555-5166].
Paul M Bowers:There it is. So Rick Brooks thanks for coming in.
Rick Brooks:Thanks for having me, I had fun.
Paul M Bowers:And listener’s thanks for clicking in and we’ll catch you next time on The Our Bird Has Flown podcast. The Our Bird Has Flown podcast is proud to be sponsored by Green Fresh Florals at greenfreshflorals.comand The
National Conflict Resolution Center at NCRConline.comwe are produced at the ramshackle dusty urban ham Shack studio of WB6QWD be sure to check out our website at ourbirdhasflown.comwhere we talked about getting ready for college and what happens afterwards, thanks for clicking in be sure to subscribe to our podcast and we’ll see you again soon.
[Singing:The Our Bird Has Flown]