The following is the transcript from Episode 9 of Retire Happy with Roger Gainer, a financial and business audio podcast.
Roger: Because it\’s such a large expense and as I pointed out that expense is even bigger than the amount you borrowed because of interest and the fact that you\’re not earning interest. So there\’s that other cost, it really adds up to astronomical numbers. So it\’s so important that you keep an eye on, \”What am I trying to do? Where do I wanna get up? What\’s my timeline?\” And put this in perspective.
Clark: You\’re listening to Retire Happy with Roger Gainer. President of Gainer Financial and Insurance Services Inc. As Summer comes to an end, one big financial topic is coming to the forefront of many people\’s minds. College, and the potential costs associated with getting a high-quality secondary education. In today\’s episode, we\’re taking a closer look at the long-term pitfalls of student loans. How to maximize potential financial aid, and why having a savings account specifically dedicated to college might not actually be the best idea. Thanks for joining us, I\’m your host Clark Buckner.
Tying together several ideas we\’ve discussed in previous episodes. This conversation dives in-depth in the planning not only for your future but for your family\’s as well. Let\’s jump right in.
The topic of school specifically college… College the price of college every single year it\’s going up, and there\’s a lot of conversation around, \”Is it a bubble? What\’s happening? How can we even afford this? Or are we sending our family into debt? Or those are our kids, are they going to be carrying this debt for the rest of their lives?\” There are a lot of things here so I\’m not really sure where you\’d like to begin. But when you first start looking at this topic of making sure college doesn\’t destroy you financially, where do you wanna start?
Roger: Well, that\’s quite an introduction, Clark. It is a big topic, and it\’s a really, really important one. And you know school\’s out now and they are back in session. Summer is kind of over for most people and thoughts start turning to Fall and Winter and that always involves school. And I know I\’ve already had a few phone calls here recently, and I\’ve had it brought up by other clients in meetings, about their kids starting the search for colleges or maybe, \”How are we gonna pay for the next year college or the year after?\” And really this is a topic that for most of my clients and most of the people I talk to, they know that this problem is coming and they don\’t deal with it until junior, senior year at high school.
You know, for most people when the baby is born you\’re happy and excited and thinking about that future and how they\’re gonna grow up and you get involved. In the back of your mind, you always know this thing is coming out there, and it is probably the second largest expense that most people will have to negotiate. So whether it\’s buying a house, or starting a business, or paying for retirement, or paying for your child\’s college education, these are all major purchases and planning will get you a better result almost every single time.
Clark: How soon do you start to plan? Or how do you know when it\’s time to start planning?
Roger: Well, there comes a time when you start to realize if your kid is right for college shall we say? I think a lot of folks go to college that maybe shouldn\’t. They don\’t aspire to the things that college will provide them. But because they go to a high school where everybody goes to college they don\’t think about things that make them, you know, that they can grow and expand into. But if you know that you\’ve got a kid who\’s smart and motivated. I had a fellow in here with his two kids just last week. And the one was going into sophomore year in high school and very, very motivated.
And I had spoken a little bit with dad previously because dad\’s asked me questions…he\’s been a long-time client…about this expense that\’s coming up. And we\’ve had the conversation since dad\’s a little bit older and maybe within a few years of retirement, \”How can I retire and still put these two kids through college when I\’m 70 years old?\” And this is, it\’s a big problem. So she\’s very very motivated, she wants to go to a top school and she asked me, \”What are the things I can be doing today to make this happen for me?\” And I explained to her A, about what the real cost of college is. Because if you\’re in high school, or you\’re gonna go to a college night, and part of college night will be a financial aid lecture or workshop that will depress everybody. Because they\’ll basically say, if you\’re really poor you can get a Pell grant. If you\’re mostly poor you can get a Cal grant. And other than that, pretty much you can borrow money, or maybe if you\’re lucky get a little work study in.
And the kid sits there and go, well, gee, here in California States school like University of California Berkeley is gonna be about $38,000, $40,000 all in for a year. And Stanford is about $65,000 those are the two, you know, main rivals out here. And the kids aren\’t stupid. They say, \”Well, gee mom and dad, I don\’t wanna saddle them with $65,000 a year. So I\’m gonna apply to that UC and save them $25,000 a year.\” I mean that\’s pretty straightforward right?
Except California students who go to UC\’s, if they don\’t qualify for lower income financial aid like Pell Grants and Cal Grants, there pretty much isn\’t anything else other than loans, because there\’s so many California kids that wanna get into these schools for the reasons I just mentioned. But if you go to Stanford the vast majority of students at Stanford, Harvard, Yale really most of the private schools get financial aid. In fact, I think the figure the last time I checked it was a couple of years ago, over 90% of the students at Stanford receive some financial aid. And this isn\’t the financial aid in the form of loans. It\’s financial aid in the form of scholarships and grants. And we sure like that kind of money. So when I talk about being strategic, it\’s about understanding how this system works and then how you can make the system work for you. Does that make sense, Clark?
Clark: Right. I know you talk often about systems and how do you make sure the system doesn\’t work you. Any comparing suggestions maybe that relate to this? I know you\’ve talked about all sorts of things previously to this, but when you think about not letting the system work for you. What are just one or two fundamental strategies you must be using to make sure you\’re not being worked over?
Roger: Well, the first one is make sure you don\’t destroy yourself financially by piling up a huge amount of debt. I\’ve met in my lifetime a number of what I would call professional students because the debt got so high they just kept going for additional degrees so they could borrow more money to live on because they knew that if they stop school they\’d were gonna have to start paying that money back. So they are in a perpetual school mode, and in a perpetual borrowing mode, and they owe hundreds of thousands of dollars. And given their majors and the amount of money they could potentially earn, they\’ll never be out of that debt hole.
So what we don\’t want his mom and dad who like my other client that I just mentioned. When he\’s 72 his youngest will have be just graduating from college. So we don\’t want him to be stuck with $100,000 in debt, or $200,000 in debt. And we certainly don\’t want those graduates having that kind of debt. I believe the average student today graduates with something like $30,000 to $40,000 worth of debt. And see the problem with that is when you\’re paying that debt back it means that you\’re not gonna have that money available to save. So that puts you behind. In previous podcasts I\’ve talked about the power of compound interest. Well, compound interest works for you and against you. So it works against you when you borrow money, and you have to understand how to manage that. In fact, we could have just a podcast on how compound interest works and how to minimize the impacts of paying compound interest and exploiting the benefits of earning compound interest. So keep that in mind, Clark, we\’ll come to that.
Clark: Yes, I\’ll pencil that down for the parking lot.
Roger: Yeah, there you go. You know, it makes sense if I\’m a student and I\’ve gotta put, you know, say $200 a month from my first job towards paying down my debt, and I\’m gonna be paying that down for the next 20 years. That 200 that I don\’t put into an account to save, well, if you save $200 a month that\’s about $2,400 a year. Say I was 25 when I started doing that and I did that till I was 35, and I put it in an account that averaged 10% interest. When I was 65 I would have almost $700,000. Just from putting money away for 10 years. And those are the 10 years I\’m not saving that money, those are the 10 years I\’m sending it to whoever I owe for my college education. So that\’s what it\’s costing. It\’s not costing the $40,000 in income, it\’s costing the $700,000 that I\’m not gonna have in my retirement account.
And if mom and dad have to pay that $40,000 off. Again, that\’s money that\’s not gonna be available in their retirement account. It\’s gonna cost them thousands of dollars in annual income potential that they could be enjoying financial security with. And instead, they might have to work more years so that their assets can last, to keep up income and those kinds of ramifications.
So we see people borrowing a ton of money and then going into a field where they make $40,000 or $50,000 a year and they owe $80,000 or $100,000. And it doesn\’t take much to figure out that equation, just doesn\’t balance. You know, how am I ever gonna get out of that hole? And so all kinds of things are delayed. There\’s some macroeconomics that come out of all of this. We\’re seeing a delay in the formation of households based on historical norms. This is simply a jargony way of saying that the folks that are referred to as millennials are not getting married as young as they, as we used to get married after, you know, school and in young adulthood. They are not formally having children as young and they are not saving money and purchasing houses, and those kinds of things because all that those resources are going to pay back debt. So there\’s even larger economic ramifications to the approach that most people take to going to college which is borrow money.
Clark: What are…Okay, let\’s say you\’re as before the student has maybe even started school. Maybe this is it\’s a little baby. And then maybe have two scenarios, maybe when they\’re very young and maybe a second scenario could be they are already in high school. But from the first scenario they\’re really, really young, what are the one or two things you would suggest someone consider doing in order to start preparing specifically for college?
Roger: Well, first of all, I wouldn\’t create what\’s called a college account.
Clark: You would not create that?
Roger: No, no. The thing with college is you have to be able to afford to pay for it. And what I\’ve seen over the years is if people save in a specific account that\’s called a college account, and that happens to be their best account, they shouldn\’t cash out of it. They should let that grow and maybe spend some different money. So what I\’ve told clients over the last 30 years when this question comes up and early in our engagement. Is we don\’t know where the best place is going to be for you to take money from when it comes time to pay for your kid\’s college. Ideally, you get the college to pay for your kid\’s college and you get to keep your money.
So we wanna operate at maximum efficiency and accumulate as much wealth as is feasible while still enjoying a great lifestyle day to day. And if we have money in different places and we have an integrated coordinated financial plan, money is gonna flow from a variety of resources in order to pay for college. One of my oldest dearest clients, he\’s also a great friend, he\’s the first guy to ever ask me that question. He\’d been a client for 27 years now, and I told him this and he\’s put two kids through college. One, the older boy went to The University of Michigan, and actually spent two and a half years overseas in college in Europe. And if he\’d had money in, say, a 529 plan, his total out of pocket to send that student through four years of The University of Michigan was about $18,000. That was it, because he got scholarships. He qualified for different things, and his son figured out how to pay less going abroad than here. So if that money had been sitting in a 529 plan now it would be trapped.
The daughter, however, she went to USC. And he ended up paying almost $160,000 for her education. But the money was there because of the overall financial plan and we had options as to where to pull it from. So it didn\’t interrupt his progress towards retirement. In fact, that guy we\’re now working on his transition to retirement over the next 24 months.
Clark: The other scenario we were trying to talk about was if it is at the point where you\’re about to head off to college…I mean this is high school…Is there, I know this is not ideal, but do you have a suggestion or two of maybe how to maybe brace for impact?
Roger: Yeah. Well I started a,… I\’m sorry if I\’ve kind of wandered here, folks. But I started telling a story about a gentleman who was in here with his two kids the other day. And the oldest is a sophomore in high school and very very motivated. So she really wants to go to Stanford and it\’s hard to get in. So I suggested as a sophomore, if she was really motivated she should send a letter something like this to Stanford and preferably the two or three other schools she might be interested in. And that is simply, \”Hi, my name is.\” And I\’m not gonna tell you her name. \”I\’m very interested in going to school at Stanford and I was hoping that you might be able to advise me since I\’m a sophomore at X high school. What are the things I should be doing and focusing on over the next three years in order to get into Stanford and qualify to go to school there?\”
Something that…some very interesting things happen when you do that. Now you send that letter to the admissions department and direct it towards the director of admissions, and you will get a lovely response. And now they know who you are as a person. If you wait until your senior year like everybody else does to submit your application. That application is coming in with many cases, tens of thousands of other applications. I think Stanford gets 40,000 freshman admission applications each year.
So if you\’re just in with that mass of submitted documents, it\’s very hard to stand out in the crowd. But, if you\’ve been communicating with the admissions department for three years, they\’re keeping an eye out for your application. In fact, many schools will give you an abbreviated application if you\’ve been communicating with them for a period of time. And like I said earlier, you get that acceptance at Stanford, they\’re gonna give you a big old scholarship. And the reason for that, and this is just a part of the big business that is University and college, colleges… You know it\’s a multi-billion-dollar industry, and they know their industry way better than us. They\’ve been in it for over 100 years in many, many cases. So they know that the big money is from donations, it\’s the endowments. Stanford has a $40 billion endowment. So it\’s no big deal for them to give you money because they\’re looking for students who will become donors. Clark, did you go to college?
Clark: Yes.
Roger: Okay. Do you ever hear from your Alma Mater?
Clark: Yeah, definitely.
Roger: Do they call to see how you\’re doing?
Clark: They do. They call and check in and see if I would like to support financially.
Roger: That\’s right. And they started asking you for money at graduation.
Clark: That\’s right.
Roger: Okay, because this is where the real money is. So when you walk through a college campus, and you look at buildings they all have names on them. The stadium has a name on it. And why? Because people gave money to build those things. And so that\’s really where the big money is. It\’s in that endowment. Tuition is a nice bonus, and they\’re not gonna turn it down. And the other thing to remember is when you do get a merit-based scholarship, they\’re not gonna give you money. They\’re just gonna discount what you receive. So in other words, you know, when you fly the retail price of your airline seat your airplane seat from here to Chicago might be 1200 bucks. I\’m not gonna pay $1,200, I\’m gonna get a discount, right? So I may pay $400 for that. Well, it\’s the same seat that gets me from point A to point B. They didn\’t give me a rebate on what I paid for, they just discounted the service that I purchased. And that\’s the same thing that schools happen, happen at colleges. So you get a $10,000 scholarship it just means they collect $10,000 less. They don\’t write you a check for $10,000. That makes sense?
Clark: Yes.
Roger: Okay. So if you\’re strategic and you go to schools who have good endowments you\’re gonna find that they have money and they even offer you money without you asking for it. Which is pretty cool.
Clark: It might be the only time in life when that happens.
Roger: It really does happen. I… Last year a client of mine son, he\’s going to I believe St. Mary\’s. And we had this conversation, the son wasn\’t motivated enough to do enough work to get it all paid for. But every time an acceptance came in he said, \”Well, these guys offered me $5,000 a year. This guy\’s offered me $10,000 a year. These guys offered me $12,000 a year.\” And so I told him, \”Well, you take all those offers.\” Typically, what happens with private schools, again not state schools but with private schools, you\’ll get an acceptance letter that will say something like, you know, congratulations, you qualified to come to Rensselaer Polytechnic. And we\’ve looked and you\’ve qualified for the president\’s merit award. And this award will be $8,000 a year for the next four years as long as you maintain a 3.0 average.\” And that\’s it. So what we like to do is, If we get three, four, or five of these things and we start using the schools, we play them off each other, and we get them to increase their award. And it\’s really a very simple process, a student just asks for more money.
It sounds too easy, but it really is that easy. If the student will do the work. Mom and dad can\’t do this because the schools don\’t care about mom and dad, of course, mom and dad don\’t wanna pay. But if the student writes the right kind of letter, and makes a copy of all these award letters and says, \”Gee, I\’d really like to go to your school but here\’s the other offers I\’ve gotten, and money is an issue so we wanna make sure that I, because of my parent\’s financial situation I have to take money into consideration.\” And then, \”If there\’s anything you can do to help please let me know.\” And almost inevitably you\’ll get an increased award offer back. And I\’ve known people who\’ve gone through this process three or four times, going back to the schools and getting their awards increased time and time again.
So that\’s what we like to see clients do, their kids do to pay for school. You know, get the school to give you the money. And there\’s ways to make your student look better as far as being somebody worth offering a scholarship to.
Clark: Right. Well, it sounds like it\’s definitely a relationship process. And what you\’re saying is even if you wait until high school, which is not ideal to start thinking about this, but sooner or later you wanna begin the conversation from the student perspective and at often times you say, you put your money to work for you. But in this case, you\’re putting your kids to work for you. Kids are working for themselves. They are avoiding going into, trying to minimize that debt. So we went through scenario one, we just talked about scenario two. So, what else is there left as we\’re trying to wrap up here?
Roger: Well, Clark, the one thing I would like to encourage people to do is be thorough in the school selection process. And there are certain, in every area, there are certain default schools that everybody is interested in. You know, around here kids wanna go to Cal, or to Berkeley, or to San Francisco State, or UCSF, or the big state schools are always very very popular. And as I said before, they don\’t have money for you. But if you go and research what I refer to as second tier privates you\’ll get every bit as good an education but it\’s not the cache, you know the prestige of Stanford, or an ivy league school like Yale, or Harvard, those kinds of schools. But these second tier, the St. Mary\’s, the Santa Clara, Rensselaer Polytechnic, great schools, Loyola Marymount, great schools all over the country.
They have endowments and these are the ones that I\’m seeing the big awards offers come from. And it\’s because students are ignoring those schools for all the reasons I stated before. You know, you either want the prestige schools, or we wanna save mom and dad money. And so I\’m not gonna apply to those other private schools.
So today, you know, they don\’t wanna fly empty seats so they\’re willing to discount to get you in. And so I would strongly urge listeners to take advantage of researching schools that fit what they\’re looking for but maybe they\’re not the big-name brand schools that everybody hears about every day. They might be name brand schools that you only hear about once in a while.
Clark: And when you compare that to what on the other hand is you tried to eat that debt. And that\’s gonna follow you for many years, and that\’s gonna change, that can change your life by having that debt hanging on you.
Roger: It not only can, I almost can guarantee it will change your life having that debt hanging over your head. So I really wanna encourage people, there\’s a time for borrowing and there\’s some strategies about borrowing and undergraduate. And doing some arbitrage because you can borrow money at zero cost for an undergraduate. We don\’t have time to get into those strategies here today. But if any of our listeners would like to get a little more information about some of these strategies, or get some tips, or you know. I\’m always happy to talk to young people and help them get going, especially motivated young people today. I think they should just enjoy the most wonderful future they possibly can. And I don\’t wanna see them buried in debt.
Clark: Well, we\’ll have links to this on the website. But one other thing we can finally like to mention is the thought organizer and, typically we\’re using the lens of the thought organizer to retire happy. But there may even be ways to definitely considering how paying for college and education all fit into the thought organizer, right?
Roger: Absolutely. You can\’t retire happy under a crushing burden of student debt.
Clark: Right.
Roger: So you know, and because it\’s such a large expense and as I pointed out that expense is even bigger than the amount you borrowed because of the interest and the fact that you\’re not earning interest. So there\’s that other cost, I mean it really adds up to astronomical numbers. So it\’s so important that you keep an eye on, \”What am I trying to do? Where do I want to get up? What\’s my timeline?\” And put this in perspective. So managing this expense is one of the most critical factors in keeping you financially sound.
Clark: Excellent. Roger, thank you so much again for the conversation today. I\’ve really enjoyed it.
Thanks so much for listening to this episode of Retire Happy. Be sure to head on over to gainerfinancial.com to download your Thought Organizer to get started. Roger L. Gainer, ChFC, California Insurance License number 0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, Pennsylvania, and New York. Roger L. Gainer is an Investment Advisor Representative providing advisory services through HFIS, Inc. a Registered Investment Advisor. Gainer Financial & Insurance Services, Inc. is not owned or affiliated with HFIS, Inc. and operates independently.
Thanks again so much and we\’ll see you next time on Retire Happy.