How The White Coat Investor’s Children Will Pay for Their College

I got skin in the game
I got a household name
I got news for you baby, you’re looking at the man

 

-The Killers

 

Dr. Jim Dahle has become a household name in certain circles. In this niche of personal finance information for physicians, you could say he is “The Man.”

The man is here to say that he wants his kids to have some skin in the game when it comes to paying for their college education and beyond.

Like me, he’s investing in 529 Plans for each of his children, but he also expects them to contribute in a number of ways as outlined below. This post originally appeared on The White Coat Investor.

How The White Coat Investor’s Children Will Pay for Their College

 

Student loans are becoming an ever-larger burden on many households.  Medical school loans are ridiculous, especially when viewed in light of many concerning trends in physician reimbursement.  Non-physicians are also encountering life-altering levels of student loan debt burden.

I had a discussion with a friend recently whose student loan burden prevents him from qualifying to buy a house, even though his income combined with hyper-frugal living is sufficient to make the payments.

Many of those who graduated about the same time I did have large burdens, but they were able to consolidate them at 1-2% interest rates, and are not in any huge rush to pay them off.

More recent graduates are in an entirely different situation, and even bankruptcy promises no relief.  Some consider the IBR program, but for most people, IBR payments are less than the interest, and thus it can be a very risky long-term solution (if your income goes up so do those IBR payments on a now much larger principal).

 

Balancing Self-Reliance And Debt

 

I don’t want my children to be saddled with student loans into their 30s, 40s, and even 50s that will prevent their financial success.  But I also don’t want them to think I’m Daddy Warbucks and never really learn to work and be self-reliant.  I’m constantly reminding them that when they turn 18 they’re out the door and will be responsible for themselves.

Who are we trying to kid, though?  I’m certainly willing to use my assets and income to help launch them into life on a path of personal, financial, and professional success.  There is little that is more important to me than that.  As Warren Buffett famously remarked, “I want them to get enough that they feel they can do anything, but not so much that they could do nothing.”

I can’t say my parents paid for none of my eight years of schooling, but the total amount (not counting flights home) was less than I can make in a single shift in the ED.  My undergraduate tuition was paid by an academic scholarship, my room and board was paid by my summer and school-year employment (and one tiny student loan with exceptionally good terms), and I learned how to pinch a penny like you wouldn’t believe.

The Air Force paid for medical school and threw in a few memorable experiences to boot (note that memorable doesn’t necessarily mean positive.)  There’s nothing like spending the Summer walking behind a lawn mower to motivate you to study hard in the Fall.

 

The Most Important Factor

 

I know another undergraduate student whose relatively well-to-do parents and other family members were willing to help him out with school.  He figured out how much help he could get, and then because it was a sizable amount, opted for a smaller (although no more prestigious) private school over much cheaper options.

I hope to teach my children that they should be even more frugal when spending someone else’s money than they are spending their own.  The most important step one can take to “pay for” college is to choose an inexpensive college.

Talking your kid into going to the local state university at $5K a year (and even perhaps living at home while doing so) versus going out of state to a $50K per year private university may be the best college savings decision you ever make.

Now, I’m not going to pretend the education at Yale and the one at my local state university is one and the same.  It isn’t.  Perhaps it is worth paying 10 times as much to attend one of a dozen high-end universities in this country.

But there are plenty of schools that charge 10 times as much and don’t provide anywhere near 10 times the value.  My alma mater and the local state universities are still a fantastic value at $5,000 to $7,000 per year.  Some people even advocate attending the local community college for the first couple of years.  That’s $3,000 per year in my town.

 

How My Children Will Pay For Their College

 

Notice how I didn’t title this post “How I Will Pay….”  I want my children to take ownership of their own education and the cost of that education.  There will be assistance from me, no doubt, but there won’t be any blank checks.  Costs will be paid out of these sources:

 

1) Their merit scholarships

 

I chose my alma mater partly because it was the only one of the 7 schools I applied to and got accepted to that offered me a full-tuition scholarship.  Working hard in high school and applying for scholarships can be very rewarding.  Like attending a cheaper school, the best way to pay for college is to not pay at all.

 

2) Their in-school earnings

 

Their mother and I both worked as undergraduates.  We didn’t work full-time, but we have a firm belief that adults are supposed to work.  Living in mom’s basement playing 16 hours a day of video games isn’t an option.  If you’re 18, you need to have a job, even if you’re in school.  Working for money helps you to value that money (especially when you’re trading your time for money at minimum wage.)

 

3) Their summer earnings

 

The lion’s share of my undergraduate living expenses were paid for by my summer jobs.  Aside from residency, the hardest and longest hours I’ve ever worked were during the summers of my undergraduate years.   I knew I could work 80 hour weeks because I’d done it before.

 

4) Their 529 accounts

 

I put money into 529 accounts for them each year and invest it aggressively.  But it isn’t that much money.  Utah gives me a tax break on $3,680 per year, so that’s what I put in there.  There will probably be enough to cover tuition plus a little more at the local universities, but that’s it.  It certainly won’t be enough for a full ride, especially at an expensive private university, and you can forget about professional school.

My children will be blessed to receive some money that was put away for them three generations previously.  Like the 529s, it won’t be enough to provide a full ride anywhere, but it’s far better than high-interest student loans.  I hope that being recipients of that money will endow them with a desire to “pay it forward.”

 

6) My current earnings

 

I expect to have the house paid off about the time the kids go to college.  Those mortgage payments can then be redirected toward college expenses.  I also plan to have the ability to retire early and be financially free, but knowing me, I probably couldn’t handle a full retirement starting in my early 50s and will probably work, at least part-time, throughout my 50s.

It seems a little silly to make huge lifestyle sacrifices now to save for something that I could just “cash-flow” later. [Update: That mortgage was paid off in 2017 – editor]

 

7) Their student loans

 

I assure you that I won’t be borrowing money to pay for their education.  However, I can think of some situations where they might have to.  If they decide not to take my advice and they attend some expensive private university, they’re probably going to end up with some loans.

It is also highly unlikely that I’ll be able to foot the entire bill for years of professional school.  Even in these circumstances, however, I hope to keep their loans down to a level where they can be paid off rapidly upon graduation rather than handicapping their financial futures.

 

Only The Very Wealthy (and Fools) Try To Pay Everything Up Front

 

I meet some parents who want to be able to pay for their children’s graduate and undergraduate educations solely through 529 savings.  They also often want them to go to really great schools.  So they run the numbers like this:

Harvard’s Undergraduate Total Cost of Attendance for 2018-2019 is $67,500.  Harvard Medical School Total Cost of Attendance averages is $97,000 a year.  The total for eight years is $658,000.

Educational costs have been going up at about 6% a year.  Let’s say the kid is 3 when I get out of residency, so that leaves me 15 years until he starts.  $658,00 growing at 6% works out to about $1.6M.  In order for me to get $1.6 Million in 15 years, earning 8% a year, I’d have to put away about $55,500 per year.

That’s a ton of money, you say, and you’d be right.  But wait, that’s just for ONE kid.  What if you have 2, or 3, or even more?  On a typical physician income of $200K, saving $55,500 a year is not doable, much less $166,500 a year.

You just cannot save adequately for retirement and save sufficiently to pay for an expensive education for your children on typical physician salaries of $200-400K.  Something has got to give.  More likely, education will have to be paid for from a variety of resources, as outlined above.  The more expensive the education, the more resources you’ll need to call upon.

 


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What do you think?  How will your children pay for college?  Comment below!

 

14 comments

  • I do love the concept that kids need “skin in the game.”

    It really is the only true lesson when they can learn the value of money. I already see a huge difference in attitude for spending in my daughter when she uses “her money” versus the bank of daddy. Much more intentional in spending and prudent.

    I have been putting in the maximum amount in 529 each year since I regained full custody of my daughter (3 yrs) plus the amount I had in it before I lost her at age 4 (basically age 4-10 I didn’t put anything in when she went to England). It definitely will not be enough by the time she turns 18 (I believe all in she has $75k right now at age 13) to go to an expensive private college and certainly not for medical school which for now she wants to do.

    I told her that she will have choices in her education path and that the 529 money is hers to do what she wants but when it’s gone she’s on the hook (and can reduce it with scholarship and more inexpensive places).

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  • My three kids all had completely free rides through their undergraduate degrees. Tuition, fees, room and board were all covered by the scholarships they won with great grades and test scores even though I was a high earner. Our deal was we would cover those costs if they didn’t get the scholarships but they did so we did not have to. Spending money, and any education past their bachelor’s degrees, were all on them. Our two girls worked for the University and got their masters degrees for free and graduated with cash in the bank from their jobs. One is now getting her PhD for free at the college she works at. Our son went to work full time as an engineer and didn’t go back for an advanced degree for seven years. He is in his residency now and we did not help him at all with medical school. He took out some loans but should be fine as both he and his wife will be well paid medical professionals. Our kids definitely had skin in the game and it showed in their performance in college. Summa Cum Laude for one daughter, two engineering degrees for the other daughter and a perfect straight A record in medical school for the engineer turned doctor.

  • Dennis

    I’ve not been a big fan of 529 accounts as I feel they are too restrictive in the type of investments they do and how the money can be used. They were not available when our children went through college and we used UGMA accounts and saved and they both graduated with no debt to burden them in life. I have one grandchild for whom I’ve started a custodial account that I direct at Schwab and neither he nor his parents know about it. His brother on the way won’t know either until he’s ready to go to college. My parents paid for my education and I considered it part of my duty as their father. My son isn’t a doc and won’t have the resources I did to educate his children plus the costs have skyrocketed beyond reason so that’s why I’m going to help the grandkids.

  • Gasem

    529 accounts are rip offs. Ever wonder WHY education has a 6% inflation? It’s because 529’s have a 6% inflation. 529’s are like a funnel, you dump money in the top and it’s only exit is into a school’s bank account, and you get to claim a $20 “tax savings”. Have you looked in the mirror to see if moron is tatted on your forehead? Also expecting your kids to have much “skin in the game” is silly. This isn’t 40 years ago when a kid could earn $1000 in the summer working labor or part time after school and pay for half his education. This is now and the schools are squared off against your earning power not theirs and the accountants have figured out how to extract every buck they can from your wallet. Yes David slew Goliath with a pebble AND the power of God backing him up. That’s a fair fight. Putting your kid up against Goliath is ridiculous. The real power in saving for college is the same power you use to FIRE, compounding, and it’s only going to matter if you compound a big amount early enough. Some little measly $3000/yr over 20 years ain’t going to do it because of the rate of inflation. If inflation is 6% and your account makes 6% you may just as well write a check at 18. At least then you and not the school retains control of the money. Do not be confused this is all marketed and tested and back tested probably with analytics provided by Google. If you want to tell yourself some story about “skin in the game” because “that’s the way I did it sonny” you brought a knife to a gun fight. You’d be better off understanding your opponent and his armament and building a cannon. What would teach your kid more than this “skin in the game” nonsense is to teach them how to plan a campaign to defeat Goliath. But wait you invested in a 529 based on some “internet advice” you may not be smart enough to build such a campaign.

    • M

      I agree that things are different today from we went through school, and parents that think their kids can do the same as them (I paid my half through summer work) are out of touch with how crazy expensive it is these days.

      However, I disagree with your view on 529s. I view them as submarines to the tax code. I put money in early, and they come up much later without any tax hit. My accounts, the first of which I started tapping last August, have roughly doubled– freeing me from cap gains on a significant amount. On $40k of spend for freshman year, I’ve saved $4k by my estimates ($20k gains at 20%). They’re in the NY plan, which has Vanguard funds, so not much different than what I’d be doing in a custodial account.

      • Gasem

        I found virtually no difference in return. The funds were invested efficiently with a lump sum in the UGTM and once spent were taxed at essentially 0% cap gains on my adult child’s income. The upfront cost to me was slightly more but I had to carry less life insurance since the cost of college was already paid for with their UGTM investment. Once purchased and apportioned I could die the next day and college would more or less be covered. I made no adjustments during the course of 16 years till I made the first sale to pay for school, and was in complete control of the rate of disbursement and tax consequence. It also depends on how you claim the kid as a dependent. There may be tax credits the kid can claim that you as a high wage earner can not. Let’s see you buy a car with a 529. Let’s see you choose investment options in a 529. Return is entirely dependent on what THEY say you can invest in. Doesn’t sound like it’s your money to me if THEY get to say how to invest. With a UGTM, you could technically buy 20K of BRK.B which has no tax consequence to own, at age 2, and at age 52 on the account on the average would have 5.7M of value to be used any way the kid wants. Pretty good submarine. That’s the Warren Buffet method. My point of course was to look at who really are the adversaries in this equation. It is not the kid’s earning potential, it is your earning power vs the school’s ability to fleece you that is in contest. A kid can’t really even work till they are 16 so the earning potential is minuscule. A 529 is declaring defeat before you even start. A little 529 money in DFA funds maybe, as long as there is an equal side by side in a UGTM. That’s a viable and flexible plan. If you want to teach the kid the value of work that’s a different issue than tying it to funding college. A kid with a 4 year piece of paper has double the potential human capital of the kid without, and the old “boot straps” model is pretty corroded. The “boot strap” model is a sure fire road into debt, and the schools like debt as much as they like owning your 529. When I went to med school it was 1981 the middle of Carter’s inflation. Carter signed a law in 1978 that uncoupled S&L interest from prime and loan rates soared to 19% on school debt. I had saved enough to pay for med school in 1980. By 83 the tuition had tripled so I went in the Navy on a year for year payback deal. They paid a year I gave them a year back in service. 2 years later it was 2 years payback for a year of school, now I think it’s even more. Everybody has a racket.

  • Dennis Maiman

    First of all, if you’re planning on 529 accounts, check Morningstar ratings. There are differences, and you don’t have to stay in state.

    I’m building 529s for my grandkids. I’ve made their parents painfully aware that they’re to be used to meaningful college work. And I ain’t paying for boutique schools. I disagree with the master that more expensive schools have value. Unless you want Harvard law, don’t matter none where you go. Spending 250k for a degree in diversity studies is quite ridiculous. I worked my way through the local university campus and got into all but one medical school. My kid went to private, but inexpensive, schools for religious reasons and all got into good grad schools. Many high schools now offer courses on college decision making which includes a financial component. Seek it out!

  • My parents had four kids and they had a system that I resonated with. My dad was a doc, well off but certainly not able to easily pay for college out of pocket for all four of us. They gave us skin in the game by promising to pay for 3 years of college while making us responsible for 1 year. That way, we internalized some of the costs of college while they still helped us financially. Any scholarships or wages in college could go towards our year. They gave us an interest-free loan until we paid back that year. Any graduate or professional school was on us, so three of the four of us went to graduate schools where it was paid for.

    All things considered, it was a good way to elicit contribution from the children but also not buying us in debt. One idea for having the kids put some skin in the game. Nice read – thanks for writing!

    DeForest

  • Kyle

    I get what he is trying to say in the last point, however, the numbers are way overblown. You don’t need $1.6M on day one of the little one’s freshman year at Harvard. You also, probably, wouldn’t quit contributing on day one either. If you worked these assumptions in and wanted to contribute an equal amount not for 15 years, but for 23 years, the annual savings amount is far less than half the stated figure of $55,500.

    • Stephen

      I like this 3:1 rule. I covered my kids undergraduate to public universities.
      I gave them a monthly payment for their housing, food, expenses and they managed it well.
      And as adults have been good budgeters.
      But I never figured out how to get their summer earnings to be incorporated (except I havent paud for things like bikes, spring break)

  • Baseballmom94

    DrBaseballDad had $150,000 in combined private undergrad/med school loans when he graduated from med school in 1990. He paid these off in 9 years rather than the 20 year term. He grew up in a blue collar family – his parents were emotionally very supportive and helped as much as they could with college but certainly were not able to cover a large portion. I was fortunate not to have any college debt because I went to a state school. Because we felt that we were blessed to be in a position to do so, we prioritized education savings for our children so that they would be less likely to have to take on debt. DrBaseballDad was diligent about contributing to 529 accounts for our two children and their grandfather also contributed $20,000 each. We chose to send our two kids to a very high ranking public school district for K-12. They each then chose to go to a very good public in-state university for undergrad since they were both planning on med school/grad school. For our oldest, we used a combination of his 529 account money and cashflow to pay for 4 years of undergrad, 1 year of grad school, and 2 years of medical school. He is fortunate to live at home so he has virtually no big living expenses. He will take loans for the last 2 years of med school or if we decide to give him a loan we will charge him a very low interest rate with the expectation that it is paid off within the first 2-3 years as an attending. This would allow him to have “skin in the game” while
    keeping the money “in the family” since he will inherit half the money at some point anyway. Our second child was fortunate to earn over 50% tuition merit scholarships so her 529 will cover 4 years of undergrad plus the 2 years of a Physician Assistant grad program. Both kids were expected to have summer jobs and our daughter also works as a fitness instructor and nurses aid at a nursing home while being a full-time college student and doing research as well. We have been proud of both of our kids for working hard and graduating within 4 years in difficult premed programs and have always said we will support them as long as they are focused and responsible. We have friends with extremely academically gifted sons the same age as our oldest who dropped out of college after 2 years or took 6 years to graduate from college. Our son was never the naturally brainiest kid but he was mentally tough, focused and never gave up – and never gave us one ounce of trouble while he was growing up. Sure, we could certainly have a lot more “stuff” if we made our kids pay for half of their college education so as to have skin in the game. We feel strongly about supporting our kids to the best of our ability and not allowing them to dig a big hole of debt that will take many more years to dig out of than it did for past generations.

  • Stephen

    I like your thoughts, and the comment above that gives the student a goal of covering 25%.

    I had my kids on monthly budgets for their expenses (cloths. Gas, gifts, anything they did on their own like movies and dining) since 9th grade.
    They continued to budget thru college with me basically giving them the monthly costs, and their being responsible.

    I didnt figure out how to apply their earnings to the formula. I think the 3:1 ratio could be good. Basically the federal $5000 loan each year, or work.

    Overall I believe if you have been educating about finance, and allowing them to gain experience (which means making mistakes), they will do well.

  • Ellie

    We have 3 children and paid for all of their undergraduate degrees. Oldest attended Yale and because it is a “target” school he was recruited by a big investment bank and now works at a hedge fund earning about 7 figures a year. Great return on the college costs.

    Second child attended state school and doing very well also.

    The youngest is turning out to be most expensive-4 years at an Ivy and now med school. We are paying as well but he will probably pay us back for final year – he does feel a bit guilty.

    So we have paid a boatload to educate our kids who are doing well. We did it out of current income because we could afford to. Also our children are spread apart age wise so we only had 1 year where 2 were in school simultaneously. If we didn’t have the funds we wouldn’t have done it – but we did -so maybe we have less in our estate; but they will get it eventually and we chose to invest in them now.

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