Over the last few years there seems to be a lot of debate about the value of college. Is the high cost of college worth the investment? I have gone back and forth on this question myself several times. I have a college degree and believe it was extremely helpful on many levels even though I no longer use my degree for income generation.
I graduated with an accounting degree and became a CPA working for a large public accounting firm. I didn’t enjoy the work and left to get into real estate. I let my CPA certificate go and haven’t used my accounting degree since. I don’t even do my own taxes!
The value I received from college was mainly through the relationships I made, my college experiences, and the life lessons I learned. All of these combined have been extremely valuable to me and I wouldn’t trade them away for anything.
Fast forward to today and I’m debating college for my oldest daughter who is a sophomore in high school. I want her to go to college and have the opportunity for similar growth. I’m not as concerned about the degree as other parents may be. I’m more concerned with who she becomes, who she meets, and what she learns through her college years.
When she was little we bought a rental property and started depositing the positive cashflow into a college savings account for her. The math I used years ago was designed to accumulate the savings needed to pay for the college I went to which would be about $20,000 a year including tuition and boarding. This is obviously a lower priced state school here in Ohio.
The challenge is my daughter seems to be interested in smaller colleges where the pricing is around $50,000 a year, which is more than double what we had saved. So we have three choices…
1. Try and stick with a college where the total annual cost is around $20,000 per year.
2. Figure out a way to generate the income/savings to cover a $50,000 per year school.
3. Have her go to a $50,000 year school and use student loans to help cover the shortage.
Before we go further, it is important to note that I’m not a fan of debt and do not want her to have to make student loan payments after graduation. I think this sets up a lifetime of debt and I really do not want this for her.
So the rough plan I sketched out is as follows:
Use her current college savings to acquire 3 income properties. One single-family home for $60,000 and two mobile homes for around $10,000 each. All properties will be purchased for cash without any mortgages. She will buy these three properties within the next few months and together we’ll get them rented to great families. We will allow the monthly rental income to flow back into her college savings account for the next 6 years. By doing this now, we get a 2 year head start on college and can hopefully accumulate enough founds for one year of school. She’ll also have this monthly income flowing into her college account while she is at college, which will be extremely helpful.
Based on my rough calculations there will still be an $80,000 shortfall over the next 6 years. This shortfall is about $13,333 per year, or $1,100 per month. The new question becomes – how do we make up this $1,100 monthly shortfall?
Here are a few of options I considered:
1. My wife and I can start saving an extra $1,200 per month. I’m not at all excited about this plan because I would prefer to have someone else pay for this on her behalf. Her current college savings was accumulated through rental income from several tenants over the years.
2. She can get student loans to help cover this shortfall. After she graduates, she can use the monthly rental income from the homes to pay her monthly student loan payments. She would technically have student loan debt at graduation, but the monthly payments would be covered by her tenants and allowing her to use her income as she chooses breaking the cycle of debt for her future.
3. I can start a new small business with her that she can manage. The goal of the business would be to generate a minimum monthly profit of $1,100 and this profit would be saved in her college account.
Right now, I absolutely love idea #3; however, haven’t discussed this with her yet! (She might not be as excited about this idea as I am!)
With idea #3, we have the potential for the following:
1. If the business works, she may graduate with zero student loan debt. She can use the rental income from the homes to live off, or to reinvest into new income producing assets.
2. She will have learned extremely valuable business skills – marketing, sales, money management, customer service, etc. These skills will pay dividends throughout her future.
3. She will own one “mortgage-free” single-family home after graduation. She can sell this home, rent this home, or live in this home.
4. She will learn property management skills from the income properties. These skills will be extremely valuable to her future.
5. She will go to the college she wants, which I think sets her up for success because she’ll be happier.
6. She will – hopefully – have a college degree at some point in the future.
7. She will – hopefully – learn to engineer her life so others pay for the things she wants in life. (Tenants, customers, etc.)
On a high level, if idea #3 fails we really haven’t lost anything. This is because we can still move forward with idea #2 and she can use the rental income from her homes to pay the student loan debt. She will still learn valuable skills in the process from the lessons learned with the small business and the rental properties.
In a nutshell, I’m trying to figure out a way to turn this challenge of the shortage in college savings into an opportunity for life lessons. I’m sharing all of this for two reasons. The first reason is for any feedback you might have on the ideas I’m contemplating. The second reason is to possibly give you a few ideas that might help you with college education costs if you’re in a similar situation with your children.
NOTE: I understand that our home prices here in Ohio are extremely attractive compared to other areas and that this plan may not work the same in other areas. You may have to consider investing in areas outside your marketplace where the values are more attractive to do something similar.