You’re ready to save for college

Hosts Whitney Reagan and Daniel Sharkey tackle the financial pressures of graduation season, demystifying the path to funding higher education. They discuss why shifting from a “single-bucket” savings mindset to a flexible, multi-asset strategy can alleviate the anxiety often associated with rising educational costs.

Learn why open communication with your children about borrowing is a critical life lesson and discover how working with an advisor can help you model realistic goals, avoid analysis paralysis and confidently fund your child’s future—without committing to working until you’re 70.

Transcript

Whitney Reagan: Welcome, welcome. We’re back with another episode, and it is graduation season, so what we’re going to talk about today is: are you ready for college and all the things that come with it. Dan, what do you think about this?

Danel Sharkey: Whit, how are we?

Whitney: I’m good.

Dan: I’m not ready for college. At all. I need not to talk about this right now because when I plan these for clients every day, I get very depressed on what the cost will be, so I might be patient zero.

Whitney: I thought you were going to say it’s really emotional for you and you just don’t want your kids to grow up. But it was more around the financial aspect of it.

Dan: Yeah, it is emotional when I see that I’m going to be working till 70. So Marty, you can expect to keep me around for a long, long time. The burden of cost is not going down, but we’re going to leave people excited about this, not depressed. So don’t listen to me. Listen to Whitney.

Whitney: We love our job so much, we might work until we’re 70.

Dan: Exactly. Positively impacting the lives of many.

Whitney: I think this is a really great topic because as you mentioned—this was your idea because it’s very timely. The time of year, the season, we’re graduating. Whether it be high school or college, it’s an exciting time. But there’s also a lot of funding needs that go with that. So I think maybe we just talk through some of the things that we should consider and some of the things that we talk to our clients about and some of the things that they come to us about with either anxiety or questions or concerns and just help settle their minds and give them a little peace of mind and hopefully a little sleep back.

Dan: Yeah. No. Absolutely. It’s a very timely topic. I feel like it comes in waves. And it’s usually, especially for younger clients or I should say those with young children, it’s always one of the topics that comes up very early in the conversation and one that people are always focused on. I think there’s a little bit of societal pressure that they’re always feeling that they’re behind. 

People now clearly recognize the cost of not only higher education like college and post-college degrees, but also primary school and private high school, private elementary school. The lifespan of a child’s educational journey, whether you would do all or some of those things is going to be materially high one way or the other.

We have a lot of different things that we really focus on. But before we get to any of them, I really want to have a kind of a fundamental starting point that people really need to have and need to talk to their advisor about before they start saving, how they start saving, all of the techniques along the way.

But fundamentally, you need to have an honest conversation with yourself about what exactly you are saving for. So I just mentioned, just taking the 529 plan, which we’ll talk about here more in a second, which is the most common vehicle that people use to save for higher education that can be used, at least in part, for private school before college and then college itself.

Whitney: Yes, correct. People often don’t know that, and I have had that conversation with my clients lately.

Dan: And there’s a $10,000 limit, right. So it’s not perfect, but it absolutely can be used.

Whitney: Oh, it helps significantly. I mean, if you think about it, that $10,000 over the years, it helps you. 

Dan: 100%. And so the question becomes, what am I actually saving for? And I don’t mean that in the abstract about am I saving for college or not saving for college, but in terms of what —

Whitney: Or a technical school or not going to college? 

Dan: Exactly. 100%. Yep. All all of those targets that you have, they all carry materially different costs and the amount that you need to save, even if you’re doing it in one lump sum, if you’re doing it monthly, if you’re counting on family members, is so stark in terms of what that rate needs to be, that you really have to have an honest conversation with yourself about what you are comfortable with, what’s feasible and what the best way to attack it is.

And so let me give you a concrete example, because again, being in Massachusetts, we have this conversation a lot. We’re very blessed to have some of the most prestigious academic institutions in the world, 10 minutes from where I’m currently sitting. And some of them have taken a little bit of a reputational hit. Some have not. But overall.

Whitney: You’re surrounded by a lot of very sophisticated people, I imagine. 

Dan: Exactly. Some people too sophisticated for their own good. But that’s a totally separate show topic. 

But the difference is very, very stark. So for example, schools that are relatively close by, you can take UMass Boston, which is a very good school locally, or even UMass Amherst, which is the flagship UMass brand that people would recognize from the NCAA tournament in other places, or take MIT.

The difference in the annual cost of those two institutions when factoring in fees and books and all that fun stuff, is somewhere north of about $65,000 a year. The difference between the two. Now that that’s going to fluctuate per year, it’s going to fluctuate per student and scholarship money and all the different things that could potentially go into it financially.

Whitney: But just, baseline.

Dan: Baseline rate difference.

Whitney: Yes. I can also give you an example in the middle of the country, because I went to University of Kansas for undergrad and then I went to Rockhurst University for my master’s. And, you know, public versus private college and private was two times— mean, this was years ago, but it was still two times more than the public education that I got.

Dan: Absolutely. So the question becomes, are you saving to cover the cost of MIT, or are you saving to cover the cost of UMass? And for most people, they’re probably not trying to cover the full cost. Right? It’s just I’m going to put a couple thousand dollars in. I’m going to get a little bit of benefit out of it, and that’s great.

But for those that are really trying, who have the means, and are trying to really efficiently plan for how we can get the most efficient coverage for your children’s education, if you’re planning on paying it in full, or at least a large portion, you really have to have an honest conversation about which of these two targets that you’re potentially planning for, and there’s a lot of in between as well.

But the reason I bring that up is that the cost difference in terms of what you would need to save, let’s say annually or monthly or even in one lump sum is materially, materially different if you’re planning versus one or for the other. So this question of, and it’s typically around 529s, and for those that are that don’t know, a 529 plan allows you to put after-tax dollars into a tax-deferred account.

And if those dollars are used for higher education purposes, the growth of all those assets is entirely tax-free. So it’s a really, really efficient way to do that.

Whitney: But there’s some guidelines—just to stay on the 529—there’s some guidelines around what those higher education costs are approved for. But it’s broad. There’s a lot. It feels like it’s getting to be a more robust list. And so it is important to look at what you can pay for with those dollars, because there’s a lot more than you would think.

Dan: Absolutely. And the goal is not to tell you to not use it. It’s a wonderful, wonderful tool. But there are some restrictions that you will face if you don’t use all of those dollars. You can repurpose it for your other siblings. You can convert some of it to Roth. There’s plenty of ways to utilize that, but you have to know those rules going in, and you can look those up.

We don’t need to go through them, you know, chapter and verse here because all that information is very easily accessible. But from a strategy standpoint, what I typically like to encourage people to do, especially high earners or for those that are really, really hellbent on ensuring that they they’re going to cover the full cost, is that I as a good proxy, I would say find a out of state, whatever state you live in, find a good out of state school and determine what the out-of-state tuition cost is.

It typically falls almost precisely between the upper end of a private school education and the lower end of the in-state option that you may have. So, for example, I live in Massachusetts. You can look at the University of Kansas or University of Michigan, North Carolina, UCLA, all these really highly prestigious academic schools and determine what the total cost is.

And that’s a good break point. And what I want people to understand and what your Mariner advisor can really help you understand and show you, is that just because you don’t have all of the dedicated funds, in this example, that came from a 529 plan, doesn’t mean that you’re not going to be able to meet that goal.

It doesn’t mean that you’re not going to be able to use those other assets that you have. And it doesn’t mean that you’re not going to be able to still cover the full cost of that tuition. You just may pull it from a couple of different sources. It’s a really, I think, useful way because you really, as parents — we have three kids each, as we’ve mentioned many times before — we don’t know what they’re going to be. We don’t know if you have any military kids in your family or super geniuses that are going to get academics covered, or those that are going to go start a business at 18 and never look back and not use a dollar of that 529 plan.

Whitney: Or, we joke in my house that my two boys are going to live with me even when they’re 40 and live in our basement.

Dan: Yeah, I’m sure Beech loves that. He must be super excited. We’ll walk through those details.

Whitney: Okay, so I should’ve said this in the beginning. I’m a little sleep-deprived, so everything is very entertaining to me right now. So please forgive me if I laugh too much.

Dan: And just think about the $600,000 a year that you’re going to be spending in the future. But all of these options are really, really good. They have an ability to still meet your goals, and you don’t necessarily restrict your capital to one type of account. Neither of us are going to be able to see the future.

But I think what we’re seeing with the continued evolution of AI, its impact on education, with more and more technology in the classroom, I don’t have a good sense, for the first time in my life, as to what higher education is really going to look like. I don’t think it’s going to go away, certainly, but I think that the manner in which our kids absorb information over the next 10 to 15 years with these rapid advances might materially change.

So not putting quote unquote, all your eggs in one basket and recognizing that just because you don’t have the full cost of that tuition covered from this single source, which, again, is the 529 plan, that you’re going to be just okay. So talk to your advisor, figure out how you can project what those costs are going to look like, where you might be able to draw auxiliary funds from.

And you can still have all those goals covered without having your capital tied up in a single-use account that limits your options in the future.

Whitney: I agree with you in that I have had more and more clients asking about this, just because there’s a little anxiety around how much education is going to cost and how much it’s going up. And so what we can do is model it out for our clients. And if they just — circling back and summarizing what you said — if they want to go to a state school or if they know that their kid, say they’re not just four years old, for example, and they’re a little bit older and they know their kid wants to go to a private school, or maybe they have wishes to go to an Ivy League.

Then we can model out how much you would need per year and give you at least like a really good feeling around how much it needs to be funded with, or how much it’s underfunded and where you can pull those sources from. So we just have a lot of really good tools to help you visualize that and feel like you know where to put the money and how much to put in.

Dan: Absolutely. It’s all critically important. And we were talking about this before the show started, but the modeling doesn’t and the guidance doesn’t need to end in the planning stages. Or once your kid is actually in school. But when you’re going in to make that decision where you’ve done your homework and you have saved appropriately, you feel like you have a really robust foundation to pay for any school that they want to go to.

But let’s say the entire cost is not actually covered, making sure that you’re having the conversation with your child about how money may impact them if they do have to borrow. For example, let’s say you do a really great job. You take our advice and you save for an out-of-state school, but they end up at MIT, or they end up at Harvard, or they end up at Duke or Stanford, or any of these private institutions that are wildly, wildly expensive.

And they’re going to have to take on some debt. Having them really run the numbers to understand what that cost will be. And I’ll just pick on another school locally that doesn’t have the same kind of academic pedigree. But Northeastern is another great school in Boston, just probably a cut below the ones that I just named, but it’s still $90,000+ a year.

It’s crazy and making sure your kids understand if they do have to borrow money, for example, what the cost of that liability is going to be in the future vis-à-vis what their earning power is going to be. I think the more we can introduce that to kids in their high school careers, the more and better prepared they will be for when they actually go through college and then come into the workforce knowing what their responsibilities are.

Plus, we’ll be training another army of future employees, which we’ll be happy to—you know, we should plug the Mariner internship program. But at the same time, it’s just an important conversation to have because most people shy away from it. And I think what the guidance of this show has been consistently across a lot of these areas is that transparency is better, open lines of communication, whether that’s family governance, whether that’s part of your estate plan, whether that’s thinking about your exposures on the insurance side, having those honest conversations, not with judgment or not with leading questions or not trying to force them to make one decision or the other, but having those honest dialogs just get you to a better place in the end.

And I think if your kids are anything like the students that I’ve seen in the schools that I volunteer at or the kids that I coach, or the college kids that have had the chutzpah to reach out to someone that they don’t know online, asking for a phone call. It’s very impressive how mature some of these kids are, and they can handle the conversation.

Obviously, that’s always up to the parents’ discretion, but I’m just a firm believer in more communication is better than less, and I think you’ll end up in a better spot by having that dialogue openly and honestly at the beginning.

Whitney: I completely agree. I actually did a podcast episode with Christina Lynn, who is an associate here, and we did it on raising financially savvy kids. And I think high school is a great time to be transparent. But starting as early as you can and just introducing them to money, you know, like age-appropriate money talks and what it means to earn, what it means to save, what it means when you have debt.

What does that debt look like in the future? And so transparency, yes, but also just teaching them lessons about 5how you get there and what it means that money doesn’t grow on trees, Dan.

Dan: Yeah, no, it’s certainly not. Not the cost of $90,000 a year. That’s not growing on any trees. But all of these things just allow you to be better prepared to make the decision. People fall into, there’s so much analysis paralysis. They know they should do something, but they don’t know the best way. And a lot of these what I’ll call techniques or products like a 529 are beaten over your head to say that this is the one and only solution.

And we are here to tell you that it’s absolutely not. I like to factor in that if you’ve saved in a dedicated account like that between 70 and 80% or even 60 to 70%, and then use some other assets that you’ve accumulated. 

Now, this doesn’t mean that you can’t save. We’re just talking about where that money goes and how it’s ultimately used. Just know that you have a tremendous amount of options, and an advisor can really walk you through those details. They can show you how you’re pacing towards a goal. I just had a call with two of my favorite clients last week, and they’ve done a wonderful job of saving for their kids.

We showed them mathematically that if they go to most public options, both their kids are already covered, and they’re six and four. And that’s just through the expectation of the growth rate. It’s understanding, you know, how that might change in the future, accounting for inflation, which continues to be stubbornly high.

And they were very surprised. And they said well okay, well we were going to put another $100,000 in, but I guess we won’t do that now. That $100,000 was then repurposed to another account that they have control over, that they’re going to use to continue to save. So it’s not as if it just vanishes into thin air.

But now they’re aware of, hey, we don’t have to go nuts with this. And I think that’s a hugely important outcome. And it’s a hugely important, you know, case of awareness. And it just all boils down to making sure that — we’ve talked about this a thousand times, there’s no right or wrong decision—but just being aware of the implications of your choices, this is a perfect example of that.

Whitney: That’s a pretty cool story. I bet they love you, Dan. And that’s really empowering for them to know that they can do something like repurpose that money. I have one question before we, you know, close out, because I feel like we’ve been talking for a while.

What are your thoughts between, you know, 529, UTMA, other savings methods for college or higher education?

Dan: Yeah. The 529 still remains the gold standard, and there’s a couple of caveats that I’ll give you with that. It remains the gold standard because, again, if you use it for qualified education expenses, all of that growth will be completely tax-free. So that’s a huge benefit; however, you get the biggest bang for your buck with that if those assets are invested for a long period of time.

So, for example, we had a call with another client who was putting money for their great-nephew in the future, and he was a senior in college and wanted to use the 529 plan. At that point, it really doesn’t help you in any material way that you would be better served to maintain the flexibility of just paying the tuition directly or doing something else with those dollars.

So the amount of time until those funds will be used is incredibly important and should be really, really considered. I would say UTMA accounts or the Uniform Transfer to Minors Act, the age of majority, basically when the minor gets access to those dollars is different in every state. That’s probably the least favorite vehicle that I have.

Just because you are fully relinquishing control to your child once they turn that particular age.

Whitney: It’s 18 here. And that’s a little scary.

Dan: I’m pretty sure it’s 21 in Massachusetts.

Whitney: Well, it’s a little scary because — and I wanted to bring that up. I’m so glad that you knew where I was going with that. Because we talk about this a lot in just estate planning. And if you have a revocable living trust, and then after that, what you want that money to do for your kids and when they get access to it.

We talk about that a lot because kids are not as mature as you think they will be at 18, 21, 25, 30 when it comes to some people, 40s, you know. So just knowing that if it’s 18 or 21 with the UTMA, they get full access to that money. And that’s a lot of money, right? You know, like in a lump sum.

Dan: Absolutely. And, to be clear, you have no control over what they do with that money. Now you can insinuate, you can pressure, but technically and legally, that money is theirs. So that’s my least favorite option.

And then I just think being able to put money aside for yourself, but recognizing and identifying that some of those assets that you have in let’s say a taxable account that you and your wife or partner or spouse might be saving for a home in Aspen or, you know, just as your rainy day fund, if you identify that a portion of that can be utilized, you begin to do a little bit better mental accounting and recognizing, hey, I have a bunch of different pots that I can pull money from, and I don’t need to be restricted by these rules.

So just know that 529s are still the gold standard. They offer tremendous benefit, but it’s not the only solution. My advice would be don’t be beholden and so fixated on that efficiency. Because if you actually have your advisor show you what it looks like under both scenarios.

In my view, it’s fairly insignificant. And the flexibility that you end up retaining when your kid goes to Annapolis or goes to West Point, and you don’t need that $400,000 is tremendously, tremendously valuable. So these are just ideas to take to your advisor with. I’m sure if you’re working with someone at Mariner, they brought them to you already.

But just know you don’t have to die on the hill of efficiency to really reach your goals either way.

Whitney: So hopefully after this episode, everybody feels like they are ready to plan for their kids to go to college or whatever happens after high school.

Dan: Or be ready to work until 70 if they’re anything like me.

Whitney: Dan, it was great to chat again around this Are You Ready campaign because it’s so fun to talk about. We’ve got so many different topics.

Dan: Absolutely.

Whitney: Thanks for joining us. Thanks everyone for listening. If you like what you heard, please like, subscribe or follow wherever you listen to your podcast and we hope to see you again next time.

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