As you may know, I have taught a high school Personal Finance class for the last few years. One topic that we thoroughly cover is the cost of college. I teach the kids the different types of student loans and show them how much they can burden not only their budget but also their future savings.
This past year, I made a post on my personal Facebook page in regards to student loans and their hindrance on future savings. I was met with hostility from a mom (I don't personally know her) whose son (I do know) graduated from NC State a few years ago. Among other things, she told me I was being unrealistic to think that a kid could graduate from college debt free. Well, I love a challenge so I decided to create a "roadmap" for a kid to pay for college debt free and without the assistance of their parents.
This example shows a student at a 4 year university (NC State) the entire time. It is important to note that, at least in North Carolina, there is a wonderful opportunity to attend community college for one to two years and then transfer into a public 4 year university. It is a great pathway to save money for the first two years and then take the core classes for your degree at the 4 year university. The reason my example shows the student at the 4 year university the entire time is because that is the more expensive path and it was the path of my challenger.
Since the cost of attendance differs from school to school, this roadmap is intended to be used as a guide, not definitive numbers for every situation. (Just clarifying that for the people that will comment and send me emails that their child's school is a different cost so my example doesn't work. This is a guide, not a one size fits all personal plan.) Also, I am using the cost of a public university because that is generally the most ideal path for a student on a strict budget. If you can get a full ride to Duke (or similar), by all means take it but graduating with $200,000 in student loan debt is not ideal.
Also, in this example I have used 5% as the rate of return in the 529 plan. That is a fairly conservative number but with all investments the return could be higher or lower than expected. The reason I like a 529 plan is for the tax free growth. A kid could save in CD's or something like that but there will be a tax liability on the growth. When they put the money into a 529 plan it grows tax free as long as they use the funds for college (note at the end about leftover funds in the 529 plan). Plus, the 529 plan could be a great place for family and friends to make a contribution in lieu of gifts at Christmas, birthdays, and graduation.
Lastly, this example doesn't include any scholarships or grants that may be received to reduce the cost of attendance. This example uses the full estimated cost of attendance (as published on NC State's website) which is rarely the full cost any student will pay. The freshman year in my example uses the published costs for 2023-2024. Additionally, I have increased the cost by 3% each year for greater accuracy in cost increases. It is important for a student to apply for all scholarships and grants they may be eligible for. Every little bit helps in reducing the cost of attendance!
Let's get started with the numbers. The below chart shows the estimated cost of attendance for four years at NC State University. Again, the freshman numbers are the published cost of attendance for 2023-2024 and then each year is increased by 3%.
So how does a kid pay for this without student loans if the parents are not able to contribute? First, they have to start their plan early, ideally in 9th grade. I have been amazed by how many of my students, whether freshman or seniors in high school, have no idea if their parents have a 529 plan or other type of college savings plan for them. I think a child should know by 8th grade what their parent's ability and intentions are with paying for college. Telling a kid mid way through their senior year is too late to make a good plan. As Benjamin Franklin said, "If you fail to plan, you are planning to fail." The earlier you have the conversation with your child and the earlier you make a plan, the greater likelihood of graduating from college debt free. This is also the time to have the conversation with your child on the vast differences in tuition depending on the school. Dream schools aren't so dreamy when they leave you in debt.
Now, back to the numbers. Let's get started with the savings plan while the child is in high school. Below is another chart that shows a child working and putting the money into a 529 plan and letting it grow. This chart assumes the money is contributed only once a year so there is potential for more growth if the contributions happen more frequently. Also, it is important to remember that your child's income will not be subject to federal income tax until they make more than the standard deduction. That amount is $13,850 for 2023. And if you have your own business, you can most likely put your child on the payroll and also get a tax deduction for yourself while helping them save for college.
Let's start with 9th grade. How does your child earn $8,500? At 14, they are able to work a retail job, fast food, or something similar. Our local McDonald's is currently hiring starting at $12/ hour. Working 10 hours per week for the 36 weeks of the school year results in $4,320. Working 25 hours per week for the 12 weeks of summer results in an additional $3,600. Add some mowing jobs or babysitting jobs throughout the year and you easily reach the $8,500. If your child wants to have some spending money as well, increasing the hours during the school year to 12 hours a week would yield an additional $864 or 30 hours a week during the summer would yield an additional $720. There are options!
Moving on to 10th grade. The $8,500 is sitting in the 529 plan growing at 5%, creating $425 of tax free money. At this point, the child should be able to manage more hours and/or get higher hourly pay based on their experience. Therefore, the bump to $10,000 in income follows a similar path as 9th grade.
Moving on to 11th grade. The 529 plan is growing and therefore creating more tax free money. At 5% it creates an additional $946.25 during 11th grade. This is from the $8,500 contributed in 9th grade, the $425 growth in 10th grade, and the $10,000 contributed in 10th grade. Making an additional $10,000 in 11th grade and contributing that creates a total of $29,871.25. It's important to note that at 16 (in most states), children are able to wait tables. A waitressing job can yield substantially more income. For example, I know a girl that worked a 4 hour shift a few mornings a week at a local breakfast place (that did not serve alcohol) and she averaged $250 in tips per shift. Again, there are a lot of options for a high school aged kid to make good money, save it and grow it.
As you can see, by the end of 12th grade the child has made $40,500 of income. This number could be much higher if they choose a job with greater income potential such as waitressing. By putting the money into the 529 plan, it creates an additional $2,865 tax free. So, in this example, at the end of high school there is $43,365 to start paying for college. Where I see a lot of kids go wrong is they wait until later in high school to start working and saving and/ or they work a minimum amount at minimum wage. The summer before and after my 12th grade year, I worked an office job during the day and at a restaurant at night. I learned a lot and was able to save a good bit of money. There is still time for friends but work ethic at this stage will pay dividends later down the road.
And make sure to put any cash money gifts received for graduation into your savings plan! Otherwise, you will spend it on something you don't need.
Let's move on the the college years. Now, when working in college there are a few ways to do it if you are on the 4 year plan. Take a full load each semester and work some during the week, much like in high school. Then, in the summer you can work full time or more. Or, take a lighter academic load each semester while working part time and take classes in the summer while working part time. Again, there are options depending on what works best for your school schedule.
This chart is a little more complicated so I will go into greater detail to follow how it is laid out.
So, here under the freshman year, the income from job is money made from working. This amount is slightly over the standard deduction so there may be a little bit of the income subject to federal income tax. That is one thing to keep in mind as you start earning more. The 5% 529 Plan Growth of $2,168 is by taking the $43,365 you finished high school with and applying the 5% growth. Add the $43,365 plus $2,168 plus $15,ooo of income and you have $60,533. If you look back at the cost of attendance chart, the freshman year is $26,772 so that cost is deducted leaving a balance of $33,761. The $33,761 balance at 5% growth gives you the $1,688 of growth income in the sophomore year. The chart continues on that way.
As you can see, there is a balance of $3,039 still in the 529 plan at the end of college. Well, the good news about that is you can now roll over up to $35,000 of unused 529 plan funds to start a Roth IRA! How cool is that? No need to worry about not using up the funds for college!
Summers in college are a great time to work during the day as well as at night, especially waiting tables. Once you are old enough to serve alcohol while waiting tables, the tip income can grow substantially. Add that onto hourly income from a day job and you are putting yourself in great shape. There are plenty of restaurants that need additional help on the weekends so that is a great option during the school year. Remember that the College Costs line includes your living expenses! You are making your college degree happen without taking on debt!
As I have said prior, this is an example of one school's cost of attendance but the methodology can easily be applied to other schools. Then, you can back into what a kid needs to start making and saving to make it work. The community college transfer route is a great way to save a significant amount of money and still end up with the same degree. If you are able to live at home those two years while also working part time, you will save a significant amount of money!
Questions on how this method works? Want to create a personal plan for your child? Does your personal budget need an overhaul? Need help setting up your small business? Feel free to contact me at email@example.com to schedule an appointment!
Information contained in this post is for educational purposes only and is not considered financial advice.