An Alternative to College Savings Plans

College tuition costs are a hot-button issue for most. After all in our recent Presidential election, one candidate planned to take on the rising cost of higher education if elected. Being a CERTIFIED FINANCIAL PLANNER™ in Knoxville, TN, a major college town, I know the extra strain saving for tuition puts on some of my clients. I’ve known them to use everything to help cover education costs; 529s, prepaid plans, UGMAs, and even Roth IRAs! In a recent conversation with one client, he blew me away with his novel idea of how he planned to pay for his child’s college education. I felt it was such a brilliant alternative to college savings plans that I needed to share it.

Now his idea will not be for everyone, and it certainly isn’t a full-proof plan. However, he certainly mastered the most creative way that I know of to lessen the burden and prevent his child from going into debt with student loans.

The Alternative Idea to Saving

This particular client told me he knew that college costs for his son were going to be about $100K for four years. He also conveyed to me that he knew he had the money to actually pay, however, he just did not want to plunk down that much money for a college education. He clearly wanted his son to have an education. Despite that, the price tag that education carried with it just wasn’t worth that to him. He had a problem with the high cost of tuition and came up with this solution to his dilemma.

Instead of investing money in one of the many savings plans typically used to fund a college education, the man and his wife decided to buy a home near the campus their son was to attend. After securing the home with a down payment, they wanted to put their son in the house and allow him to rent the extra rooms out to other students. In doing so, he would make enough rent to cover the house payment.

As I’m listening to his concept, I become very intrigued by this idea. We start to run the numbers on how his concept could possibly work. Theoretically, after paying on the home for a four-year period, the benefits would begin to add up he proclaimed. Obviously, the man would be paying for the college cost out-of-pocket. However, in the end, owning the home would give him back most everything he’d ever paid out of pocket for his son’s college education. Here are some hypothetical numbers for his fantastic idea. Obviously, if this were the route you choose to take for funding college, your numbers would likely be different.

The Numbers

Let’s say you plan to purchase a $340,000 home near the school of your child’s choice. In order to do, you would secure an FHA Kiddie loan, which allows young adults to purchase their first home, with both the parents and child on the note. These loans offer very low down payments, so you only need to come up with 3% for the down payment.

Since your child is on the loan, their only job for the duration of the loan is to be responsible for the upkeep of the home along with securing trustworthy tenants for each of the four rooms. We will say you are going to rent the rooms out $400 a month. Not only that, but in order for the scenario to work you double the tenants in rooms, meaning each room brings $800 a month with two tenants in them. That would give the student a total of eight tenants, which equates to $3200 of monthly income.

The average house payment is just over $1000, but we know you have taxes and insurance, so we will escrow and make the payment along with other expenses total $1500 a month. Now if everything goes according to plan, and the math works out perfectly during this timeline, the $3200 of monthly rental income more than covers the $1500 in expenses. So the home is now netting $1700 a month in income. Multiplying that by 12 equals $20,400 a year in net income.

Now after four years of school, which equals $81,600 in rental income your child applied to tuition. Remember we’re looking at around $100,000 in educational expenses. So you managed to drastically reduce that amount to just under $20,000 when you subtract your $81,000 over the four-years.

Furthermore, not only have you managed to cut your out of pocket college costs to around $20,000, the house has reduced the debt to asset value. So this $340,000 house appreciated while paying down the mortgage at the same time. With inflation in that four-year period of time, we can project that the home’s value has now grown by about $32,000 in equity. At this point, the home could be sold, and you would eradicate the other $20,000 you spent out of pocket towards tuition and even gross an extra $12,000.

The End Result

Now, obviously this isn’t all an exact science, and it doesn’t come out to be a guaranteed match on the $100,000 tuition. You’ve paid taxes on that $20,000 income you made each of those four years. Additionally, I’m sure there will be some fixing up expenses, especially if “Junior” didn’t do their job right. Nonetheless, in doing this, you have significantly cut the cost of your child’s higher education expense in the long run.

Furthermore, you’ve taught your child some valuable lessons. “Junior” had to learn a few skills he or she may not have already attained going into college.

First of all, money management, because daddy and mama made them responsible for collecting rent. They also picked up some business experience during these four years time.

So, not only did your child get an academic education, but they also received a real-life education. They mastered dealing with money; conflict resolution was likey when managing renters and any squabbles that may arise. They learned the importance of investments and the power of yield; they have now seen the power of compound interest at work. There are so many life lessons passed on to your child now.

Likewise, “Junior’s” credit score built up thanks to the FHA Kiddie loan since they were also on the note. So now when your child comes out of college at 21 or 22 years old, they are now ready to be part of the workforce.

Perhaps, in the end, instead of selling the home to regain the $20,000, you make the decision to keep it and maintain an income-producing asset to recoup that money. That’s not a bad outcome to the scenario either. There are a number of ways to do that.

Are the numbers going to work out exactly the way I laid them out? Probably not. Will it help cut down some of the cost of college? It appears so. Is it without risk? Obviously, nothing in life is without risk almost anymore. There are always risks involved. However, this is absolutely the most creative plan I’ve ever heard of to cover college. So when it comes to paying for your child’s college education, know that you have options. This very well could be one of them!