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Episode 23 - Being Smart About Saving for Education

In this episode of Blue Money, Jim & Kevin are discussing education planning. Kevin keeps it real and is honest about the cost of financing higher education. Jim gives us the Rule of One-Third concept. Kevin goes over the different investing options for educational savings funds and how to choose the one that’s right for you. The guys go more in depth on the 529 plan.

Kevin & Jim aren’t just talking about saving and investing, they’re also discussing affording higher education and paying back student loans. Kevin stresses the importance of planning ahead when it comes to saving for, and paying for, education.

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Episode 23 – Being Smart About Saving for Education


This is Blue Money, a finance podcast made for cops by cops. With us, you know your money’s safe. Lieutenant Jim Donnelly of the Bensalem Police Department and co-host Kevin McGarry of Valley Financial Group, come together to help protect and serve your financial needs. This is Blue Money.

Jimmy: I want to welcome everyone back to the Blue Money Podcast. This is your host, Jim Donnelly. I’m here with Kevin McGarry, my co-host.

Kevin: What’s up Jimmy?

Jimmy: Hey Kevin, for today’s podcast. It’s a topic, I mean, it’s education savings. We have kids, college is through the roof. It’s even high school through the roof, trade school’s through the roof. Education across the board is across the roof. So, you got to start saving. Some people don’t know where to turn, what’s their best place to invest. So, start it off Kevin.

Kevin: No, I think we should call the cops on education cost. I like that Jimmy, don’t you?

Jimmy: Man, I wonder why I ain’t getting no pay increase here. You spend all this money on the bells and whistles.

Kevin: Nah. I think education crosses out of control. That’s just my 2 cents on that. But really education planning. Remember the movie Christmas Carol?

Jimmy: Yeah.

Kevin: That’s basically education planning. You are going to pay education with past money savings. You’re going to pay it with present income and financial aid and you’re going to pay with future income when you’re paying off debt. I mean, I rarely get to see a lot of clients’ children get through education without coming out of pocket or taking some type of loan. The average attendance the cost for in-state campus, living on campus is over $26,000 per year. Over $104,000 over four years. Private tuition living on campus per year is around 55,000 and over four years. Almost little under a quarter million dollars.

Jimmy: Crazy.

Kevin: It’s crazy man.

Jimmy: I saw a rule of one third. I’m like, what’s this all about Kyle Savings? And you kind of hit upon that, but it really should be like one third. You’re going to be your 529, another one third will be your current income. And the next one third is going to be loans. You just hit upon that we broke it down a little bit easier. So, Kev, what do you think is the best at like vehicle to park your money in for your kids’ education?

Kevin: I mean, there’s all different types of vehicle, but the one we use the most is the 529. 529 families can save for future college costs using a 529 plan. Essentially it’s just an investment account used to pay for qualified education expenses. It could be used for K through 12 tuition, apprentice programs and even student loan repayments now and also college. I think there’s two different college 529s. We look at college savings plans, which work like a Roth. You invest in it after tax money in the mutual funds or similar types of investments and the money comes out if it’s used for education and it comes out tax free. And also you have prepaid tuition plans. These plans, you’re prepay and all are part of an in-state public university or college. But that also can be converted or used for some private, now state colleges. I was just up in happy Valley, Jimmy and it’s unbelievable up there.

Jimmy: Yeah, it is. I was up there for two years.

Kevin: And what’s crazy about it is, is you’re getting a deal there, it’s around 26, 27, 28,000 and that’s a hundred grand for a four year school. And I think the best way to look at it, that’s the number, that’s your destination. How much are you willing to pay for your kid? How do you choose to pay for it? And a lot of people come in here and say, how do I even choose any of these plans? Because nearly every state has a plan. So, what we look at is we look at state plans and we look at, hey, does the plan offer state income tax reduction? We also look at fees and we look at investment options. So, when we’re looking at plans for clientele and we’re doing education planning after doing a college savings plan, there are three things we look at. Do you get a deduction from a state tax? What are the best fees out there? And do you have a depth and breadth of investment options? I think the thing to look at is how much can I contribute to a plan?

Jimmy: So I mean like, let’s look 529 where it gets the name. I’m like, where did they come up with this 529? Any idea Kevin where 529 comes from?

Kevin: No.

Jimmy: So, it comes from a section, the IRS code 529. That’s where it comes from. Just in case. Little fun fact there.

Kevin: There you go.

Jimmy: But for the limits, there is no limit for the 529. What you can put in there is none. But now if you’re a grandparent and you’re giving it to your grandson or your granddaughter, the gift tax is 17,000. So, anything over 17,000 you’d have to claim. So, you see a lot of grandparents, if they’re going to do it yearly, they’re in 2023, you can give 17,000. Now with the education savings account, it’s maxed to 2000. Now that’s the other problem is with the ESA, is that if you make over jointly 220,000 as a married couple and you file together, you can’t contribute. Where 529 has no limit. So, a lot of people are invested more than one 529 because it fits everyone. Another positive about the 529 is if your son’s 30 and he decides to go back to school, you can still use the 529.

Kevin: That’s correct.

Jimmy: Now however, with the ESA, the education savings account at 30, it’s over. At 30 that the account’s done right. If you use it for anything that’s not school related, it’s going to be a 10% penalty in both accounts. It doesn’t matter if it’s a 529 or ESA, it’s both a 10% penalty.

Kevin: I think the big thing is, you mentioned there is no contribution limits, but each state has an aggregate contribution limit, which falls between 235-550,000 depending on what your state is. Also with the gifting Jim, as we’ve seen here, is you have the five year election where you can contribute. Right now with 2023 $85,000 you can spread that out over five years and you just have to report that on form 709 for each of the five years you do the five year election. So, there’s ways to attack it. But it’s important to help pay for it. The 529 has become less restrictive as it was in the past where you couldn’t use it for high school, now you can, you couldn’t use it to pay some portion of a loan back. Now you can and you can. Listen, if Quinn doesn’t get a scholarship, but Grace does, well we can transfer that beneficiary. So, it’s very flexible in planning for education. So, I do think sitting down and have an idea where Susie, Bobby and Tina want to go to school and plan for it because it costs a lot of money. And then when you get there, I think it’s very important to fill out the fast aid form as soon as possible to see if you can get any financial aid, apply for grants and scholarships in the show notes. We’re going to put some scholarship sites on there like Fast Web, Big Future Scholarship Monkey. There’s a bunch more too where you go in there every year, apply for the scholarships. The big thing is what our parents did, they made us work at college. So getting a job, helping pay down that tuition, helping pay or room with people, live with people, which you did at college. You live with a bunch of guys to help reduce the cost. So, because what’s going to happen and where we see the most impact in people’s financial future to take on these loans, and you’re talking about a hundred, $200,000 loans. Now we’re planning to pay down those loans from the income they’re making. And a lot of these kids get out of school and their income doesn’t support paying that loan back.

Jimmy: Good. They’re in debt. 

Kevin: They’re in debt.

Jimmy: And the how it starts, I mean, one thing that’s important, if your child’s in kindergarten or 12th grade, how much can you take out of 529 a year to distribute? If you’re in college, you can take 40 grand out of your 529. But if your kid’s going the Holy Ghost next year, you can give $10,000. You can take out 529. So, if your kid’s kindergarten and 12th, the number that you can take every year out is 10 grand. When it hits college difference, important number. People always ask what’s a better one? The savings plan or the prepaid plan, meaning you’re buying prepaid college credits at a price right now and whatever your child is one or 18 or is it better to do the one that’s a savings account? So Kev, with the 529 plan, I think is important to break down. Do we recommend the savings plan or the prepaid tuition plan? I think a lot of it makes sense for the savings plan. And while we said it, if you buy the college credits now for a certain amount of price and your kid don’t go to college, you’re just getting refunded that money. You’re going to have to pay the tax on it, but you’re not going to be getting any interest on it. You’re not going to get anything. You’re going to lose a lot of that. So, that doesn’t really make sense. So, we think that in the long term, by investing in the savings plan, you’re going to get more for your bank, for your buck over the investments. That’s what a lot of experts out there. It’s what Dave Ramsey recommends. I read an article about him, gave all the bullet points you can pull it up. And it was a good article. Gave you a lot of pluses that if you’re kind of undecided what the gurus, experts out there are recommending, they point more toward a savings plan than they do with a prepaid credit one.

Kevin: It just gives you more flexibility. And I think the big thing here is too is unless you’re lock and load to send your kid to Penn State and they’re on board or Notre Dame, there you go. But most kids, when they’re going through high school or grade school or high school and they don’t know. They just don’t know where they’re going to get in. Their lives change and they’re not sure where they’re going to be for education.

Jimmy: And what about this Kev? People will hear this a lot. Or you read about it. Maybe you can give a little insight…

Kevin: Did you know what you were going to do?

Jimmy: What? For career wise? No.

Kevin: Education or school? Yeah.

Jimmy: No, I caught in Kutztown. That was the only place…

Kevin: Remember you called me with the dream

Jimmy: No, that’s why I went to [inaudible 00:09:59] transfer Penn State. What about you?

Kevin: Remember, remember the dream though?

Jimmy: Yeah, I remember tell. If you want to say it.

Kevin: You called me up. I was going to temple about to go to Temple sophomore year and he calls me up and he goes, I had a dream. We’re all going to Penn State. And I still went to Temple, Jimmy went to Penn State and went how many other guys?

Jimmy: Four of us went up there, I guess.

Kevin: What it cost then?

Jimmy: I don’t even remember. I really, I have no idea what it was. I owed less than 20 grand when I got done for…

Kevin: It’s a pretty good deal.

Jimmy: Yeah, it was, it wasn’t bad. I owed 20 grand total for four and a half years. I didn’t even do the four year plan. I got four and a half. You’re up Penn State, you stretched it out for a little bit. I got the four and a half plan.

Kevin: But the whole point of it is, those prices went up from 20 years ago, 25 years ago. I don’t want to date us, but it probably cost our parents around 6-5,000 with debt we took on to go to school. Now it’s costing these kids over a hundred to $250,000. It’s heavy paper on them. So, planning is not just prudent. It’s extremely important.

Jimmy: So Kev, before we wrap it up, there’s a lot of stuff that you read that if you do invest in a 529 for your kids, it’s going to hurt them for later financial aid. Is it going to show them more? Is that a myth or is…

Kevin: Listen, what if it does and you save a hundred grand for education, it’s better than walking in. Like how much financial aid are you costing yourself? It’s minimal.

Jimmy: Right, that’s the question.

Kevin: It’s minimum. I think you can try to spread it out and they’re all different strategies and everyone has different takes. Hey, do I take it earlier or later? It all depends on the planning. The best way to look at it’s at that time. If you have to borrow money, what’s the cost of the money and what’s the best way to attack paying down tuition and saving for it is the number one thing to do. Not a hope and a prayer and hoping you get financially

Jimmy: And I think Kev one thing you actually shared with me, what you’re doing with your children that I implemented was when it’s their birthdays, when it’s something you would tell family members or grandparents or aunts and uncles, don’t buy them a gift card to [inaudible 00:12:04]. Don’t buy them — give them money in a card. Here’s your account number for 529s, put it in there and it’s great. I mean, I have my family member’s now contributing money instead of giving cash to my kids or gift cards or gifts, whatever want to use it goes in their 529 account. So, it’s great advice. I think other people should utilize that. I mean, it’s a great way to build it and it means something. Grandparents, aunts, uncles, they feel like they’re putting something towards your kids’ education and they can buy into that and it really helps out.

Kevin: And the other thing is, tell your kids the best way to go to college, whatever we do is, hey man, you going to have to hit the books.

Jimmy: Yeah, absolutely.

Kevin: So, at the end of the day, I want to wrap this up too.

Jimmy: Yeah, wrap it up. Kev, what do you give me some pointers that you want to remember?

Kevin: I think the three most important things here are the plan, to save and have flexibility. Understand and apply early. So, just keep on applying when you get to college or before college. Be early and often when you’re applying for scholarships and grants.

Jimmy: And that’s going to wrap up the Blue Money Podcast for today. I want to thank all of our listeners. If you have any questions about 529 plans, don’t hesitate. Don’t be afraid to reach out to me and Kev, we’ll see if we can help you out, give you in the right direction. Thank you for listening and be safe.

Kevin: Be safe.

Thanks for listening to Blue Money. To learn more about Jim and Kevin or for a free financial assessment, visit or click on the link in the podcast description or show notes. Until next time, safe investing.

This material is intended to be educational in nature and not as a recommendation for any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended for any form of substitute or individualized investment advice. This discussion is general in nature and therefore non-intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment clients, as well as all other readers are encouraged to consult with their own professional advisors, including investment advisors and tax advisors. Valley Financial can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined here in.

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