Podcast Title: All the Hacks with Chris Hutchins
Episode: Saving on the Cost of College with Brad Baldridge
Release Date: November 27, 2024
Host: Chris Hutchins
Guest: Brad Baldridge

Introduction

In this episode of All the Hacks with Chris Hutchins, host Chris Hutchins welcomes Brad Baldridge, a seasoned expert in college financial planning. Together, they delve into the complexities of saving for college, exploring common mistakes, strategic planning stages, financial aid intricacies, scholarship opportunities, student loan considerations, and tax optimization strategies. The conversation is enriched with actionable insights and practical advice aimed at helping families navigate the escalating costs of higher education.

Common Mistakes in College Planning

Brad Baldridge opens the discussion by highlighting the biggest mistakes families make when planning for college:

• Starting Too Late:
  “Probably the biggest one would be starting too late and not realizing what they're getting into.” ([02:15]). Families often underestimate the time and effort required, leading to rushed decisions and increased costs.

• Underestimating Costs:
  Comparing his own college experience, Brad notes the drastic difference in tuition costs over generations. “When you're spending 25, 50, $100,000 or more per child to educate them, you want to make sure you're doing it right the first time.” ([04:55])

• Misguided Savings Goals:
  Financial advisors may overestimate the amount needed by focusing on list prices without accounting for scholarships. Brad emphasizes that saving based on inflated costs can deter families from saving altogether.

Early vs. Late Stage College Planning

Brad distinguishes between early stage planning and late stage planning:

• Early Stage Planning:
  Initiated when college is a future consideration, possibly when children are as young as four. Focuses on saving and investing, laying the groundwork for future expenses.

• Late Stage Planning:
  Engages families when children are in high school, involving:

  • College Visits: Assessing the right institutions.
  • Financial Aid Applications: Understanding need-based and merit-based aid.
  • Major and School Selection: Ensuring decisions align with financial capabilities.

Brad advises starting early to maximize savings potential and reduce reliance on loans. “It's important to look at what your state's rules are and that you are not required to use your state's 529.” ([07:52])

Saving Strategies and 529 Plans

A significant portion of the discussion centers on 529 college savings plans:

• Maximizing 529 Benefits:
  Brad discusses the importance of understanding state-specific benefits and selecting cost-effective investment options. “Now they're all small, relatively speaking...you need to be careful. There's lots of pros and cons when it comes to 529s.” ([08:58])

• Contribution Limits and Gifting:
  Explaining the generous limits of 529 plans, Brad notes that typical families don’t reach these caps. He outlines gifting strategies, including using the annual gift tax exclusion and leveraging five-year gifting rules.

• Impact on Financial Aid:
  Brad emphasizes that 529 plans generally have a minimal impact on financial aid eligibility compared to other savings vehicles. “Need based aid is based on income and assets of the parent and the student.” ([12:51])

Financial Aid and Scholarships

Understanding financial aid and scholarship opportunities is crucial:

• FAFSA vs. CSS Profile:
  Brad explains the differences between federal FAFSA applications and the more detailed CSS Profile used by elite institutions. “FAFSA is like 32 questions now, CSS profile is like 300 questions.” ([26:30])

• Merit-Based Aid:
  Discussing merit scholarships, Brad highlights that high-achieving students can secure substantial aid, reducing overall costs dramatically. “There are scholarships for the C student. That's the point I'm trying to make.” ([31:44])

• Scholarship Strategies:
  Brad recommends leveraging resources like tamingthehighcostofcollege.com to identify and apply for scholarships effectively. “A family filled out 41 scholarship applications and won seven for $39,000.” ([30:20])

Student Loans: When and How to Use Them

The conversation shifts to the role of student loans in college financing:

• Loans as Tools:
  Brad views student loans as a necessary tool for many families. “Student loans are just another tool in the toolbox.” ([42:48])

• Parent vs. Student Loans:
  Differentiating between loans taken out by students versus those co-signed by parents, Brad warns about the long-term implications of high debt burdens. “Loans in the student's name have better terms than the loans in the parents' name.” ([47:34])

• Loan Forgiveness Programs:
  While acknowledging the existence of loan forgiveness for certain careers, Brad cautions against relying on these as a primary strategy. “It could happen, but it's not a plan.” ([48:58])

Tax Optimization Strategies

Optimizing taxes can significantly reduce the cost of college:

• 529 Contributions and Tax Benefits:
  Brad reiterates the advantages of 529 plans in tax savings, including growth that is not subject to capital gains.

• Opportunity Credit:
  Families can utilize the opportunity credit, which phases out at higher income levels, allowing eligible families to claim up to $2,500 per student annually. “Up to four years, roughly $10,000 per student.” ([38:55])

• Strategic Retirement Contributions:
  Redirecting funds to retirement accounts can lower Adjusted Gross Income (AGI), thereby enhancing eligibility for need-based aid. “If we each put $30,000 into retirement, that's $60,000 off.” ([25:46])

Advanced Planning Techniques

Brad shares advanced strategies for families with higher incomes or complex financial situations:

• Income Management:
  Temporarily reducing income through sabbaticals or strategic retirement contributions can improve financial aid prospects. However, Brad notes the difficulty in sustaining this long-term. “You need a long sabbatical or a lot of times there's some dramatic changes.” ([17:50])

• Asset Management:
  Utilizing business holdings and non-primary real estate can impact financial aid calculations. Brad advises against setting up student-named accounts like UTMA, which can negatively affect aid eligibility. “The worst thing you can do is set up an UTMA account.” ([12:51])

• Tax Planning for High Earners:
  Families earning substantial incomes can benefit from tax planning strategies such as hiring their children in family businesses to shift income and eligibility for tax credits. “You have to be able to see a path that works.” ([39:45])

Practical Tips and Resources

To aid families in their college financial planning, Brad recommends several resources:

• Website Resources:
  Families can access tools and information at tamingthehighcostofcollege.com, including:

  • Scholarship Guide for Busy Parents: “Free video series available on YouTube.” ([32:00])
  • Financial Aid Calculator: Helps estimate need-based aid eligibility.
  • Email Newsletter: Updates on new scholarships and financial aid opportunities.

• Planning Early:
  Starting the financial planning process early allows parents to maximize savings and explore all available options without the pressure of impending deadlines.

• Avoid Common Pitfalls:
  Brad advises avoiding student-owned savings accounts and being mindful of how asset reporting affects financial aid.

Conclusion

Brad Baldridge and Chris Hutchins wrap up the episode by reiterating the importance of thoughtful, early planning in managing college costs. By understanding and utilizing tools like 529 plans, scholarships, financial aid, and strategic tax planning, families can significantly reduce the financial burden of higher education. Brad emphasizes that while not all strategies are applicable to every family, informed and proactive planning can lead to substantial savings and more manageable college expenses.

“The average family could save 10 to 30% off the cost of their college if they plan well.” ([51:54])

For more detailed information and personalized assistance, listeners are encouraged to visit tamingthehighcostofcollege.com and explore the available resources.

Notable Quotes:

• Brad Baldridge ([02:15]):
  “Probably the biggest one would be starting too late and not realizing what they're getting into.”

• Brad Baldridge ([04:55]):
  “When you're spending 25, 50, $100,000 or more per child to educate them, you want to make sure you're doing it right the first time.”

• Brad Baldridge ([12:51]):
  “Need based aid is based on income and assets of the parent and the student.”

• Brad Baldridge ([31:44]):
  “There's a place for everyone. There's scholarships for the C student. That's the point I'm trying to make.”

• Brad Baldridge ([38:55]):
  “Up to four years, roughly $10,000 per student.”

• Brad Baldridge ([51:54]):
  “The average family could save 10 to 30% off the cost of their college if they plan well.”

This comprehensive episode provides invaluable guidance for families aiming to navigate the financial challenges of college education. By implementing the strategies discussed, listeners can approach their college planning with confidence and clarity, ensuring a more secure and affordable path to higher education for their children.