EP 17: Busting College Funding Myths for First Gen Kids
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We lightly appreciate the spirit of this statement within certain immigrant communities: "My kids can study anything in college after they get the medical or engineering degrees out of the way."
According to the IFS - Institute of Family Studies research, immigrant parents have even higher expectations that their kids will not only get their undergraduate degrees but will go on to get graduate and professional degrees.
In other words, the kids are expected to attend college; ideally, it should be an Ivy League school. The question is, how do we pay for this education?
In this episode, we discuss all the traditional possible ways immigrant and U.S.-born families (we include the kids, too) can help pay for their kids' college. We also include other non-traditional options like studying abroad in the home country and other ideas.
We briefly touch on how we funded our education on international student visas.
We also delve into a question that's rarely asked, yet it's answered daily. "How do we approach the college choice as a family?"
This episode is for you if you are a parent stressing about the whole college situation.
In a future episode - we'll address how we approached the college choice and funding question with our kids.
The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Speaker 1 (00:06):
Welcome to the International Money Cafe Podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host Jen, me from Certified Financial Planner, founder and owner of Elgon Financial Advisors,
Speaker 2 (00:21):
And I'm your host, man, Nadi, enrolled agent, owner and founder of Amman Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance and financial planning. Let's get to the show.
College Funding
Speaker 1 (00:43):
Hello everyone. As an expert or immigrant parent who came to the US to pursue higher education, I completely understand and dare I say sympathize with the statement my kids can study anything in college after they get their engineering or their medical degrees out of the way. It's probably a statement we've all had, but we might not want to agree or talk about it loudly, but what it comes down to is that college education has become and continues to be very, very expensive in the US. College debt is a big issue, which is compounded by some of all wishes and desires, which brings us to today's topic. How do we approach the college discussion, which includes things like college choice, how do we approach the whole question of funding it where that makes the most of the current opportunities while not leaving us completely broke?
College Debt Stats
Speaker 2 (01:49):
Yeah. As a general rule, Jean, most parents want their kids to go to college. Definitely most immigrant parents want their kids to go to college, and if we want to go back and look at the statistics, there's the Institute of Family Studies Research and they have seen that immigrant parents have even higher expectations that their kids will not only get just an undergraduate degree but will go on to get a graduate and a professional degree and maybe even further. But first, let's talk a little bit about some of the stats we have seen on college debt from education data.org. Here are some of the stats. Student loan debt list is super high in the United States it totals $1.766 trillion and the average federal student debt balance is 37,718, and if you include private loan debt, that could be as high as $40,500. We know almost 52% of students who have taken on student loan debt, but what's concerning is they sometimes begin to think that it was not worth it. These are concerning statistics of course, but what I would like to know, Jane, is did you end up with student debt?
Speaker 1 (03:12):
That's a great question. I did not, and this is simply because when I was attending college as an international student, I really did not have the option of applying for federal student loans, which I understand, especially today makes it very tricky for incoming international students. So I did not have a chance to actually apply for the launch, which means I really had to get creative to get things out, but at the same time, I know it's really difficult if I look at an international student coming into the country now because costs have really, really gone up. For example, I was looking at some stat the other day, an average Ivy League school, which I know everybody wants to attend, is now charging anywhere between 76,080 5,000 a year.
Speaker 2 (04:08):
Yeah, those are very high numbers and even if you're not looking at Ivy League schools, even the second tier United States universities are charging quite a lot in fees for international and or out of state students. So that's definitely crazy, especially when you consider that this is only undergraduate education. Let's start off by talking about how to mitigate some of this debt. What can you do? How can you save for college? And then let's discuss some other options of maybe attaining the same goal but probably not paying as much. I don't know. So let's see how we get there. Back to Jane, where do you want to start?
How to Save for College
Speaker 1 (04:51):
I love it. So what I'm going to do is let's start Ashley, as you said, talking about how we can save for college. I'm actually going to start with one of my favorite accounts.
Brokerage Account
This is the brokerage or the taxable account. What I love about this account, it's probably the most flexible investment account out there. As long as you leave stuff in there for more than a year, you end up paying capital gains taxes. Obviously, if you invested in the account and you sell before the year is over, you end up paying ordinary income tax. But the thing I love about it is the flexibility. They're not penalties for taking the money out early. You can go to whatever school you want to go up to and including schools outside the us it is perfect for some of our clients that we work with. If let's say you don't have a social security number or an IT number, which I know when you start talking about some of the other options, that becomes really critical.
Speaker 1 (05:55):
If let's say I'm working a foreign national who's on an H one B visa and they have to wait a long time before they can get their green card or any one of those things and they still want to continue saving for college and their kids were born overseas, this is actually one of the best ways for them to start saving for college. Obviously if they already have the social security numbers, the kids who were born here.
Custodial Account
The other investment account I would like to think about, I want to propose or talk about is what we call the custodial account. This go by the name U-T-M-A-U-G-M-A, and we'll talk about them in a future episode. The key thing with this account is that even though you as a parent are the custodian, technically the kids own the account when they get to 18 or 21, depending on your state, they own the money and if they choose to go to Vegas, they can go to Vegas and spend all the money or they can use it for college. So something to keep in mind as you're considering what option to go with Manasa. Let me pass it back to you. I know there's one you really like and you want to talk about.
Speaker 2 (07:09):
Yeah. And the one that you can't spend in Vegas.
529 Plan
Speaker 2 (07:13):
Yes. The one that I like to tell my clients about is of course the 5 29 plan and why I like the 5 29 plan is over the past couple of years it has now opened up where you can use the funds from a 5 29 plan for maybe even K to 12. If you wanted to send your child to one of those private schools, then you can use money from this as a qualified expense and the 5 29 plan grows tax free. You put money in, it grows tax free. Of course there's a caveat you have to use it for qualified educational expenses, but some of the plans can be a little more flexible where you could use it for housing and lodging and other books and stuff like that, which you have to look into before investing. The other type of plan, which is a little more restrictive than a regular 5 29 plan is a prepaid college plan.
Prepaid College Plan
Speaker 2 (08:14):
Let me give you an example. Here in Michigan where we live, there is a plan called the Michigan Education Trust, which is the MET. Now, the MET is a prepaid college plan where total that you put into the fund is determined by how old your child is and when they will go to college in all of those calculations that go into it. This of course can be opened in any state, but usually you get a tax break for putting money into these plans just on your state tax return. If you live in one of those states which taxes you like Michigan, Georgia, et cetera, a lot of them could look into that. But if you think that the plan which is available with your state is not that great and the tax break doesn't make much of a sense, you could go with any other state that you like is doing well, that could be an option as well.
Speaker 2 (09:15):
You have to keep in mind that there is an aggregate maximum that you can put into these plans and each of those is determined by the state. Obviously where these funds are located, it could go anywhere from 235,000 to $550,000 and you could trigger a gift tax if you put more than $18,000 for 2024, which is the annual gift tax exclusion. So you should be mindful about those things, but still it's one of the good options for putting money away and getting a tax break for education expenses. Back to you Jane, what can you think of any other options? And I know you're waiting to talk about this one
Speaker 1 (10:01):
I know, but before I talk about the one we want to talk about, let me say one more thing about the 5 29 plan. Now there are actually something like over 400 foreign institutions where you can actually use the money. You're not restricted only to the US colleges. There's a list that allows you to actually use that money to attend schools overseas. If you're thinking of a school overseas and you really want to use a 5 29, it's worth taking a look at this list to see if your college is on the list. Another thing I do want to add, and it's fairly new because one of the questions that people ask is as minus. I said, this is one you can't take to Vegas, but it does mean if you don't use the money you could be penalized. There's now a new rule that says some of this money can actually be converted into a Roth account, but of course there's some restrictions and some rules around it for the beneficiary.
Using a Roth Account for College Savings
Speaker 1 (11:01):
So absolutely what thinking about the one I do want to talk about is actually using a Roth account for college saving In 2024, the number has gone up. You can actually put in seven K 7,000 and the money grows tax free. You can actually withdraw your contributions anytime without a penalty. I'm not saying you should, but you are able to do that. Also, you can take out the earnings and not pay a 10% penalty, but pay taxes if you want to use it for college education. And there's this rule that says if at 59 and a half if opened for five years, you can actually withdraw the earnings and pay for college penalty free. And of course now with the group that we work with, so in the cross border context, you do have to think about the whole idea of the Roth being taxable depending on where you're going to end up being. So man and I have talked a lot about this, if you end up let's say moving to a country where we know the Roth can be penalized and you were thinking about using it for paying for your kids' college in the us, you kind of have to keep that in mind. So something to obviously always think about your immigration status does impact what we end up doing with everything up to and including college expenses or college savings. Manasa, let me pass it back to you. Which one do you want to talk about next?
I-Bonds
Speaker 2 (12:38):
I think that I'm going to talk about the I Bonds next. This is very popular where especially the past couple of years where the interest rates were super high, they were over 9% Right now the interest rates have now come down and as we recording this podcast, it's at 5.27 through April of 2024. It's still a good interest rate. I think you can purchase up to $10,000 per year per individual, and they need to have a social security number so that you can purchase these I bonds. And under the Education Savings Bond program, the interest can be partially or fully excluded from federal income tax if used to pay for college expenses. A couple of things to keep in mind though before you cash these IBOs is if it's been less than five years, you lose three months of interest and also know that there are few steps in reporting these IBOs on your tax return if you cash them for education.
Coverdell ESA
Speaker 2 (13:46):
So be mindful of that. There's another one that I would like to quickly interject here is a Coverdell ESA is not that popular though because the amount of money that you could put into it is really $2,000 a year and that's it. And there's no tax breaks for putting that money in there right off the bat, except that of course it grows tax free. And yes, there is a restriction that you can only take money out of it if you have to pay qualified education expenses. So those are a couple of things and anything else that you can think about that's interesting or options that we would like to give our listeners? Jane,
College Choice
Speaker 1 (14:28):
I think in terms of investment account, I think we've covered all of them, but where I want us to pivot to is actually talking about the college choice, the whole idea of, I know I came to the US to go to school, there's a lot of immigrant parents that came to the US to go to school and we know there's a whole idea there's pride in attending an Ivy Leagues school and absolutely I'll give you that, but I want to think or consider the option that maybe that's not the only choice. And if your child does not end up going to an Ivy Leagues school, even though like I said, there's a lot of pride and we know there's a lot that comes out of it, it's still okay. So a while back I'd put out a post on LinkedIn talking about college choice and the discussion was awesome and amazing, and the question was does it matter what school your kids go to?
Speaker 1 (15:30):
And those pros and cons and the people that said yes, they should go to Ivy League school, others that said you shouldn't, but what it came down to is the connections and the engagement and what your child ends up doing at this Ivy League school. It's okay for them to go to Harvard to MIT, all these schools are great, but what they do once they're there, how they engage, how much they apply themselves is really what gives them positive outcomes. So we are okay encouraging the kids to go to these schools, but really make sure you're talking to your kids about once they're there, what they do, the community that they build around them, who they end up connecting with and that would really impact what they end up doing in the future. And in this case, what I want to say is it's okay to go to a state school like here in Texas we have some amazing state schools and those schools tend to be actually a lot cheaper than the Ivy League schools. I think it may be like anywhere from 20 to 30 K, which is a big difference to the 80 5K that we talked about at the beginning. We want to have you seriously consider sending your kids to state schools because end up doing great again, as long as they study the right course. And then of course there's a whole idea of how do they pick the choice applying themselves and who they end up connecting with. Manasa, let me pass it back to you. Which one do you want to talk about from here?
Speaker 2 (17:04):
Yeah, this is definitely a situation where it's very personal. Having these conversations with your children, especially your 17, 18 year olds really depends. It's not always that a child is ready to walk into a four-year university and even here in Michigan we have two really well-known schools which are humongous. I know for a fact that class sizes are almost three to 400 students in each class. It may not be that these are schools for every child and then if that is the case, then a community college is an option that's available and I don't see that there's anything wrong with that. These are great options to have. Definitely lets your children explore their skillsets and if you think to what I was saying earlier, you're not ready to face a huge university, then it gives children time to settle into a routine of going to college and taking college classes and maybe even get to that point of maturity.
Speaker 2 (18:21):
And if not, just the overwhelm of dealing with these classes and take it at your own pace. I love that there is an option actually, and you can of course save a ton of money because community colleges much less expensive than either universities state around universities or even Ivy League. The differences marked in this case, and if your child is still trying to figure things out, they don't know what their major should be and they are not really sure about what they want to do in the next four years, this is a good way to get some of the stuff out of the way that you can maybe then transfer over to a four year university. Those are definitely community colleges are a great option I think. And going back to one other option that you and I, Jane were talking about just before started recording, and this is something that is so unique to a lot of our immigrant foreign born national clients, is that the familiarity of your home country, if your child can go back to your home country and study there, that's an option.
Going Back to Your Home Country for Education
Speaker 2 (19:33):
You are already familiar with the country's education system and you can guide your child even though they may have lived and grown up and gone to school in the US or not, they may already be familiar with that home country if they came here as a young child or later in life. And then the expenses. Think about it, if you are from the uk, you went to school in the UK and your child is now going back there, think about the difference in expenses of what you would spend going to college in UK or maybe Australia or India or New Zealand, wherever, and compare it to what you would pay here in the us. That's an option, and I think that that's something that we definitely see a lot of people now beginning to explore. I think that community college, going back to your home country and there are a lot of options in Europe and other countries as well as colleges. I would think that those are two good options as well. Jane, what do you say?
Speaker 1 (20:31):
I agree with you and I think as we have more and more parents get shocked or sticker shock by the price of colleges here, it's that last one, going back to your home country is something that we seriously should consider as an option for our kids. Now, let's say you are in the situation where maybe you didn't save as much, but college is here, we got to pay for it, and you really don't want to take home the student debt. I know my daughter has told me very clearly she's not getting student debt and would need to figure out how she goes to college if we don't have the money. So what we'll say in this case, please pick a college where you can actually cashflow what you are making and you be able to hopefully pay for it, include the kids in the financing aspect of it, even if it's just getting them to get their own pocket money.
Speaker 1 (21:30):
They should be able to do some odd jobs here and there and it does actually teach them a lot of discipline things around time management, getting along with people, so absolutely get the kids involved. In addition, the one thing they should absolutely do and they should spend a lot of time doing is actually applying for scholarships. You see stories every now and again of a kid that got, I do remember this one close to a million dollars just because they spend the summer applying for scholarships. And once you do the first one, it gets really, really easy. And by the way, this is not only before we go to college, even once they're there. As one of my daughter's friends said to me the other day, we don't ever stop applying for scholarships until you are done with school, which I thought was really, really wise council.
Speaker 1 (22:23):
It then brings us to the point where we have to say, okay, we've talked about all these funding options. The big question, how do we choose the schools or the colleges the kids attend, man and I have seen a lot of options and some of them did not consider cost, so I'm going to tackle the first one. The first one that I see is where we are the parents. And so we decide, and a lot of times I do sometimes see prestige winning over common sense because we as parents, we are trying to sometimes live our dreams through our kids and I know my child best and I'm going to pick the school that they go to. The other argument we use is, oh, our family tradition is we go to X, Y, Z school. So little Johnny is going to x, y, Z school and it doesn't matter what they're going to end up doing, they're going to X, Y, Z school to pursue engineering or medicine or whatever the degree that we want them to pursue. The other one, and I think I've kind of just talked about it is we select or we pick out the programs for them and I think a time that a contact very close to Manasa used the other tables, these are dream children. We tell them go to X, Y, Z and pursue X, and they do that. It may not be the best option. So mana, do you want to talk about the other option that we have of how we choose the college the kids attend?
Community College
Speaker 2 (23:59):
Yeah. The one that is not dream children, right. Alright, yeah, let's talk about that. Don't get us wrong. Both Jane and I are parents and I have two children who have already been through this route and you let the child decide maybe they figure out what they want to do and maybe this is a little more expensive than you thought it would be. Maybe they take a couple of years, they know what they want to do for the rest of their lives. Maybe then go back. Community college is an option. You just kind of go the less expensive route, let's put it that way, where they are trying to figure out what they want to do, but they decide how about talking to their guidance counselor. They have guidance counselors in high school, they have guidance counselors in the college itself. They can go talk to them and say, Hey, what do you think?
Talking to a Guidance Counselor about College Choice
Speaker 2 (24:54):
This is the type of person I am and these are my interests, so what do you think I should be doing? Sometimes children know what they want and they know what they want to do or they know what they don't want to do, which is also a good thing. They didn't waste those couple of years, if you want to call it that way, trying to figure out what they wanted to do because they knew what they didn't want to do. They just went straightforward for the major and what sounds like a cool major to them that's maybe not a typical immigrant or a foreign born national mindset, but I would think that putting more power back into the children's minds and hands in putting more control back into them and having these open discussions would definitely help the child or the student decide where they want to go and how to choose what they want to do. What do you think?
Speaker 1 (25:48):
I love that and the next question that comes in, and I think maybe I suggest we do this as a different podcast or a different episode, is I'd love for you and I to actually talk about, because I know your kids already done with college, how you went about making the choice. I have two kids, my oldest is already in college. We're looking at the college journey and I have a lot to say about it. I think you have a lot to say about it. I'd love for us to come back and do an episode where we actually talk about how we helped our kids or what our college journeys were and maybe even include ourselves into it. How did we pick the colleges that we ended up attending from thousands of miles away? I think let's do that as a separate episode.
Speaker 2 (26:38):
I agree. I agree.
Speaker 1 (26:40):
Awesome. It does come down to cost to be a big consideration for our kids today. As you've said, kids have to be ready for college. We want 'em to have that great college experience and if they're not ready, let's not force it. Especially where it forces us to kind of impact or retirement or what we are trying to do with our family and the rest of the kids, for example. So it's okay for them to not go to the college that you want or an Ivy League school. I believe they'll still come out okay as long as with really not trying to live our dreams through the kids. Anything else you want to add, man, before you conclude?
Speaker 2 (27:25):
No, I think this was a great discussion, Jane. I think that it's important that yes, that we are honest about our expectations and our ability to support our children in their next journey of going to college and being successful and also definitely have these discussions and let them tell you what they want to do for the next four years or beyond. I think that that would great that if we can go back later like you said, and have another discussion about our own experiences wrapping up today, IMC listeners, if you like our episode and if you like what you heard, please feel free to bookmark this episode and come back to it for all these cool tips that we gave you about saving for college and all the different options you have. And if you want to listen to more of our episodes, we have already quite a few of them lined up for you. Go to our website, the im cafe.com, again, the I am cafe.com, subscribe to our newsletter and share our podcast with your friends and family and whoever you think would love listening to us. Happy to be here and signing off for now. Thank you. Bye.
Speaker 3 (28:53):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross border finances and tax needs.