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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Jane Mepham, CFP (00:03.977)
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 wanna.
Manasa Nadig, EA (00:21.43)
Hehehehe
Jane Mepham, CFP (00:31.885)
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 U.S. College debt is a big issue, which is compounded by some of our 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 in a way that makes the most of the current opportunities while not leaving us completely broke?
Manasa Nadig, EA (01:12.75)
Yeah, as a general rule, Jane, most parents want their kids to go to college. You know, 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 educationdata.org, here are some of the stats. Student loan debt, we know this is
super high in the United States. It totals $1.766 trillion. The average federal student debt balance is $37,718. And if you include private loan debt, that could be as high as $40,500. And, you know, 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. So, these are concerning statistics, of course, but what I would like to know Jane is did you end up with student debt?
Jane Mepham, CFP (02:49.173)
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 loans, 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 international student coming into the country now, because costs have really, really gone up. So for example, I was looking at some stats the other day, an average Ivy league school, which I know everybody wants to attend is now charging anywhere between 76,000 and 85,000 a year.
Manasa Nadig, EA (03:47.134)
Yeah, that is, 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. And when you, especially when you consider that this is only undergraduate education,
So 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 you, Jane. Where do you want to start?
Jane Mepham, CFP (04:40.577)
I love it. So what I'm going to do is let's start, Actually, as you said, talking about how we can save for college. And I'm actually going to start with one of my favorite accounts. 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 staff 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. There's nothing like, you know, there are no penalties for taking the money out early. You can go to whatever school you want to go up to and including schools outside the U.S. It's 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. So if,
Let's say I'm working with a foreign national who's on an H1B 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 were born here, the other investment account I'd like to think about or I wanna propose or talk about is what we call the custodial accounts. These go by the name UTMA, UGMA, and we'll talk about them in a future episode.
Jane Mepham, CFP (06:30.845)
The key thing with this account is that even though you as a parent are the custodian, technically the kids own the account. And so 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. Okay, Manasa, let me pass it back to you.
there's one you really like and you want to talk about.
Manasa Nadig, EA (07:05.49)
Yeah, and the one that you can't spend in Vegas. The one that I like to tell my clients about is, of course, the 529 plan.
Jane Mepham, CFP (07:08.834)
Yes!
Manasa Nadig, EA (07:20.114)
And why I like the 529 plan is over the past couple of years, it has now opened up where you can use the funds from a 529 plan. So for maybe even K to 12. So 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 529 plan grows tax-free. So you put money in, it grows tax-free.
Though, 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 529 plan, is a plan
prepaid college plan. So 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 the total that you put into the fund is determined by how old your child is and when they will go to college.
Manasa Nadig, EA (08:49.026)
calculations that go into it. So 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. You live in one of those states which taxes you, like Michigan, Georgia, et cetera, a lot of them. So then you 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. So that could be an option as well. 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, let's say, $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. So back to you, Jane, what can you think of any other options? And I know you're waiting to talk about this one.
Jane Mepham, CFP (10:28.249)
I know, but before I talk about the one I want to talk about, let me say one more thing about the 529 plan. So now there are actually something like over 400 foreign institutions where you can actually use the money. So 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. So if you're thinking of a school overseas and you really want to use a 529.
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
Cause one of the questions that people ask is as Manasa 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 these money can actually be converted into a Roth account. But of course there's some restrictions and some rules around it for the beneficiary. So absolutely worth thinking about.
The one I do want to talk about is actually using a Roth account for college saving. So in 2024, the number has gone up. You can actually put in 7K, 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're 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 open for five years, you can actually withdraw the earnings and pay for college penalty free.
Jane Mepham, CFP (12:23.981)
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, you know, depending on where you're going to end up being. So Manasa 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. So Manasa, let me pass it back to you. Which one do you want to talk about next?
Manasa Nadig, EA (13:14.058)
think that I'm going to talk about the I bonds next. And this is very popular, right? There are 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're recording this podcast, it's at 5.27 through April of 2024. It's still a good interest rate, I think.
which is 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. So.
A couple of things to keep in mind, though, before you cash these I-bonds is, you know, if it's been less than five years, you lose three months of interest. And also, you know, know that there are a few steps in reporting these I-bonds on your tax return if you cash them for education. So be mindful of that. There's another one that I would like to quickly interject here.
Howardell 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. So, there is, 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?
Jane Mepham, CFP (15:24.917)
I think in terms of investment accounts, we've kind of covered, I think we've covered all of them. But where I want us to pivot to is actually talking about the college choice and 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, this pride in attending an Ivy League school,
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 League 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? And there was pros and cons and the people that said, yes, they should go to Ivy League school. Others 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.
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're 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.
Jane Mepham, CFP (17:22.457)
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 a little bit, actually a lot cheaper than the Ivy League schools. I think it may be like anywhere from 20 to 30K, which is a big difference, you know, to the 85K that we talked about at the beginning.
Jane Mepham, CFP (17:52.311)
state schools. Because they'll 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. So, Manasa, let me pass it back to you. Which one do you want to talk about from here?
Manasa Nadig, EA (18:12.122)
Yeah, this is definitely a situation where it's very personal, you know, it's having these conversations with your children, especially your 17, 18 year olds who...
Jane Mepham, CFP (18:19.73)
Yes.
Manasa Nadig, EA (18:30.054)
It really depends. It's not always that a child is ready to walk into a four-year university. And, you know, even here in Michigan, we have like two really well-known schools, which are humongous. Like the, I know for a fact that, you know, the class sizes are like almost three to 400 students in each class. So,
It may not be that these are schools for every child. And so then, if that is the case, then a community college is definitely 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 skill sets.
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 and if not just the overwhelm of dealing with these classes and take it at your own pace. I love that.
Oh, I love that there is an option, actually. And you can, of course, save a ton of money because community colleges are much less expensive than either universities, state-run universities, or even Ivy League. The difference is marked in this case. And if your child is still trying to figure things out,
they don't know what their majors 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 kind of get some of the stuff out of the way that you can maybe then transfer over to a four-year university. So those are definitely community colleges are a great option, I think. And going back.
Manasa Nadig, EA (20:49.762)
to one other option that you and I, Jane, were talking about just before it 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, you know? If your child can go back to your home country and study there, that's an option, you know? One.
you're 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. 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. So that's an option. And I think that that's something that we definitely see a lot of people now beginning to explore. And yeah, I think that the idea of the US
community college, or going back to your home country. And, you know, there are a lot of options in Europe and other countries as well as colleges. So I would think that those are two good options as well. Jane, what do you say?
Jane Mepham, CFP (22:25.813)
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. And so now let's say you're 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.
Manasa Nadig, EA (22:44.34)
Mm-hmm.
Jane Mepham, CFP (22:55.387)
to take home the student debt. Like I know my daughter has told me very clearly she's not getting student debt and we'll 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 cash flow what you're making and you'll 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. 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 spent the summer applying for scholarships.
first one, it gets really, really easy. And by the way, this is not only before they 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're done with school, which I thought was really, really wise counsel. So, it then brings us to the point where we have to say, okay, we've talked about all these funding options, so the big question,
How do we choose the schools or the colleges the kids attend? Manasa and I have seen a lot of options and some of them did not consider costs. So I'm going to talk of the first one.
Jane Mepham, CFP (24:49.305)
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 kind of winning over common sense because we as parents we are trying to sometimes live our dreams through our kids and so I know my child best and so I'm gonna pick the school that they go to.
Or the other argument we use is, oh, our family tradition is we go to XYZ school, so little Johnny is going to XYZ school. And it doesn't matter what they're going to end up doing. They're going to XYZ 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, you know, we tell them go to X, Y, Z and pursue X and they do that. It may not be the best option. So Manasa, do you want to talk about the other option that we have of how we choose the college the kids attend?
Manasa Nadig, EA (26:08.694)
Yeah, yeah, the one that is not dream children, right? All right, yeah. Let's talk about that. You know, where it don't get us wrong, we both, both Jane and I are parents and I have, you know, two children who've already been through this route. And, you know, 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 to get to where they know what they want to do for the rest of their lives. Maybe then go back. Community college is an option, right? You just kind of go the less expensive route, let's put it that way,
trying to figure out what they want to do, they decide. And then 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? This is the type of person I am, and these are my interests. So what do you think I should be doing? And sometimes,
Children know what they want, you know, and they know what they want to do, you know, or they know what they don't want to do, which is also a good thing, you know, they didn't waste like 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. So they just went straight forward for the major and what sounds like a cool major to them. So that's...
you know, 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 and putting more control back into them and having these open discussions would definitely help the child or the student decide, you know, where they want to go and how to choose what they want to do. What do you think?
Jane Mepham, CFP (28:34.225)
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 you 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.
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. So I think let's, let's do that as a separate episode.
It does really come down to, awesome, it does come down to cost has to be a big consideration for our kids today, as you said, kids have to be ready for college. We want them 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 our retirement or what we're trying to do with our family and the rest of the kids.
Manasa Nadig, EA (29:28.795)
I agree, I agree.
Jane Mepham, CFP (29:58.131)
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 we're really not trying to leave our dreams through the kids. So anything else you want to add Manasa before you conclude?
Manasa Nadig, EA (30:18.734)
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 and or beyond. So I think that would be great that if we can go back later, like you said, and have another discussion about our own experiences. So yeah, so 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, theimcafe.com. Again, theimcafe.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.
