Think college is too expensive? Perhaps you’re not paying attention. No doubt, the sticker price of college is out of control. But, the people who pay full price must apparently enjoy watching money burn. With a little financial planning, anyone can qualify for need-based gift money that dramatically reduces the cost of college: even if you’re a millionaire. What!? Yes, that’s right: even millionaires can qualify for a shipload of free money in the form of need-based grants, scholarships, and tuition waivers that dramatically reduce the cost of college. Why pay full price when all you need is a little financial planning and a few years to carry out your strategy? Here’s how a millionaire with stealth wealth can qualify for free college money.
Whether you want to or not, you cannot disown your child when it comes to paying for college. Even if you don’t want to pay for your kids’ college, universities will look at the parents’ income and assets to determine how much they think the child should pay. Thus, it is up to the parents to make the right financial planning moves to score free money for their kids. I personally am not going to allow my kids to be burdened by student loans. Here’s how I’m doing it in 5 easy steps:
Step 1: Save Early, Save Often
The best way to get a bunch of free college money is to first save a ton of money. The more the better. But you’re not going to spend all that hard-earned cash-money on tuition!
That’s right – the whole strategy here is counter-intuitive: save enough money in order to not spend it! Instead, your savings will allow you to qualify for free grants, scholarships, and tuition wavers.
The whole purpose of saving stealth money for college is so that you don’t have to spend it on college!
Saving for college and saving for early retirement go hand-in-hand. Both require you to save a large chunk your income over many years so that you no longer have to work.
Step 2: Protect Your Assets
You can hide money from the university admission offices in “protected” asset classes, so you look like you’re not loaded. Not only is it fun, it’s totally legal!
By far, the best way to do this is by taking full advantage of tax-advantaged retirement accounts, such as 401ks and IRAs. That’s because most colleges completely ignore your retirement account balances. That’s right: you can have $1M in 401ks and IRAs, and it will be completely ignored by most colleges.
Your Primary Residence
The other major asset class that colleges generally overlook is your primary residence. Many private schools and just a couple of public schools do consider a portion of your primary residence – so it is not entirely ignored by all colleges – but it is a much better place to stash half a million dollars than an unprotected cash savings account.
Even if you have over $1M in retirement accounts, most colleges will ignore it. Many also completely ignore your primary residence.
The Worst Place For Your Money
What’s the worst place to keep your assets? Any unprotected accounts such as cash savings, taxable investment accounts, or real estate investments. Colleges expect you to part with up to 5.6% of these assets each year your child is in college. Furthermore, they expect you to maintain a good attitude while you do this. Over 4 years, they can bleed more than 20% of your assets, for each child! That’s a massive tax on your unprotected assets.
Step 3: Window Dressing
Unfortunately, there are strict annual limits on how much money you can contribute to retirement accounts. This is why you need to start early – to get as much into the retirement accounts as you possibly can. If you wait until your kid is in high school before stuffing your retirement accounts, then you just won’t have enough time to protect very much money from the university Vogons.
If you still have substantial savings outside of retirement accounts when your kid is in high school, then you need to do some window dressing: last minute moves that will save you more money. You can make moves such as paying down your primary residence mortgage or buying a bigger house.
Most public schools ignore the value of your primary residence, and most private schools only consider a portion of it. The elite private schools usually do consider home equity, but they’ll ignore it completely if you make the following move:
Step 4: The Best Part – Quit Your Job
Now that you have substantial savings hidden in retirement accounts and your primary residence, the universities are starting to think you’re poor. But, we need to address the single most important factor in college financial aid decisions: your annual income.
There’s no getting around it. Colleges will expect parents to contribute between 10% and 50% of their annual income each year. I call this the University Tax. DAMN SON! Any parents that make a good income are going to generate massive college tuition bills for their kids. Not good!
Here’s where all those years of savings comes in handy. If you’ve saved substantial portions of your income for decades, chances are you no longer need to work, unless you want to. This would be a good time to quit your job – or at least take a hiatus for a few years while your kid is in college. In the meantime, you can live off your retirement accounts using a Roth conversion ladder.
Step 5: Watch The Free College Money Roll In
You now have little income and few reportable assets. Smile as you fill out your FAFSA and CSS forms, and tell the universities whatever else they want to know. You’re going to qualify for some of the biggest financial aid packages available! In fact, you will get so much FREE MONEY, that sending your kid to college may turn out even cheaper than keeping her at home!
Sending your kid to college may be even cheaper than keeping her at home!
My own personal plan is to give myself a pay-cut and a time-raise through part-time early retirement while the kids are in college. I will make just enough money to cover my expenses while my retirement savings continue to grow untouched. I’ve found that with a family income of about $50,000 per year and few unprotected assets, I can get most of the financial aid benefits colleges have to offer.
So, to recap the stealth-wealth college strategy: Save a ton of money, protect it, and then quit work… Meanwhile tell your kid not to worry at all about the cost of college. Just try to get into the best college you can, kiddo. Then, sit back as you watch a ton of free money roll in to pay for college, with no strings attached. Your kid goes off to college, and it costs you LESS MONEY then if they stay at home. Finally, you can use all your glorious free time to visit your darling offspring every single weekend while she’s away at college! Rough life, right?
So, just how much free money are we talking about? How much is at stake? Conveniently, most universities have “Net Price Calculators” on their websites, where you can enter your financial data and get an estimate of how much you will have to pay if your child attends. I poked around at some of the schools I think my kids are likely to apply to.
I made some assumptions about what my finances will look like in 7 years when we are applying to colleges. I assume that I will be paying down my mortgage with whatever unprotected investments I have at the time, leaving only about $50,000 in unprotected investments – about a year or so of living expenses. Here are my assumptions:
- Family of 4, with 2 kids in college.
- Annual part-time incomes between me and my wife: $50,000. I tried moving this number around a bit to see the impact. There’s little difference in my case between a $50k income and no income at all, but if I earn more than $50k, the universities would start taking about 20% of my additional pay (that’s the University Tax).
- Cash & investments (excluding protected retirement accounts and primary residence): $50,000
- House: $700,000, with no mortgage.
- I assume my kid has no income and no assets – though he’ll probably have a bit. This also has a big impact, so you may want to play around with these numbers too.
University of California, San Diego
We live in San Diego, so this is kind of the default public school for us. UC San Diego’s sticker price for tuition, room & board is currently $32,161 per student per year. My stealth wealth strategy will bring my price down to $13,373 per year. That’s a 58% discount off the sticker price. Not bad, and much much more affordable! Factor in the Federal education credits and deductions, and I’ll be paying well under $10,000 per year. No problem!
What if I didn’t make those stealth wealth moves? Specifically, what if I don’t use unprotected assets to pay down my mortgage when the kids are in high school and what if I don’t quit my job? In that case, UC San Diego would cost me $30,000 per year – almost full price. My stealth wealth strategy will save me $133,000 over 4 years with 2 kids at UC San Diego.
Stanford (A guy can dream, right?)
Like the most elite private schools, Stanford uses a more peering method to calculate a student’s financial need. They do consider primary home residence, as well as any businesses you own. But, like most elite private schools, Stanford is also rolling in the dough – which means they have a lot of aid to give.
If my kids are fortunate enough to get into Stanford, it will cost me a whole $5,000 per student per year under my stealth wealth strategy. That’s a whopping 93% discount off the $67,500 sticker price! After Federal tax credits and deductions, it would be darn close to free! Go Trees!
Without my stealth wealth moves? Stanford would cost me $25,000 per year. That’s a $160,000 ($20,000 x 8) difference to put two kids through Stanford.
Here’s Stanford’s Net Price Calculator.
University of Southern California
OK, let’s be honest, we’re probably not getting into Stanford. So, how about a more humble but still very good private school? USC uses the same financial data as Stanford (The CSS form), but has a different calculation method. At USC, my stealth wealth strategy will result in annual fees per student of $17,000 for tuition, room & board. That’s a 75% discount off the sticker price of $67,563
So, USC would be the most expensive of the three, but we’re still talking about pennies on the dollar when compared to the sticker price of admission. After federal tax credits and deductions, our true cost will only be a bit over $10,000 per year.
Without the stealth wealth moves, I would have to pay full price at USC – $67,000 per year. The stealth wealth strategy will save me a whopping $300,000 to put 2 kids through USC!!!
Here’s USC’s Net Price Calculator.
Moral: Don’t Wait Until High School To Start Planning
If your kid is already in high school it may be too late to make the moves necessary to qualify for substantial need-based financial aid through “stealth wealth”. The biggest mistake that most parents make is that they don’t start planning early enough. Whether it’s not saving enough, or not properly protecting your savings, if you are still totally dependent on your annual salary, you may be headed for a massive college bill.