FACT 1 “The Have and the Have- Nots”
The gap between the rich and poor is growing rapidly across the United States. The richest 20% of US households receive a greater share of national income than the middle three-fifths combined. The bottom 40% are worse off in inflation-adjusted terms than similarly situated people two decades earlier. (Source: US Department of Labor)
FACT 2 “A College Education Is the Difference”
Earnings of full-time workers who have a college degree continue to accelerate faster than those with just a high school diploma. Each year of formal schooling after high school adds 5% to 15% annual earnings later in life. (Source: Department of Labor)
FACT 3 “College Costs and High and Rising”
Today, the minimum per year cost for a student attending a 4 – year, in-state University is about $20,000 per year. This cost includes in-state tuition, books, and room and board. It now takes an average of 5 years to graduate. Only about 40% graduate in 4 years. Here are the minimum costs of a college education based on 5 years to graduate and college costs rising at 5% per year.
Future 5 Years: $127,628
Future 10 Years: $162,889
Future 15 Years: $207,892
FACT 4 “You Have Four Choices”
1. Pay college costs out of ordinary income. Add 25% to 30% to cost for taxes 2. Student works to pay part of costs. This could take longer to graduate with the higher possibility that the student will dropout. 3. Student loans. College graduate starts out in life deeply in debt. 4. Pay college costs out of assets. Buy a rental property that will be free and clear.
The easiest way to pay for a college education is to buy a rental property when your child is young, and put the property on a 15-year loan. Here’s the equity created in a $200,000 rental property with a 20% down payment and a 15 year amortized loan at 5.0%
Equity Now: $40,000
Equity in 5 Yrs: $80,708
Equity in 10 Yrs: $132,952
Equity in 15 Yrs: $200,000 *Assumes no increase in property value
Equity Now: $40,000
Equity in 5 Yrs: $135,964
Equity in 10 Yrs: $258,731
Equity in 15 Yrs: $415,786 *Assumes 5% per year in appreciation
If your child is already a college student, purchasing a property is still an excellent solution to curbing the high cost of education. The investment property can be a place for the student to live and provides a source of income (roommates) to help pay the mortgage.
We are happy to sit down and go through this with you and answer any questions you may have.