There are many strategies doctors can use to put kids through school without racking up more debt or sacrificing their own financial goals.
Physicians may have greater earning potential than many other professionals, but they often also have greater debt and financial burdens. When it’s time to think about saving for the children’s college years, the stakes can seem overwhelming. However, there are many strategies doctors can use to put kids through school without racking up more debt or sacrificing their own financial goals.
Alissa Krasner Maizes, an attorney, registered investment advisor and founder of Amplify My Wealth, offers a counterintuitive word of advice: “Physicians should prioritize their own finances before they think of their kids’ needs” because “there are no loans for retirement, but there are other choices for college. Think about the life you want to live and look at your goals in their entirety.”
The best-known option for those with young children is a state-sponsored 529 account, which allows you to put money aside for their college costs by designating them as the plan’s beneficiary. “Some of the advantages are that you can invest that money and not pay taxes on the earnings, and as long as it’s used for qualified [educational] expenses, you don’t pay tax on that,” Maizes says.
Another advantage is that if the money goes unused after 15 years, it can be rolled over to the beneficiary through Roth IRA contributions. Additionally, Maizes points out, “someone else in your family may be interested in funding one for your kids. Grandparents, when they can afford it, often love to fund a 529.
However, there are also downsides to these plans, according to Sean M. Duncan, certified public accountant, president of SMB Consulting and Accounting and founder of Chief Proactive Advisors. “With a 529, you’re putting money in that’s supposed to grow. But we have seen college costs outpacing investment returns and inflation.”
Moreover, because 529s are typically state-based, “if your child decides they want to go to college outside the state, that may not help you,” says Tanisha Coffey, a principal broker and business and financial strategist at Rock Solid Financial. And if you move to away from the state where your 529 originated, you may not be able to take the state income tax deduction or tax credit for previous contributions to the plan.
Indexed Universal Life Insurance
A lesser known but often used college- and tax-saving strategy is to fund an indexed universal life insurance (IUL). Although most people think of insurance as something beneficiaries receive after the insured is deceased, IUL policies allow you to take out money you’ve invested as a loan—on a tax-deferred basis—and still earn on the policy, Coffey explains: “When you put your money into an IUL, it can grow tax-free. But, unlike a 529, or some other options out there, you can do whatever you want with the money; there’s no requirement that it has to be used for education.” This is especially helpful if your child decides they want to go to a trade school or some form of nontraditional training.
These policies make the most sense for individuals planning for the longer term, not “for somebody who’s got a 15-year-old who’s going to college in three years.” Because they are invested in the stock market, IULs reap the benefits of the market but don’t entail the same potential for loss as other market investments, Coffey says. “So, if the market goes up 14%, you have the ability to earn 14% that year. If the market goes down eight percent, you don’t gain but you don’t lose, either.” If you’ve put $100,000 into that policy, for example, you can take out money as needed, perhaps in $20,000 increments, to pay for college, and the money that remains in the policy will continue to grow.
Perhaps one of the most attractive features of these plans for physicians is that the money is protected from lawsuits and creditors. A malpractice lawsuit or settlement can’t touch an IUL policy.
High-Yield Savings Accounts
For physician parents who start saving later, perhaps for a tween or teen, it may be a good idea to open a high-yield savings account. “Right now, these sound very attractive because the interest rates are finally high,” Maizes says. “I could see why someone would want to consider that if you have a child approaching college in the next few years; it’s a great place to put money because you don’t want to take the chance that the market fluctuates and the money is no longer there for the child.”
However, if your child can qualify for financial aid (although this is unlikely given a physician’s salary), these accounts can work against them, Maizes observes. Additionally, savings accounts, even high-yield ones, don’t always keep up with inflation.
The more important question when it comes to any of the options, is “What is your risk tolerance?” Maizes says. “It’s important that the physician feel comfortable with the way they’re investing money.”
Furthermore, anytime you’re trying to grow money for a long-term goal, be it college or retirement, “you should diversify the portfolio, says Duncan. “Don’t just drop it all into a 529, when you might be able to put half the money in and half the money in another vehicle that has more flexibility.”
Something that Duncan has found to be quite lucrative for physician clients is real estate investment. “It’s a side hustle that generates cash, and there’s a specific strategy we use as the kids get into college.”
One option is to purchase, fix up and resell a home or building and use the profits to fund a 529, IUL or high-interest savings account. But if you know where your kid is going to school and can afford it, it’s a good idea to purchase a home in the area that can both serve as housing for the student and generate rental income.
“Your child can live in that house and then they can rent it to two or three roommates. Now there’s cash flow supporting this asset and you save on housing,” he says. The home can continue to generate income after the child has graduated or can be sold to pay the student’s college loans, if any.
Scholarships and Grants
Lastly, don’t forget the simple, though time-consuming, process of combing through scholarships and grants, particularly those that are not tied to income, Duncan advises. There may be a grant for something your child has never considered: “Half of scholarships for girls who play golf go unclaimed,” for instance, so you never know what you’ll find.
Whatever approach you take, the best strategy is to “focus on [what] gets you the highest yield.” To do so often means working with a dedicated financial planner who has experience in this area.