Lance Morgan
WHAT IS THE NEW WAY TO PAY FOR COLLEGE?
MARIA GEFFERS
Tell us about your journey and when you knew where you wanted to go with your life.
LANCE MORGAN
I am the father of five kids, and as they started getting older, the more I became concerned with how I was going to help them pay for college. I had gotten into the financial industry as a way of giving myself an advantage for retirement. I was doing what everybody else was doing. I was teaching people how to use 529 plans. I was setting up 401(k)s for companies. I was doing IRAs, mutual funds, assets under management, all the traditional financial services work. When I decided to go and start my own company, the timing wasn't the greatest with the recession. It hit me hard. I ended up losing everything.
I cashed out my retirement and college savings and everything to help keep my employees. I was trying not to lay anybody off. We ended up losing our house and everything else trying to get the company up and running. Shortly after that, I realized it wasn't financial products that were the solution to everybody’s financial situation. It was about strategies and thinking about money completely differently than I had been taught to. I ran into a guy named Don Blanton who taught financial advisors about money and financial strategies. I ended up going through a year-long program learning about money and the six major wealth transfers.
One of the six was how you save and pay for college. At this point, I knew I had to make up for a lot of lost time because my kids were getting older, college was just around the corner, and I felt sick as a father who couldn't help them financially because I had lost everything. I knew I needed to catch up and make up for a lot of lost time. As I went through this program, I was quite embarrassed about how little I knew about financial strategies, because I was always taught how to sell products. I was never taught to think differently about money. During this program I learned to think differently about paying off your house, about saving and paying for college, about retirement, tax strategies, and other major capital purchases.
I have four daughters, so I have weddings to pay for. I started teaching my clients some of the things I had learned. The interest around college funding was popular because it can be a difficult subject to discuss. I know a lot of our clients who will work the rest of their life if they need to and are willing to make all sorts of sacrifices to help their kids with college. I admire them for that, but I'm also sick to my stomach for them, thinking about how much they must sacrifice.
We all want to help our kids get the best start in life. We want them to be able to choose the career they've always wanted. We want them to be able to go to the school they want to go to. We want to do it all without sacrificing our lifestyle or our retirement. This topic kept hitting home more as my kids got older and as I got closer to that situation myself, and I ended up in this niche. Not a lot of people teach what I teach. It's a little bit controversial because it's different. Most people think their goal is to save up enough money to pay for college. Then if they can pay cash, they feel like they've succeeded because they don't have to take out any loans.
When you pay cash for something, however, you lose the interest you could have earned on that money. That’s what we would call the opportunity cost, which is the money you could have earned toward your retirement. We talk to people about how borrowing money for college with a lower interest rate than what you’re earning on your money is the smartest way to pay for college. It's a little bit different and goes against the general thought process of most people. Most people don't like debt, which I don't either, but we must define debt. Taking out loans at a lower interest rate than what you can earn on your money is not necessarily debt because you have the money. If you have the money to pay off the loans, then you’re not in debt. It’s just a different way of looking at it.
TOM GEFFERS
In your webinars you ask if people have financial advisors who help with college searches and finances and most of them say no. Can you explain how your new way of financial advising works?
LANCE MORGAN
Traditionally there are two ways to pay for college. One is to save and pay cash, or if a family doesn’t have enough saved, they try to cash flow it as their kids are in school. They eat ramen noodles and live in a van down by the river so they can try to cash flow as much of college as they can to avoid loans. That's one way to pay for college. The second way to pay for college is to take out loans. If you don't have enough money saved for college and you can't cash flow the cost of college, then of course you're forced to take out loans. You borrow the money and then you spend 10, 20, or even 30 years paying it back.
Now, there is a third way, which would be a combination of the two and is most common. Some families have a little bit saved and they try to cash flow as much as they can, and then they borrow when they're short. No matter what, people either pay cash for college or borrow. Those are usually the two options. The third way to save and pay for college is to leverage somebody else's money at a lower interest rate than what you earn on your money. Many times, when I say that, people think they must start when they're young or when their kids are young to save up all this money. Most of our clients, however, have seniors in high school and little or no money saved for college.
Then we could leverage some of the college loans which allow you to defer the payments, so we can build one of these plans and help families figure out a college funding plan within a five-year window, a 10-year window, a 15 or a 20-year window. It doesn't matter. It's all based on the cashflow of the client and what they can afford. Some families can only help their kids pay for some college. Some can't help with any of it. A lot of families want to help them pay for all of it. Everybody's different. We show people where they can save their money at a 7% return on average and use that money to borrow money at 5% fixed rate. It will never be more than 5%, even if you have kids in elementary school.
15 years from now, you could still borrow the money at 5%. If you could earn 7% on your money and borrow the money at 5%, you're making money on the cost of college. I tell people, it's like two cars driving across the country. One's going 70 miles an hour and one's going 50 miles an hour. In the beginning there's not much of a difference between the two cars, but by the time they get from New York to California, there's a huge difference between the two. We tell families that if they follow this strategy for paying for college, they can get the entire cost of college back during retirement. 20 or 25 years after paying for college, they would have a full refund on whatever they contributed toward college.
TOM GEFFERS
The concept you’re talking about will help lower EFC in most cases. Can you elaborate on that?
LANCE MORGAN
Unfortunately, we get penalized for saving for our kid’s college. If you put money into a savings account, a brokerage firm, or a traditional 529 account, when you’re filling out financial aid forms, they will be looked at as assets that can be used for college. They don't look at retirement assets because they're not going to force you to take a penalty to cash in retirement or anything. The money designed for college or available for college is considered an asset. That asset hurts you when it comes to your financial aid calculation. When you fill out your financial aid forms, they're going to ask about income and assets for you as the parents, and also for the kids if they have income or assets.
They're going to take your income and your assets and come up with an expected family contribution number. It's the number used in the formula to determine if you qualify for financial aid. If your EFC number is $25,000 and the cost of school is $50,000, then they take the cost of school minus your EFC number, and you qualify for $25,000 of financial aid. By saving for college in the wrong vehicle, you're hurting your chances of getting financial aid.
TOM GEFFERS
Are 529 plans like IRAs? Do they use the same concept?
LANCE MORGAN
It would be closer to a Roth IRA in the sense that it's going to grow tax-free. You're going to be able to access the money tax free, but your money goes into the 529 accounts after taxes. In some states you're going to get a tax break on a local state level. That makes it a little better than a Roth IRA. Other than that, it's very similar. About 5% of the money in your 529 account gets calculated against your EFC number.
TOM GEFFERS
What should parents know about having money in their kid’s name?
LANCE MORGAN
When a family is filling out the financial aid forms, sometimes they count the 529 money as their kids' assets, but it’s not, and you shouldn't do that because then it counts about 50% towards your EFC number instead of a little over 5%. It's important you make sure you count those assets as yours. Some families try to get creative and give the money to their parents, the grandparents of the kids. Now, they don't have the asset anymore because they gave the money away to grandma and grandpa. When grandma and grandpa take the money and send it to the school for tuition, it counts as income for the student, so it still hurts the EFC number. You can’t get around it, unfortunately.
TOM GEFFERS
Could it be a benefit to hold onto the money and not use it in your freshman year? Can you use the 529 to pay off loans?
LANCE MORGAN
Yes, but they limit how much of it that you can use toward loans. One of the strategies would be to use that money later. If the grandparents are going to pay the school, then you would want to do that in the child’s junior or senior year. For the parents it would be better to use it first. Then it's gone and it doesn't hurt the EFC in the future years. If you have multiple kids who are going to college, you can transfer the beneficiary into the oldest child. If you have two or three 529 plans and the beneficiary is each child, you can transfer everybody into the oldest child and spend it in the first year of school. Then it won't hurt you in future years.
TOM GEFFERS
This year, mortgages have very low interest rates and home equity loans are low as well. Are you telling any of your clients to consider refinancing or taking out a HELOC to pay for tuition at this point? Is there a benefit to that? Does it take off equity if they’re looking at the equity of the home on a CSS profile?
LANCE MORGAN
Some schools are going to require the CSS profile, which is going to look at the equity in the home. Anything you can do to shelter or use that equity for something else to not have as much impact could help your EFC number. The schools don't look at debt. You could be in mountains of debt and it doesn't help you. We tell people to use the equity in the home to pay off high-interest debt like credit cards because that's not going to help you. If you can access low-interest loans through using your home and pay off some high-interest credit card debt, you can use the extra money to help fund one of the college plans.
Equity in your home is tricky and there are some things you can do to shelter it. I always caution people to not make all these changes because you might be able to lower your EFC number, but you’re not going to save any money if your EFC goes from $120,000 to $110,000 and you’re only looking at state schools. We caution families not to make any financial decisions until they know how much it’s going to help. Some families could do something with their 529 money that might give them a penalty. There is a 10% penalty on gains of the account. The gains are going to be added to your income.
You want to do the math before you make any of those changes. Some families might only have $20,000 in a 529 account, which might not move the needle enough to make it worth it. There are other things to consider like opportunity cost. Once you spend that 529 money on college, it's gone and no longer compounding interest. There is the opportunity cost to consider.
TOM GEFFERS
It sounds like you look at a lot of what-if scenarios and figure out the best number.
MARIA GEFFERS
That is why you must have professionals helping you through this. Google isn’t the best advisor. What is your biggest challenge when you're talking to parents about all this?
LANCE MORGAN
My biggest challenge is very easy. I'm teaching people a different way of thinking about paying for college. When they go back and ask their traditional financial advisor about these strategies their financial advisor says not to do it, so they don’t. I always tell people that two plus two will always be four. Somebody could tell you that it's three, somebody could tell you that it's five, but it's always going to be four. People put their trust in their financial advisor. Advisors, however, are mostly stockbrokers. They’re putting money into the market so they can get assets under management.
There's nothing wrong with that. Their model relates to the market. 529 money, IRA money, 401(k) money and mutual funds are always in the market, so they can make commission on it and have assets under management on it. It's tricky because the financial industry doesn't look at other ways for people to make money. Real estate is a great investment, but not many of them tell you to invest in real estate because they don’t sell it. Instead, they talk about IRAs and 401(k)s. I teach people different ways to think about paying for college.
Most families want to take that money they have saved and pay cash for college. Then that money is gone. I tell people they could earn a 7% return and borrow money at 5% interest. Then they go back to their financial advisor and their financial advisor says they can get you 10% or 50% on returns, which is great, but if you're going to take your money and spend it on college, you're not earning anything on it. It's gone. I don't care if your advisor could get you a 50% return because you just charged yourself 50% to pay for college. That's the opportunity cost. If you pay cash for college or if you use your savings to pay for college and it could have earned 50%, well then why wouldn't you take out a college loan at four or five or six percent? That would've been cheaper.
MARIA GEFFERS
Who is your ideal client?
LANCE MORGAN
We work with a wide range of clients from people who have young kids and are just starting to plan, to people who have kids who are about to graduate from high school. When people look at 529 plans, they must think about what higher education will look like 15 years from now. If you look at the cost of college and the average income, something must happen. Will there be other educational opportunities available in 15 years that don't qualify for a 529 plan? Sometimes we work with families with young kids who are trying to find a good plan that isn’t tied to a certain school. Most of our clients have seniors or juniors in high school and are realizing how expensive college is going to cost.
A lot of families have their heads in the sand and don't want to think about how much college is going to cost. Then spring of their child’s senior year comes around and they start getting all these award letters back and they think there is no way they can pay 50 grand a year for college. If their child is excited to go to that school, they try to figure out how to make it work. We work with a lot of families who have $300,000 to $400,000 saved in 529 plans for college and we help them save money off the cost of college and reposition some of their assets.
A lot of our clients have nothing saved. Life has thrown them some curve balls and they’ve had some financial setbacks in life. Then college is around the corner, and they don’t have anything saved, so they have to figure out the smartest way to borrow. That’s how I help families and their kids pay for college.
MARIA GEFFERS
You help a lot of families. Thank you for doing that, and for sharing the unique aspect of what you do.
