Jason interviews Young Boozer about college planning for grandchildren.
Young Boozer is the Treasurer of the State of Alabama and Chair of the College Savings Plans Network. The College Savings Plans Network (CSPN) is a national non-profit association and the leading objective source of information about Section 529 College Savings Plans and Prepaid Tuition Plans—popular, convenient and tax-advantaged ways to save for college.
Treasurer Boozer also serves as chair of the board for Alabama’s Prepaid College Tuition Program (PACT) and Alabama’s 529 college savings program, CollegeCounts. CollegeCounts has experienced growth of 81% in assets and 42% in number of accounts since Mr. Boozer began his first term in January 2011.
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Announcer: Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. Now, here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. So glad to have you on the program this morning. This is going to be a good one. One of the things we hear from a lot of folks that we work with around the country is that they say they’re saving for their … Or they want to save for their grandkid’s college education. We’re going to be talking about 529 plans today.
Before we get started with the program though, as you know, I like to start the morning right by renewing our mind, and I’ve got a verse here for us from Galatians 6:9, “Let us not become weary in doing good, for at the proper time we will reap a harvest if we do not give up.” That’s awesome. A bit of encouragement there this morning.
Then, if you’re going to go see your grandkids, I’ve got a joke here for you to share with them, maybe even teach them a little bit of history, but what was Betsy Ross’ favorite sport? Flag football. I know you, you guys were hoping we’d start 2017 without any more of these bad jokes, but there you have it.
Okay, episode 121. We’re talking about 529 College Savings Plans. I’ve got an amazing guest on the program here, Young Boozer. Young Boozer is the treasurer of the State of Alabama and chair of the College Savings Plan Network. The College Savings Plan Network is a national nonprofit association and the leading objective source of information about section 529 College Savings Plans and Prepaid Tuition Plans. Popular, convenient, and tax advantage ways to save for college.
Treasurer Boozer, welcome to Sound Retirement Radio.
Young: Thank you Jason, it’s great to be here.
Jason: We spoke just a moment ago about your name, and I have to tell you, we almost didn’t have our interview this morning, because when I heard the name Young Boozer, I thought this was a Home Simpson prank or something. I thought … You probably get a lot of comments about your name over the years.
Young: I get comments all the time, and I really appreciate them. I have to admit, I have the greatest name of all times. Over my life, I have never had an experience where I was introduced to somebody and they forgot my name. It’s great, especially in politics. It’s always good to have a memorable name.
Jason: One of the members of my team said to me, he said, “Jason, are you interviewing a rap artist today? What’s …” Young Boozer, that aside, I appreciate your good humor there when it comes to poking fun at you. I am excited to have you on the program today to talk about 529 plans.
I read recently, there was a study that was … Or a survey that was done by Fidelity Investments, and they said … Let’s see here, I’ve got the number. It said 53% of grandparents were saving or plan to start saving for grandchildren’s college expenses. On Sound Retirement Radio, we’re all about retirement planning, but this is an issue that comes up a lot.
Why don’t we start from the high level? Why should families be saving for college in the first place?
Young: There are plenty of good reasons for that. Students in the class of 2016 graduated with a record average college loan debt of $37,000. With the challenges of cost of paying for higher education, saving now can have a huge impact later.
Jason: $37,000 of college debt graduating.
Young: That is correct. That is correct. What I’d like to say is for every dollar you save now, you’re probably avoiding $2 of student loans in the future.
Jason: Yeah. Just out of curiosity, I went and ran some numbers before our interview this morning. Just to give people an idea of what they could expect. For an in state college, I saw that the average cost today is about $25,000 a year. Assuming that college cost only increase at … Let’s see. What was it? 4% per year, which seems lower than the historical average. By the time a child born today, by the time they’re 18 years old, assuming that we have 17 years ago, they’re going to need $206,792 for college. That number seems overwhelming. Is college getting to a point where … Does it still pencil out and make good sense for people to be sending their kids to college?
Young: I think it does. Let me just confirm your numbers. I went to Stanford University, and I admit, I graduated a long time ago, 1971, but I entered in 1967, that’s 50 years ago.
Young: Fifty years ago. Total tuition, room and board, all fees at Stanford University, $3,400 a year. This year, it’s approximately $63,000. If you do the math, everybody is familiar with the rule of 72. If you do the math over 50 years, it’s going to double four times.
When you look at it, what is that number? It’s really only 6% compound increase per year. When you quote your numbers and I show you mine from that time period, it is confirming.
Young: It is going to be a big number when you go. But I always say is, if you were going to prepare to cover those costs, you have to get started immediately. A couple of things that also come to mind is that when we talk about savings for college, is that if a child knows, is aware of a savings account, no matter what it is, whether it’s a 529 account of a savings account at the local bank, they are six times more likely to attend college than somebody who doesn’t have that kind of funding. That’s basically establishes an expectation.
The payoff for starting savings and being prepared for college is that studies have shown that a college degree results in an increase in income over a person’s working career of over a million dollars over what you would earn if you just had a high school diploma.
Jason: Awesome. The good news is it still makes sense. It can seem a little bit intimidating, because we’re talking about the future. The other side of that is I did crunch some numbers and I said, “If we had 17 years to save and we could earn 6% per year on our money, how much would we have to be saving today to get to that $206,000?” It’s only $487 per month.
When you break it down into what you need to be saving monthly if you wanted to pay 100% of the cost, that’s not as intimidating, I guess.
Young: It is not. Certainly, that’s the best way to look at it. Another saying that goes along with that is that how to eat an elephant? You eat it one bite at a time. What you want to do is start a regular savings program. If you could do it by paycheck, that’d be great. If you do it on a monthly basis, on an automatic payment out of your account, that’s good too, but pick a number that’s going to get you close to that goal that you’re targeting. Also, a number that is comfortable for you to put away at this time in order to provide for that college education later.
Jason: Folks, if you’re just tuning in, I’ve got Treasurer Young Boozer on the program from the State of Alabama. Treasurer … Mr. Boozer, I want to share with them more of your bio here, because I think this is really important for people to understand your expertise.
Treasurer Boozer also serves as chair of the board of Alabama’s Prepaid College Tuition Program, PACT, and Alabama’s 529 College Savings Program, College Accounts. College accounts has experienced growth of 81% in assets and 42% in number of accounts since Mr. Boozer began his first term in January 2011. What’s the success there? How is it that so many more people that you’re getting people engaged in saving for college since you’ve taken over?
Young: I came in office in 2011; it was after the ’08 financial downturn. What we did was we came in … And you’re correct. I do have a financial investment, finance background. What we did was we said, “We want to focus on this program, and we want to focus growing this program.”
We had a prepaid college tuition program that we closed down in 2008, so that there was some built up demand for the new program, plus, we went out and had restructured the program a couple of years before I got here. So that we had great administration, Union Bank & Trust out of Nebraska does the front end work for us. We have terrific investment options. Investment options, we’re doing better during that time period. We’ve had a nice long run of stock market increases and good returns on our portfolios.
The other thing is that we are … I’m a huge believer in higher education and being prepared for it. If you combine all of those things, the good mechanics and also the great philosophy that we have about promoting this program, it has resulted in significant growth, and that significant growth is a huge benefit to the citizens of the State of Alabama.
Jason: Yeah, that’s awesome. Let’s talk about why are 529 plans a popular way to save for college, because there’s a lot of ways you can do this. You can just open a savings account, you can do the Coverdell 529 plans. Why are 529 plans attractive to people?
Young: It is the best way to save for a child or a grandchild’s college education, period, end of sentence. The way that they are structured is that in the State of Alabama … I’ll use an example, and this example covers almost all states. Let me tell everybody upfront is that whatever is your home state, you should look there first, because typically, if your home state has a tax deduction for your contributions, you need to look there first and then look at administration and investment performance.
If you were in Alabama, you’d say, “Let me look at the State of Alabama,” and let me explain to you why it is such a great way to invest. State of Alabama, we have a tax deduction on state income taxes of up to $10,000, if you’re filling jointly, and up to $5,000 if you’re filing singly. A tax deductible going in.
Jason: That’s great.
Young: I get a 5% boost everything I put in while it’s in there, and it’s growing over the next 18 to 22 years, it is tax advantaged, on that tax, while it’s in there, while it’s growing. If I withdraw that and I use it for qualified education expenses, it’s tax free.
Just think about the spectrum here of investment, is that I have money today that I want to put aside for my child’s education. When I put it in there, I get a boost. While it’s in there, I get a boost. When I take it out, I don’t pay any taxes.
Young: I don’t know of another investment vehicle that is better than that. The other thing is that it has incredible flexibility. As we have seen with a number of our contract holders is that you make plans for your child when they’re born, but 18 years later, they either decide they don’t want to go to college, or something else happens and you realize, “I’m not going to use that for those purposes.”
529 plans are incredibly flexible. I can change the beneficiary. If I have another child who is younger, who is on their way up, I can just switch from child one to child two and they can use the benefits that are a part of that 529 plan.
Jason: It just has to be somebody in the same family, right?
Young: It does. Family is reasonably broadly defined.
Young: The other thing is that I can change the beneficiary to me. If I wanted to go back to school, if I want to go to graduate school, or get continuing education, I just switch it from my child to me and I can use it. It has great flexibility.
Jason: One of the— Oh, go ahead.
Young: Yes. Go ahead.
Jason: No. Go ahead. Go ahead.
Young: A lot of programs, especially prepaid programs, many of them are just focused on undergraduate education. With a 529 plan, it is focused on education across the spectrum. It could be undergraduate, it could be graduate, it could be multiple degrees, and has great flexibility.
Jason: Okay. Now, I’m going to ask you in just a minute about the College Savings Plans Network. Before I do, one of the things, one of the points you’re bringing up here is in terms of structuring these plans, is it better to have the account in the child’s name, the account owned by the parent? If it’s the grandparents that are funding it, is it better to have the account owned by the grandparent and then have the child as a beneficiary? What’s the best way to structure it?
Young: What I would do is, if I’m the parent, I would put it … The parent should be the account holder with the child being the beneficiary, because you maintain control over the assets.
Jason: Okay. Okay.
Young: All right? A grandparent, the same way, so that if a grandparent wanted to make a contribution to the grandchild’s education, they can open it up, it can be in their name and—
Jason: And the grandparent maintains control of it.
Young: Exactly. I think those are the best way to start.
Jason: Okay. So that way if the grandchild ends up going off the deep end and the grandparent said, “Hey, you’re flunking out of high school. We’re not paying for college.” They can use the funds for somebody else in the family.
Young: That’s right. Sometimes, we use other mechanisms too, get assets to a child for college, like AGMA. You lose control at a certain age. It would be … If you’re interested in keeping control, it would be a better way to handle it.
Jason: Okay. Tell us about the College Savings Plans Network.
Young: We call it CSPN, and it is a network across the country. It was founded 1991, so it’s been around for a while. We’re national, we’re a nonprofit, we’re associated, we’re an affiliate of the National Association of State Treasures. Like you said at the beginning, be believe to be ourselves the leading objective source of information about 529 College Savings Plans and Prepaid Tuition Plans.
There are 49 states, and District of Columbia that have programs. All similar, but all have slight variations as to how they run their operations and what they do. We meet on a regular basis. We try to cover current topics, and we’re always interested in federal legislation that would improve or enhance the programs and the options that people have in managing and owning these college savings accounts.
Jason: Okay. Now, recently, my wife, she sent me to the store and she asked me to get some toothpaste. I walked in to the toothpaste isle at the grocery store and I was so overwhelmed by choices, ’cause I couldn’t remember what kind of toothpaste we had before I went to the store. I stood in that isle for probably 15 minutes looking at all these different toothpaste. I didn’t want to bring home the wrong one and have her tell me, “Why did you get this one?”
I think we can both agree that the best choice you can make is to get started, but sometimes people are going to get hang up on the number of choices they have. If they’re evaluating these plans, Mr. Boozer, what’s the best way for them to … How should they evaluate a 529 plan? What’s some of the criteria they should be looking at when trying to make that decision?
Young: Okay. As I’ve said earlier, the first thing they should do is look at their home state plan, because of the tax advantages going in that have great benefit to people. There are some states that don’t have income tax, which means that they don’t get that benefit of the deduction going on.
Jason: I’m in one of those states here, in the great State of Washington, The Evergreen State.
Young: There it goes. There’s Washington, there’s Texas, Florida, there are a couple of others that out there. It basically opens the field to you for evaluation, comparison and then a choice.
What I would do to help people out, CSPN has developed a website, collegesavings.org. Great website. Tells you about 529, the background of it. It also will lift and detail each state’s plan. In that, we have a plan comparison tool that people can go in, read, they can choose whatever plan they want to read. Then, we have a comparison tool to let them match these things up and see which one is better for them.
What I tell people is go in and look at those things. Look at who is the administrator. Look at the portfolio options that they have. Look at the performance that they have produced over these years. An important thing is to look at the fees that are charged.
Also, a lot of plans have two types of options. One is a direct plan, which means that the individual invest directly into the program. Another is an advisory plan, which means that the individual has an investment advisor that they’re familiar with, that they have worked with over the years, and they can open the account through the investment advisor. The investment advisor is going to charge a fee, it’s going to be more expensive. One of the keys to growth, one of the keys to good results at the end is that you minimize the fees that you do spend.
Jason: That’s awesome. What would be a fair free structure, you think, in the world of 529 plans. What would be acceptable in your mind?
Young: There’s a spectrum on this too. Some of the plans are almost entirely index funds, which mean that you’re going to be dealing with Fidelity, a Schwab, a vanguard, and you’re going to be looking at fees on the funds themselves that are probably 15 to 25 basis points. The program is going to charge you a program fee, and that varies from 25 to basis points. You’re probably looking at 50 basis points, to 75 points on average out there for a direct plan. An advisor plan is going to be higher than that.
Jason: Okay. I don’t want to get too into the weeds with this thing, ’cause I think the idea is let’s just get people started. Let’s get them moving in the right direction.
Young: Oh, absolutely.
Jason: I did want to ask you about your opinion with the difference between the prepaid tuition plans versus the college savings plans. What are your thoughts there?
Young: Yeah. This is really pretty simple in my mind, is that a prepaid plan is a defined benefit plan that basically says, “I am going to put in a certain dollar amount today in order to receive a set dollar amount, an open-ended dollar amount when my child goes to college.” Typically, it’s for undergraduate, and typically, it is for tuition and fees only.
Young: It is—
Jason: More restrictive and—
Young: Yeah. It’s not quite as broad. That doesn’t give you as much flexibility, but it does address that issue of what is tuition going to be. What are the fees going to be? I need to put down money today in order to hit that target.
The other thing is it … Typically, if you’re going to pay for the full amount at the beginning, it’s going to be a large dollar amount. Some of the plans do have the ability to pay on an ongoing basis, an installment plan. You’d have to look at how they have that structured. That’s how prepaid work.
The 529 plan, the savings plan, basically, is a defined contribution plan. So that I will put in money, I will invest it, and whatever that investment grows to over that time period will be what I have for college. It’s more open-ended. It’s not a set number.
The other thing is that it can be used for just about anything, any qualified education expenses. It could also be used for room and board. It can be used for computers. It can be used for supplies that are required.
Jason: Yeah. What’s the worst case—
Young: Some prepaid accounts don’t allow that.
Jason: Worst case scenario if somebody decides, “Nobody in the family is going to go to college.” You want to pull the money back out. What’s the worst case scenario?
Young: There’s a plus to this whole thing, is that there is no set time at which you need to shut this thing down. It will continue to grow as long as you have an account owner and you have a beneficiary.
Jason: Over generations.
Young: Over generations, correct. So that you would … Let’s say I planned for my child to go and my child decides not to go, but they have a child. X number of years later, their child is ready to go to college, and I’ve been saving this money all these time. I can change the beneficiary from my child to grandchild and then use it.
It can have a significant long life to it, but—
Jason: Now, if you’re the owner of the plan, if you’re the owner though and you die, can somebody inherit it and keep the thing going and just keep naming new beneficiaries, or is there an endpoint to that game?
Young: You have asked a question that I think you’d have to check within each state to find out if that can be done. What should be done before that death would be to transfer the asset and make sure that … Yes.
Jason: I was just going to say for folks that are just tuned in, I’ve got Treasurer Young Boozer on the program from the State of Alabama. He’s also with the College Savings Plans Network, which is an nonprofit. Treasurer Boozer, we only have 30 seconds. What’s the most important thing you want to get across to people on our time together today?
Young: If you’re going to start saving for college, the best time to start is at birth of your child or your grandchild. If you don’t start then, the second best time to start is today.
Jason: Today. Awesome. I want to make sure they go to your website. What’s the name of the website again where they have access to all of these tools?
Young: The website is collegesavings.org.
Jason: Collegesavings.org. Young Boozer, thank you for being a guest today.
Young: It’s been my pleasure. Thanks Jason.
Jason: All right, thank you. Take care.
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Jason Parker is the president of Parker Financial, and independent fee-based wealth management firm located at 9057 Washington Avenue North West, Silverdale, Washington. For additional information, call 1-800-514-5046, or visit us online at soundretirementplanning.com.