First Things Are FirstIn Medical Degree to Financially Free, I teach a four-step wealth building formula to my students:
- Earn a Doctor’s paycheck.
- Spend less than you earn so that you can save 30% of your take-home pay.
- Save the difference to allow you to get to your financial goals.
- Spend lavishly on the things you love and that bring you value.
Public Versus Private School ValueIn non-pandemic times, this debate is interesting. Does private school really provide enough value to make the cost worth it over what public school has to offer? Let’s attack this first before we discuss how the pandemic has changed this debate. Before I answer this question, let me go ahead and get my bias out of the way. Kristen and I were both products of public school education – at least through high school. Kristen is also an early childhood coach for 8 public elementary schools where we live. Our 3 kids all attend public school.
The argument that is made for the value of private school often falls into one of a few buckets:
- The public schools in my area are terrible.
- Private schooling provides amenities that don’t exist in public school.
- Faith-based arguments for surrounding children with people with similar beliefs.
- Smaller class sizes and more attention on my kid.
- I went to private school; my child is going to attend private school, too.
- Better chances of getting into college (not sure if this is true, but the argument is utilized).
The Math of Private School vs Public SchoolNow, this is a personal finance blog. So, let’s not skip the math. Nobody gets a pass on that. If your child attends a private school, and it costs $10,000 per year for 12 years. Let’s look at the ultimate cost of that had that money been placed somewhere else. If you planned to save this amount of money for your child’s college education instead over that 12 year period, how much would that decision cost you? Well, that $10,000 per year (or $120,000 total saved over 12 years) would turn into $189,500 – assuming only a 6% rate of return on your money – by age 18. If that money was instead placed into a taxable account for your retirement, the math gets much worse. Let’s say that the $189,500 was allowed to continue to grow another 20 years prior to your retirement. Without adding another dime to that pot of money, it turns into ~$644,000. So, depending on how that money would have otherwise been saved, the $10,000 annual cost of sending your child to private school costs between $189,500 and $644,000. Those are the numbers you must consider when determining the “value” or private school. Obviously, the numbers can double or triple for families with more than one child in this situation. Are the arguments laid out above (bad public schooling, better chances of success, etc) worth that kind of money? It depends on what you want for your child and the cost to value you see in the decision. Personal finance is personal. …yet, how does the private versus public school debate change now in pandemic times?
The Pandemic Effect on Private vs Public SchoolAn interesting twist has taken place in this debate due to the COVID pandemic. All of a sudden, the decision isn’t as simple as private versus public school. The decision has often become in-person schooling (private school) versus virtual learning (public school). How has this happened? Well, private schools are not held to the same rules and standards as public schools. They are not paid for by the state government and our taxes. For this reason, they can operate independently of what is being required of public schools. In the current environment, what this has amounted to in many states is that the smaller, more-controlled private schools are still offering in-person education with mandated social distancing (possible due to larger buildings and smaller class sizes) while many public schools are forcing students to stay home. Now, the purpose of this post is not to debate whether students should stay home or go to school. Many of us have our opinions on that subject from both a medical and parental perspective. However, for those who do think it is okay to send their child to school, private schooling is now potentially offering some very real and easily measured value over public school education. So, if you have decided to brave the pandemic elements by sending your child to in-person private schooling because they otherwise would have had only virtual learning made available to them, how should you go about paying for this cost? Here are some ways to consider footing the cost.
1. Using Your 529 Plan for Private SchoolOne way that recently became available to parents to pay for private schooling is through your 529 plan. Starting in 2018, parents were allowed to use 529 plans – which were previously reserved for a college education – to pay for K through 12 schoolings. The amount is limited to $10,000 per year, however. So, if your private schooling costs $20,000 you will only receive the specialized tax-treatment on the $10,000. However, it gets a bit more complicated. Not every state allows for the $10,000 to be used on private school education for K through 12. Some states limit it to a much smaller number. Others don’t allow the use of this money from your 529 plan as a qualified use at all. If your state doesn’t allow for this, you may have to pay state income tax on any earnings used from the 529 to pay for private school.
2. Cash Flow the ExpenseThe simplest way to pay for private school is to cash flow the expense. If you have more than a $1,000 margin between your earning and spending each month, this is the simplest solution. If not, you may have to give that country club membership up or sell that BMW M5 for a prius. Either way, while this is not the easiest solution, it is certainly the simplest. And it may be the best solution, particularly for those banking on a vaccine who only intend to put their child(ren) in private schooling for just one year while this all gets sorted out. It also keeps any college savings for your child intact.
3. Your Taxable AccountFor anyone who has been saving money inside of a taxable account, this money is available to you to pay for school. Any money that you put in has already been taxed. However, you must be careful about the gains made inside this account. Any gains that have been made in less than 12 months are considered additional income and taxed at your ordinary tax rate. However, if it has been in the account for longer than 12 months, you have the benefit of capital gains tax rates, which are usually much lower. At the time of this writing, long-term capital gains tax rates are as follows:
- Income < $78,750 – taxable gains rate = zero percent
- $78,750 – $434,500 single ($488,850 married) = 15%
- >$434,500 single ($488,850 married) = 20%
Take Home: Private School vs Public SchoolIn the current pandemic climate, the in-school education versus virtual learning decision has added a new wrinkle to the private versus public school debate cost/value debate. However, the basic nature of the argument remains the same as any other financial decision. If you feel that the value you are getting for the money you spend is worth the cost (and the potential sacrifice to your long-term savings), then spend lavishly on what provides you value and satisfaction. Just don’t forget that there are multiple options when determining how to pay for the cost!
Are you considering a private school for the year? How do you plan to pay for the cost? Public school all the way? Leave a comment below.