Alaskan Parents Can Give Their Kids A Free College Education

Very rarely do I get a chance to talk about governments making intelligent investments that are in the long-term interests of their constituents. But today, I want to bring to your attention one of the most beautiful financial arrangements that exist between a constituent and its government: The Alaska Permanent Dividend Fund.

Without bogging you down in the details, the state of Alaska had set up a permanent fund in 1982 to pay dividends to Alaskans every year in perpetuity. Although the initial contributions consisted solely of oil dividends, the original fund of less than $1 million in assets has ballooned into $40+ billion in total principal due to shrewd management. The net result of Alaska’s long-range thinking in the late 1970s and early 1980s is this: by 2013, the fund was able to pay every Alaskan $900 that is likely to continue to increase well into the future. To be eligible for the dividend payment, you have to be a resident during the calendar year, express an intent to stay in the state, and you can’t have been recently incarcerated for felonies or certain misdemeanors.

The existence of this dividend fund pretty much gives every Alaskan parent an avenue to send their child to college for free. If we assume that a child receives a $900 check each year, and it is invested at a rate of 8.5% total returns (which should be doable with dividends reinvested) for an eighteen-year period, then we are looking at $38,000 in total wealth without doing anything other than engaging in common-sense delayed gratification. Tuition at schools will probably go up over the next 18 years, but then again, so will the payouts of the Alaskan dividend fund (especially since it is calculated using a weighted five-year average, meaning that the low profits of 2008 are currently dragging down the payments).

But it is amazing to me how many schools have out-of-state tuition around the $10,000 per year rate. Ole Miss is about $9,000. The University of Florida is about $12,000. Oklahoma is a little over $8,000. The University of Texas is a little over $10,000. The University of Arizona is a little over $12,000. Kentucky charges a little over $11,000. Texas A&M charges a little over $11,000. LSU charges around $9,000. And those are all out-of-state rates, which I gathered from viewing this source.

Since 99.63% of this site’s readers aren’t Alaskans, you might wonder why I mention this. And it is this: almost any financial obstacle can be overcome with a little bit of planning and foresight. The longer you delay, the greater the sacrifices become, mathematically speaking.

Other than health-care, the biggest bogeyman affecting the middle-class in America today is spiraling student tuition costs, and the difficulty in paying them. If you have enough time, and you are serious about solving the puzzle, you can get your kid’s tuition paid without making significant sacrifices. If you save $2,000 annually from the time your kid is born until he/she/it goes to school, you will have almost $85,000 in the account if you can get 8.5% total returns which include reinvested dividends for the duration of the period.

That’s enough money to pay for almost any college in America at in-state rates, and you could likely send your kid to a high-quality private school if you combine that money saved with some kind of ½ tuition scholarship on your child’s part. The point is: that $85,000 gives you lots of options.

Examples of passive income are all around us. I guarantee you there are Alaskans receiving $900 dividend checks from the state that think “Hey, this is sweet” but then don’t even give a second thought to building up passive income streams in their own lives. In college, I would see classmates of mine play videogames in which you owned diamond mines and oil wells that kept giving you profits as you advanced through the levels, without realizing that you can do the same thing in real life. I’ve seen people complain about paying $500 in monthly rent to the landlord without realizing that they, too, could save up and one day be on the receiving end of those $500 dividend checks. If you are a resident of Alaska reading this, you can put your kid in a great situation by taking those dividend checks and investing them into high-quality stocks. For the rest of you, it’s nice to see living examples all around us of what can happen when you take some money, allocate intelligently, and let it compound for an earmarked future purpose. It’s a habit that will do most of the heavy lifting in helping you reach each of your clearly defined life goals.

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2 thoughts on “Alaskan Parents Can Give Their Kids A Free College Education

  1. Hi Tim

    By coincidence, I have just posted an article about compound interest, which goes on to question if governments may be better off by investing money when a child is born to fund some of their retirement income. This could be achieved at a relatively low cost compared to the amount that they will have to pay if they just wait until their residents retirement age.

    I think your post also demonstrates how this could work using Alaska as an example, but my suggestion is to leave the income invested until retirement age, as compared to Alaska paying out the income each year.

    I know this will require governments to have a long term view, but something has to be done to defuse the ticking pensions timebomb.

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