This month, as proud parents listen to dull or overzealous high-school commencement speakers nationwide, many will (or should) wonder: Is paying for college the best way to equip my kid to support himself, and what will I give up to do it?
The holder of a bachelor’s degree can expect to earn about $2.42 million over a 40-year working life, according to Synthetic Work-Life Earnings (SWE) estimates based on US Census Bureau data. Tack on a master’s degree and it jumps to $2.83 million… or a professional degree and it skyrockets to $4.16 million. With only a high-school education, the SWE estimate drops to $1.37 million.
Statistics like these aren’t new; however, how to pay for those degrees is causing parents increasing anxiety. Retirement savings is often the first thing to fall victim to the offspring’s college plans, but this is a mistake. No parent should pay for college at the expense of his or her own retirement.
Student Debt Is Prison for the Whole Family
Since 2010 the total outstanding student debt in the US has outpaced credit card debt, mortgages, and auto loans. According to data published by the New York Fed, student loan balances totaled $1.08 trillion in Q4 2013, a $114 billion increase for that year. 11% of that debt is at least 90 days overdue, and sad to say, the burden doesn’t just fall on students.
Last month Yahoo Finance shared the cautionary story of Peter and Valerie Shippen, a schoolteacher and an electrical engineer who backed into $500,000 in student debt for their brood of four. At first the Shippens agreed to pay for just one year of college for each of their three oldest children, who were all attending private colleges at the same time. They assumed financial aid would cover the rest and had no money saved, because they thought they could pay for the year out of their current earnings.
They learned some harsh realities. As a middle-class family, the Shippens’ income was too high for financial aid. The fact that they had three children in college at the same time and a fourth to follow made no difference.
So the Shippens borrowed from the federal direct loan program, taking out a total of $500,000 in Parent PLUS loans. Each of their children agreed to pay back 75% of the loan, but only two of them followed through. Today, the Shippens sit on a $150,000 debt—which translates to payments of $1,700 per month over 25 years.
In Valerie’s own words, “It has just killed us. … We have no retirement savings.”
The Shippens made a couple of clear-cut mistakes: assuming their current earnings would cover their children’s college costs; and bankrolling private colleges when their children likely had lower-cost options at public universities. But even if you did everything right, getting your kids through college is a colossal hurdle for middle-class parents, even those who plan well in advance.
Plus, the cost doesn’t necessarily stop at graduation. 85% of American parents either expect to allow their adult children to move back in with them after graduation or to help their children pay for a place of their own.
What the heck happened to preparing your kids for financial independence and then kicking them out the door?
Cost of College Up 27% over Five Years
The rising cost of college is a big part of the problem. The cost of attending a public four-year college rose 27% above inflation over the last five years. For private universities, the cost is up 13% and for community colleges, 24%.
One of my favorite sayings around Casey Research is: In a free market, the cure for high prices is high prices. This means prices can only rise so far, and then the market will no longer pay them. Unfortunately, the university system is not a free educational market. The government has enabled colleges to raise their costs to astronomical levels by making student loans easily available. Take student loans out of the picture and college costs would come down radically.
Having Children Late Leaves Little Time for Catch-Up
In addition to rising tuition costs, today’s parents are writing those checks when they should be making the final wealth-building push before retirement. In 2011, the median age at which an American woman had her first child was just under 26, up from age 22 in 1970. In addition, one in five women now have their first child after age 35, per the Centers for Disease Control and Prevention.
Waiting to have children has created a retirement Catch-22. On the one hand, postponing childbirth generally correlates with higher earnings, but it also leaves parents with no time to finish saving for retirement after the kids have flown the coop.
If you have your last child at age 35, you’ll be 53 when your baby graduates from high school and at least 57 when he graduates from college. That doesn’t leave many kid-cost-free years to plump up your nest egg.
So, unless you’re ultra-wealthy or have saved a spare $100,000 or so per kid, something has to give.
A Way out of That Catch-22
While everyone’s family and finances differ, consider taking some or all of these eight steps.
In conjunction with The College Board, most college websites include a net price calculator. Parents and students can use them to compare approximate costs of attendance, estimated grant and gift aid, and the net cost families should expect to pay out of pocket or via loans. These calculators require students to enter financial details about themselves and their parents to best predict costs, and they also factor in non-tuition expenses. (Here’s an extensive list of net price calculators.)
You wouldn’t buy a pair of blue jeans without knowing the cost, so why commit to paying for a specific college without seeing the real price tag?
In real life, some parents can afford the cost of prestigious universities, and some cannot. While non-need-based financial aid is sometimes available for particularly gifted students or athletes, most children and their parents shouldn’t rely on that.
If you can’t pay for your child’s top-choice school or if you can only afford to pay in part, tell him or her. Your love and support as a mother or father is far more important than your spot on the economic ladder. Plus, being upfront about what you can and can’t afford will teach your children to do the same—an invaluable lesson.
Shop around and price out alternatives. Graduates of prestigious universities often earn more, but nowhere on any diploma is there an asterisk noting, “This student spent the first two years at a junior college getting excellent grades before we accepted her.”
If you can afford to indulge your kid’s intellectual whims and have no problem raising a scholarly bartender, great! If not, take stock of realistic post-college job options as well as your kid’s aptitudes, skills, and desires.
The Center for College Affordability and Productivity (CCAP) published a fascinating report titled “Why Are College Graduates Underemployed?”, analyzing how students with different majors fare economically. Though this isn’t the whole story, this sort of information is important for students to consider when choosing a major.
On the other hand, it’s important to encourage your kids to do what they love to do. As a senior in high school, I had my required 30 minutes with a guidance counselor. The counselor (who had never worked in the private sector) told me I was good at math, so I should become an accountant. My mother, too, wanted me to be an accountant because we had a rich uncle who was a CPA.
Maybe I had a rich uncle and was good at math, but I hated being an accountant. Fortunately, one day a well-meaning mentor called me into his office. He complimented me on my people skills and strongly suggested I apply for an opening in the sales department. My whole life changed, and I never looked back.
Hopefully parents today are more informed and listen to their children. Our youngest daughter changed majors in the middle of college, which was expensive. She basically told us she’d tried it our way, didn’t like it, and was going to focus on what she wanted to do. She became an honor student and an independent thinker, and Mom and Dad learned a good lesson along the way.
#3—A country club is a luxury, even when it’s called “college.”
The CCAP study highlights what college life is for many: a really expensive party.
For a large portion of the college-going population, attendance is only partly motivated by human capital investment criteria, namely a desire to ultimately obtain a good job and a ticket to a relatively affluent middle class (or better) life. Those students go to college also to have fun—to meet new friends, to use top-of-the-line exercise machines to relax, to party, to get drunk, and have sex.
The “country-clubization” of higher education … is important to many, particularly for the relatively affluent families who can afford to let their kids indulge in such activities. Some schools explicitly cater to students for whom this social/consumption dimension is very important.
Those who came of age in the ‘60s and ‘70s saw college as a fun rite of passage. They were fortunate to graduate into a growing economy where jobs were plentiful. A lot has changed.
Is a four- to six-year party with no job at the end worth the price? Will the college experience described above prepare your kids to be financially and emotionally independent? Not likely.
Of course, that doesn’t mean college shouldn’t be fun. However, setting ambitious expectations for your child’s academic performance, capping the number of semesters you’ll pay for, and requiring your children to cover at least part of the tuition—whether from summer jobs or part-time work during the school year—can make college a good investment for everyone. Your kids will still have fun… trust me.
#4—Every student should be a stakeholder.
Even if you can cover 100% of your children’s college expenses without flinching, students are more responsible when they’re spending their own money. It’s basic human nature.
There are countless ways to make your children financial stakeholders: requiring them to cover a set dollar amount each semester; creating financial incentives for good grades and timely graduation; or only paying for tuition, room, and board, but not beer, spring break, or a car. Pick your flavor.
Write a college budget with your children, no matter whose money you’re spending. Learning to budget for food, clothes, gas, and fun is essential to adulthood. Help them prepare and monitor monthly and annual budgets and insist on regular updates.
Be explicit from the outset that there are strings attached to your money, including sticking to a transparent budget. Don’t fuss over every pizza purchase (or your children will quickly learn about creative accounting), but do review ways to save on larger purchases and suggest places to cut if they routinely cut it close each month.
If you don’t teach your children to budget during college, expect them to be on your payroll long after graduation.
#6—Don’t touch your IRA/401(k).
While it is relatively easy to tap into IRAs, 401(k)s, and the like, just don’t do it. They’re safe havens for non-taxable compounding, which is how retirement money grows fast.
The deal you want to cut with your children is: you will take care of your retirement so they won’t have to support you in old age. Keep your end of the bargain.
529 plans, which are operated by the states and some educational institutions, provide a tax-advantaged way to start saving early. In our family, most of the money grandchildren receive from their grandparents goes into a college fund. It’s an easy way to introduce kids to saving and helps put an early dent in college expenses.
#8—Don’t fret if you can’t pay.
If you simply cannot fund a college education and retirement, don’t ignore the facts. Talk to your children and show them the numbers. It’s a teaching opportunity parents shouldn’t overlook.
Most kids get it. Realign their expectations early, and most will take on some or all of the responsibility for college costs without complaint. Once the plain facts are clear, you can build a plan together. Maybe a part-time job, a less expensive school, and/or community college is in order. There are ways to fund a college degree without drowning in student loans.
Cut the Cord So You Can All Survive
Do not give up your retirement to send your children to college. Any child who would ask or allow you to do that has a distorted sense of values. Compromise where you can, but there comes a time when you must cut the financial cord so you both can survive.
My children summed it up this way: “Dad, it’s the job of parents to help their children learn to survive on their own. When it comes time for us to send our kids to college, we don’t want to worry about supporting our parents.”
My wife and I plan to enjoy our retirement ride for as long as we can—on our own dime. Most parents have a similar goal: an independent and dynamic life during retirement. Really, retirement offers more free time than you’ve likely had since college, but hopefully on a much better budget.
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On the Lighter Side
Hockey has certainly become an international sport since it became part of the Olympics. Seems like every National Hockey League team has players from around the world. Late Sunday, Los Angeles beat Chicago in sudden-death overtime to advance to the finals, where they’ll play against New York for the Stanley Cup. There’s no sport more riveting than hockey in overtime.
In a flash, a player takes a shot, and the game is over. Winners move on and losers go home for the season. Hopefully it will be a great series and go seven games. When Tampa won the cup about 10 years ago, Jo and I had a picture taken standing behind it. She even put her hand on it. Pretty neat!
Dear friend Bob L. sent along more of Murphy’s laws:
- At any event, the people whose seats are furthest from the aisle always arrive last. They will leave their seats several times to go for food, beer, or the toilet and leave before the event is over. The folks in the aisle seats come early, never move once, have long gangly legs or big bellies, and stay to the bitter end of the performance. The aisle people also are very surly folk.
- As soon as you sit down to a cup of hot coffee, your boss will ask you to do something that will last until the coffee’s cold.
- When you try to prove to someone that a machine won’t work, it will.
- The severity of the itch is inversely proportional to the reach.
Until next week…