Paying for College

Should You Pay for Your Child's College Education?

The question in the title of this post may seem rhetorical. “Of course parents should pay for their child(ren)’s college education!” you might think most people would answer.

However, in today’s world, where a four year degree (assuming that the degree can be completed in just four years) can cost upward to $300,000, that may not be the slam-dunk answer some parents can afford to embrace. The confrontation with debt and parental retirement finances has changed some minds about such an obligation.

In a stimulating article on CNBC.com, Susan Poppick attemps to answer the parental question from various points of view:


College degrees lead to higher pay, greater career options, and — research suggests — longer lifespans. But parents with college-bound children may feel trapped by the skyrocketing costs of education, which can also last a lifetime.

If you pony up, you could risking your retirement; if you don’t, you could be risking your kid’s future.

Indeed, the average graduate leaves school with nearly $30,000 in student debt, a sum that will reduce their future retirement savings by more than $300,000, according to a projection by insurance and financial research group Limra.

Likewise, parents’ retirement savings are also getting put on the line because of skyrocketing costs. Nearly a third of parents in a T. Rowe Price study admitted they’ve made the risky choice of tapping their 401(k) plan to save for their kids’ college …

 

That’s a debatable strategy. I posed this thread on the College Confidential (CC) forum to see what the astute parents there had to say about it. One particularly apt poster noted:

To answer the post’s title question – “Should you pay for your child’s college education?” – I would broaden the questioning. I would ask “Are parents responsible for ensuring their child is as prepared as possible to be self sufficient as an adult and become a contributing member of society?” My answer – Yes. Does that necessarily mean the child should attend college? Not necessarily. For those children whose path is best achieved by attending trade school, community college or a 4 year college, then yes, I think it is the parents’ responsibility to do whatever they can to help the child achieve that end. That includes financial support, which is much more nuanced than simply paying for college.

Getting back to CNBC, Poppick says:

[Raiding a family’s 401K] is … a shortsighted move, said Sean T. Keating, a certified financial planner in Eatontown, New Jersey.

“You can always borrow money for college, but you can’t borrow money for retirement,” Keating said.

What do you do? …

A CC poster reports:

… I do believe that parents need to fund their own retirement first and should not go broke for ANY college. That said H and I paid for NYU for D (we are full pay) and would happily do it again.

And another:

Yes, you should, if you can. I realize times are tough out there. Maybe someone can educate as to when times weren’t tough. It has always been hard to find a good career that one actually likes (i.e. won’t drive you crazy) and that pays well. I am sure being a professional surfer or late night talk show host is great but there are only 10 jobs like that worldwide so most people have to scramble around and settle for something less cool. Lots of jobs have gone overseas and they aren’t coming back no matter who you vote for. So, in some cases, you live paycheck to paycheck and grumble about things like this. Other folks plan ahead, skate to wear the puck is going to be not where it was, and find that amazingly there are ways to pay for the kids education. You usually have to live below your means. But it can be done.

So, how much can you, as parents, afford to pay?

Keating projects that “One rule of thumb says that to maintain your standard of living, your savings at retirement should be high enough to replace at least 80 percent of your annual income each year, said Keating. Work backward from that assumption to see how much you can actually spare today, he said, also keeping in mind obligations like your mortgage payments and any other debts.”

In my view, that’s a rather brutal formula, considering the abysmal savings level of the majority of American families. Marketwatch, in a December 2015 article delivers the bad news:

Americans are living right on the edge — at least when it comes to financial planning.

Approximately 62% of Americans have less than $1,000 in their savings accounts and 21% don’t even have a savings account, according to a new survey of more than 5,000 adults conducted this month by Google Consumer Survey for personal finance website GOBankingRates.com. “It’s worrisome that such a large percentage of Americans have so little set aside in a savings account,” says Cameron Huddleston, a personal finance analyst for the site. “They likely don’t have cash reserves to cover an emergency and will have to rely on credit, friends and family, or even their retirement accounts to cover unexpected expenses.” …

That rather puts the kibosh to Keating’s ideal plan. Another CC poster says:

I calculated the minimum in my state to get a 4 year degree (2 years at community college+ 2 years at a state school while living at home) and it’s still about $50k since a car would also be necessary. While I don’t have to fund it, where else could my child get that kind of money at 18? You can’t be an independent student and eligible for financial aid without your parent’s income until 24 years old (unless married, parent, veteran or a few other qualifications). Do I want to encourage or force my child to get married, have a child, join the service, etc. so I can save some money? Do I want my child to have to wait until 24 years old to attend college? If I don’t pay, who will?

“If I don’t pay, who will?” This strikes right at the heart of the seeming Catch 22 of paying for college, which in turn asks the question, “Does your child really need a college education?” We’ve discussed this at length before here.

The conundrum seems to be: Should parents scrape the bottom of their financial barrel or should their son or daughter incur massive loan debt? That’s a very heavy question.

Poppick’s article’s logic goes on:

“You have to be aware of what you’d be sacrificing,” said Erika Safran, a CFP and president of Safran Wealth Advisors in New York. “Will you run out of money at age 75? You must also consider medical expenses and where you will live.” …

Speaking to the need for a college education:

… Not all high school seniors are academically or emotionally ready for college.

“For some, a year in the working world not only allows them to contribute financially but also gives them a sense of accountability,” Keating said. “It might also make them more reasonable in their choice of schools.”

Joining the military or starting at a community college before transferring to a four-year school are other options that can save money and give your kids extra runway to mature before college, Keating said …

Back to CC:

I do think parents should do what they can to HELP pay for the education of their children. I also think the child needs “skin in the game” and that should start far before college does. In our case, that “skin” meant having a job at age 14 and every summer thereafter and putting a good amount of that $$ in college savings. It also meant doing the very best they could in order to get into the flagship or another school with merit aid to have some affordable choices. I had one child who didn’t buy into the strategy and didn’t take the traditional route to a four year school and D who did everything she could to make it happen. In the end, I have and will continue to make any sacrifices I can to keep the debt low including downgrading a vehicle, taking a second job, and stashing every last penny into the 529.

And also:

… An important part of this general story is that people need to think about their own retirement savings very early in their working careers. Take advantage of every opportunity to put money into tax qualified savings and investment plans (IRA’s, 401k’s, 457b’s, etc.). And do not ever borrow from those funds. If you can put away 10-15% of your gross salary “pre-tax” into such funds, you are likely to end up at the place mentioned in the article: able to generate 70-80% of your pre-retirement income after retirement. That income, plus Social Security, will allow you to maintain your basic standard of living in retirement.

Finally:

My husband and I think that we should pay for our children’s educations, and we do. We can afford to do so. I don’t think we owe our kids a $60,000 a year education, but I think we would do them a huge disservice by not paying for college. In terms of getting a job, college (or at least a post-secondary trade school) now seems to be what high school was a couple generations ago. I also understand that not every parent can afford to pay for college. Neither my parents nor my husband’s parents paid a cent for our college or post-graduate educations; we did it entirely on our own (albeit in a time when it was much more possible than it is today). However, I think parents should plan in advance, save what they can – including sacrificing in order to be able to save for both college and retirement if at all possible – and make every effort to at least help with college expenses …

Poppick concludes her article with perhaps a needed word of encouragement for parents:

Indeed, at least one study has shown that undergraduates receiving less financial support from their parents actually get higher GPAs.

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Parents, if you are inspired by Poppick’s final statement, then keep in mind that the Heaviest Debt Burdens Fall On 3 Types of Students:

1. Graduate students: The reason that the “average” student’s debt is so high – almost $23,000 – is because the figure includes the loans of graduate students, who are permitted to borrow unlimited amounts from the federal government up to the cost of attendance. Sixty-five percent of 2012 graduates who borrowed $50,000 or more were graduate students …

2. For-profits: At first glance, there’s been an alarming increase in the number of four-year college graduates with very large debts. Back in 2004, only 1 percent of students who earned a bachelor’s degree that year had borrowed $50,000 or more, adjusted for inflation. That grew to 10 percent in 2012 …

3. Dropouts: People who didn’t complete their degrees account for 59 percent of the students with low debts, that is, debt between $1 and $10,000. Those without college degrees are less likely to pay back their student debt, not only because they often can’t get a high-paying job, but also because “some people feel ripped off and they shouldn’t have to pay it back,” explained Baum …

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Significant financial food for thought. Time for some serious pondering and discussion.

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Be sure to check out all my college-related articles at College Confidential.