Paying for College… or Not?

From nearly the moment your children are born, the question of whether or not to pay for college begins forming in your mind or being asked by “concerned” friends and family.  Can we have a few years to make sure this little one doesn’t stick a nail in an outlet or take a flying leap off of the top stair before having to worry about a major financial decision?  Paying for college to many is a given – if you can afford to do so, of course you will.  But I’m less certain.  Are our kids really better off if we continue adolescence beyond its natural stopping point?  Will they have better outcomes if we don’t pay versus if we do pay?

Let’s start with the basics before moving on to a more substantial discussion.  Only pay for college when you can afford to pay for college.  Never put your personal future at risk.  Do not favor college savings over retirement savings, do not take out a second mortgage to the point where you put your home at risk, and do not take a loan or co-sign on a loan unless you can afford to pay it yourself (because you will).  Contrary to popular opinion, there is no requirement that you have to pay for college.  Your kids can always take on debt for college, but you will not have that luxury during retirement.  In fact, you and your kids may be penny wise and pound foolish to pay for college over saving for retirement, as there’s a good chance they would be the ones to take care of you in old age if you can’t.

With all that being said, college is expensive.  Really, really expensive.  An average in-state public college costs between $12,000 and $16,000 for tuition and fees annually.  Add another $12,000 per year in living expenses and you’re paying $25,000-$30,000 per year.  Add another $20,000-$25,000 per year if your kids go to a private school.  All of that is using today’s dollars.  If your children are younger, you may have another ten years or more until they are college age.  In 10yrs, at a 4% inflation rate (about 2% higher than broader inflation, or about what college costs have been increasing by), the public school costs is $37,000 for a $25,000 school today, or $44,400 at a $30,000 school.  So basically, add another $12,000-$15,000 per ten year period for inflation.  Feeling a bit demoralized yet?  I know I am.

Overall, parents with more money tend to have kids that do better across the board regardless of how much help is given.  Is paying for college really an important determinant of future success, or is everything else you’ve done to that point more important?  Money early on in a child’s development helps improve cognitive outcomes (knowing and understanding) while money during the teen years tends to improve social and behavioral outcomes.  Both of these are crucial, but assuming they’ve got the basics, kids who can improve social and behavioral outcomes will have a leg up over their peers.

There are two sets of explanations for this, both of which seem to have validity.  The first is the better average family situation for upper income parents.  The biggest factor is the lack of “family stress”, which could be anything from fighting parents to a real crisis, such as job loss or eviction.  It could also be due to more basic issues such as marital relationship and parental involvement (single parenting verses two active parents) or even smoking during pregnancy.  Alternatively, there is the “investment” theory of parenting.  Wealthier parents are able to “invest” in their kids by hiring tutors and coaches, and paying for extra-curricular activities.  Wealthier parents tend to be more active in their kid’s schooling, will hire help for certain subjects as needed, and cluster in good neighborhoods with good public schools.  All of these are huge advantages over their less well-off peers.

The “Yes” Camp

College degrees lead to higher pay, greater career options, and even longer lifespans.  The chart below comes from the College Board and shows median income for varying levels of education.

It’s pretty evident that more education, on average, pays for itself in higher median earnings.  That being said, there are many things that impact earnings beyond just a degree.  Readers of this blog will know that positive actions taken in the workplace can be done by anyone, and anyone can earn an above average income.  Of course, playing the game of averages will lead you to err on the side of more education, not less.  By themselves, these stats almost win it for the Yes Camp.

Student debt is a ridiculous burden on twenty-somethings just starting their careers.  It’s also one of the main issues preventing the taking of smart risk, as well as holding back other wealth building behaviors.  Further, helping to pay for college sends a powerful message – education and improving your life outcome is important to us.  Our children should know that we want them to succeed and will help set the basic foundation for their future.  Alternatively, imagine how demoralizing it would be for your child to have to drop out of college due to finances.  One of their first major goals in life is squashed because of an external factor that you may have been able to help with.

The “No” Camp

The No Camp has many valid reasons as well.  College aged kids are no longer kids.  They’re adults, and should be treated as such.  Our society tends to baby our kids for too long, and college has become an extension of that.  In fact, there’s evidence that this is a big negative.  An article by Laura Hamilton published in the American Sociological Review argued that increased parental contribution to college decreases GPA while increasing the amount of time spent on “leisure activities.”  The headline here sounds bad, but she also argues that increased parental contributions increases the odds of graduation.  To me, this is far more important, as your GPA only matters early on in your career (if ever).  The degree and contacts you made in college will be far more important.

Also, college expenses are a real burden for parents too.  Much of this article has been stipulated on the fact that you can afford to pay for college.  Even if you can pay, it will still be a burden, unless you find yourself in the lucky .1%.  Not only that, but for poorer families, college degree holders don’t earn as much as college degree holders from wealthy families.  According to the Brookings Institute: “College graduates from families with an income below 185 percent of the federal poverty level (the eligibility threshold for the federal assisted lunch program) earn 91 percent more over their careers than high school graduates from the same income group. By comparison, college graduates from families with incomes above 185 percent of the FPL earned 162 percent more over their careers (between the ages of 25 and 62) than those with just a high school diploma.”  At this point, the authors have no good conclusions, but it seems likely that parental contacts, college choice, or even where the individual grew up all impact this statistic.

Finally, we must resist treating our children as an extension of ourselves.  They are different people and may not want what we want, nor have the same priorities.  Going to a less expensive school, starting a business, or even working a low wage job in the real world may be okay for them.  Especially if those things make them far more motivated later in life.  After all, nothing will teach you that you don’t want to work a crappy job more than working at a crappy job.

Our Plans

Our family’s plan is to have conversations with our children early and often, starting around age 12 or 13.  We will set our expectations, and help them research college costs and figure out how to budget.  While we will not force our children to go to college, we will highly encourage it.  About the only reasonable alternative is to pursue starting a business, which even then would benefit from classes in business management and accounting at the local community college.

Our goal is to institute an aggressive savings match program to incentivize them to save for their future.  Since our family likely won’t qualify for financial aid, the location of the assets won’t matter much.  For any savings done pre-high school, we’ll use a dollar for dollar match.  If they save $500 dollars when they’re 14, we’ll match $500.  Once they reach high school, we’ll still do an aggressive match of $.50 for each dollar.  These savings will help launch their next chapter in life.

In addition to that, after high school graduation, our plan is to cover an equivalent of basic tuition and fees at a public, in-state school.  Given current costs and expected inflation, we think that amount will be $25,000 per year, or $100,000 per child.  If they get into Harvard, great!  We’ll help them plan for and find financial aid to supplement what we’re contributing.

Once at college, we’ll help point them along the right path and hope for the best.  One bit of sound advice is to ensure that they major in something with real marketable skills.  Following your passion is great, but if it isn’t a marketable skill, then do it on the side.  You can’t follow your passion if you can’t pay the rent.  We’ll also encourage things like work-study or even a part-time job.  A 12-hour per week job at minimum wage would bring in over $2,000 per year.  12 hours per week should have a minimal impact on study time and um, not-so-study time.

Should You Pay?

Assuming you can afford to, the decision to pay for college or not is up to you.  It’s also not all or none, as you can contribute only part of the amount if you want.  There are good arguments on both sides of the conversation.  From our perspective, we think contributing sends a signal that we consider education to be important to our children’s future.  However, if they had a great business idea that was well-researched, that would be a viable alternative as well.

Start talking with your kids early enough so that they can take action depending on what your plans are.  If you wait until they’re 17 to tell them you are not helping with college costs, then they’ve lost some valuable time that could have been spent working and saving or researching alternatives.  Set and explain your expectations early.  We plan on helping to pay a reasonable amount, but want our kids to have skin in the game.  An aggressive savings match program should help institute the savings mindset.  Whatever your plans, be sure to communicate them well with your children.

Keep building my friends.

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