Saving for College: Time to Think Differently
For many parents, figuring out how to pay for a child’s college education is the most stressful financial issue their family faces. It becomes even more worrying if the family has multiple children that want to go to college.
Escalating tuition costs have led to a surge in students and parents taking out student loans in order to pay for college. So much so, that student loans now amount to almost $1.5 trillion, dwarfing the amount of debt that consumers have with credit cards and auto loans!
The consequence of this is that we have a generation of American Millennials that are entering their adult lives after college with crippling levels of student loans. This burden is not just a money problem, it’s an emotional one. Burdened by the reality of having to make monthly student loan payments, young adults may feel as if they have to delay getting married, buying their first home, or even starting their family.
The Reality of Saving for College
So what can parents do about this? The first step is to see the math of saving for college for what it is.
The College Board reports that annual tuition inflation averaged close to 5.5% since the early 1990’s. That is well above the rate of general inflation and wage growth. Raise your hand if your company has faithfully given you a 5% raise each year for the last 25 years. I didn’t think so! When the cost of a major expense goes up each year faster than your take-home pay, you have a problem.
In addition, the College Board notes that the average cost for college tuition plus room & board at a 4-year public university averaged just under $21,000 during the latest school year. Yet this average doesn’t tell the whole story. As our son, Luis, prepares to head off to college next year by blanketing the Big Ten Conference with applications, we are finding that in-state costs are easily over $30,000 a year. If he wants to go to a Big Ten school as an out-of-state student, those costs are pushing over $40,000 a year!
So what does this mean for parents? Suppose a child is born today and their parents decide to start saving money for college immediately. Let’s assume they want their kid to follow in their footsteps and go to the big state university, which currently costs $30,000 a year to attend. If tuition inflation remains at its historical 5% rate, and the parents are able to generate investment returns on their child’s college savings of around 7%, then the parents must start saving $675 a month starting TODAY and every month for the next 18 years!
It’s Time to Think Differently
I think one of the big reasons why we have a student debt problem is because of how quickly costs have increased – parents have simply been caught off-guard. The chart below shows that less than 30% of Boomers have ever had a student loan, while only ~50% of Gen X’ers such as myself ever needed a loan to go to school. Today, almost 2/3 of Millennials have needed student loans to go to college.
Gone are the days of being able to scrape together tuition costs for a brand name university by working hard during the summer, or being able to hang around college for a fifth year to get that “double-major” (i.e. another year to party).
So what can be done? The common solution you hear from pundits is to plow money into a 529 College Savings Plan. While this is a very important part of the solution, as you can see from our example above, sending just one newborn child to a brand name school can mean saving upwards of $675 a month.
Here are some other suggestions:
– For birthdays and holidays, consider asking people to skip the gift cards and toys and instead contribute directly to your child’s 529 accounts. A child may play with a set of Legos for a week before they end up stashed away in a box. The same money spent on those Legos but invested in a 529 can add up to real money for college.
– Talk to YOUR parents (children’s grandparents) about helping pay for their grandchildren’s education. I realize this may be a non-starter for some people if the grandparents don’t have the wherewithal or willingness to do that. But if done correctly, grandparents can pay directly for their grandchildren’s college without incurring any gift taxes, which is a great way for them to leave a legacy.
– Consider sending your child to a local community college or a smaller state school for the first one or two years. The first two years of college are typically made up of taking a bunch of general credits, which can then be transferred to the big name state school when your child wants to pursue their major.
– Invest in tutoring. Probably the best way to reduce the cost of college is by your child earning merit scholarships. Scoring well on the ACT or SAT exam can mean thousands of dollars of scholarship money. Find a good tutor to start working with your child to help them score well on these tests.
– Don’t force your child to take out loans to go to college if they’re not up for it. Society has told us that you have to go to college to be successful. While going to college certainly increases your child’s chances for long-term earnings, there are far too many kids taking out student loans for college only to quit before graduating. If your oldest child decides they don’t want to go to college, you can easily transfer those 529 savings to another one of your younger children, use it yourself, or keep it for a future grandchild.
– Consider splitting the cost with your child. Many parents want to pay for the entire cost of their child’s college education, but there’s something to be said about a child having “skin in the game.” For example, the parents could pay for the first 2-3 years of college, with their child picking up the cost of Year 4. This way, the child learns a valuable lesson about working towards a life goal, while the parents have extra funds available to focus on their own retirement savings plan.
The best way to avoid seeing your kids graduate from college with crushing levels of student loans is to start planning EARLY. The days of waiting until they got to high school to start worrying about college are over.
Many parents worry about what happens if their child doesn’t want to go to college. What happens to the money they saved up? There are a number of options for what you can do with that money, so don’t let that be a barrier to starting the college planning process early!
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