College – An Opportunity to Teach Your Children

It wasn’t all that long ago that a college education was considered a privilege.  Today, our society has started acting as if it’s a requirement for anyone wanting to be “successful” in life.  Going to college is no longer the exception.  Rather, it is the expectation for many kids, regardless of their desired career path or aptitude.  To add fuel to the fire, funding has become easy to get through lenders looking to make a profit from this growing demand.  When you combine high demand with easy money, you have a recipe for inflation, which is exactly what we’ve seen happening to college tuition over the last few decades.

Recent numbers from the Bureau of Labor Statistics help us see rising tuition costs in proper perspective.  When you compare how the price of things have changed from 1996 to 2016, you’ll see the cost of groceries and housing have remained close to the rate of inflation, with costs going up around 55% over those 20 years.  The much maligned cost of healthcare has roughly doubled during that same time.  College tuition, on the other hand, has tripled in that 20-year period.

Simple economics will tell us that when a cost goes up at a faster rate than inflation, it becomes more difficult to purchase.  This is because so many other aspects of our financial lives, including our income, are tied to inflation.  With tuition rising faster than income, it continues to require a larger percentage of our budget and eventually something has to give or perhaps even break.

Aside from all the bad news about the high cost of a college education, this tricky situation does provide us with an opportunity to teach our children some life lessons that may turn out to be more valuable than any lesson they’ll learn in school anyway.  Here are some things to consider as we help them plan for and navigate these tricky times:

Student Loan Dangers

With college costs being so high and many people no longer having the time to save enough money to pay all those costs, we need to discuss the possibility of student loans.  Regardless of what anyone tells you, this is not a topic to be taken lightly.  Student loans are incredibly dangerous, as you’ll see in a minute, and should only be used as a last resort.  Unfortunately, this has not been the attitude toward student loans in the past.  The current US student loan total is just under $1.4 Trillion and has been called the next financial disaster by many.

What makes student loans so dangerous?

• They’re easy to get for anyone that wants them.
• The target audience is young people that rarely understand the consequences until it’s too late.
• They have few consumer protections when compared to other forms of debt.
• Student loans cannot be discharged in bankruptcy.  This all started back in 1978 when doctors and lawyers were declaring bankruptcy upon graduation to get their debts cleared before starting their practice.  The government responded by excluding student loan from bankruptcy discharge for the first 5 years after graduation.  In 1998, that time limit was removed and in 2005, the same rules were extended to private lenders.
• The lenders make more money when you default or get behind.  Since the loans are guaranteed by the government and the law gives lenders tremendous power to collect, the fear of not getting repaid isn’t a major concern.  So, when you fall behind, it simply means more profit for them as they add on fees and penalties.

Avoiding Student Loans

Teach your children stewardship – If they’re good stewards, they will keep their expenses low, and look for ways to live frugally during their college years.  They will also understand the value of working hard during their high school years in an effort to earn scholarships.  These lessons can’t be learned overnight though and bad behavior is hard to erase, so start teaching them early through open conversation and your own example.

Choose the right school – Is it really worth the extra cost to go to a prestigious school?  For a select few, there’s probably an argument to be made for paying the higher cost of an elite school.  However, there’s also a lot of wisdom in the alternative.  Some studies show that many brilliant kids are being lost chasing this dream.  They’re graduating high school at the top of their class only to lose that confidence when they find themselves in a crowd of equally or even more brilliant minds.  They soon lose that confidence and start to underperform their own abilities.  It’s the whole little fish in a big pond problem.  However, when similar kids are put in an environment where they continue to stand out, they continue to be noticed and receive praise and as a result, they excel and perhaps perform above their own abilities.  This self-confidence will carry on to the workplace and the rest of life.  Let’s not forget, that smaller college probably only costs a fraction of the elite education, reducing the financial burden.

Have a defined goal – College is an expensive place to “find yourself”, yet a lot of college students don’t have a well-defined goal in mind.  As parents, we need to help our children consider their career choice, their ability to succeed at it and the costs of getting that education through various means.

Consider technical schools – There’s nothing wrong with a technical degree.  In fact, it is often under-utilized.  Even students wanting a non-technical degree should consider the possibility of taking the first few years of elective classes through a technical school at a fraction of the cost and transfer those credits to the more expensive school to finish out their degree.

Start early – There are increasing options for younger children to start earning college credits at a reduced cost.  It not only lightens the workload during the college years, but may reduce the time your child is paying to live away from home, which can greatly reduce the overall costs.

Save and Invest for College

Teach your children to save – The high cost of college gives us a stage to teach our children the discipline of saving for a large future expense.  This also gives us opportunities for lessons on investing and debt-avoidance.

Decide your role – You need to decide if you’re going to help them pay for college.  If so, you’ll want to start saving as soon as possible to have the best chance of reaching that goal.  Note:  Parents shouldn’t even consider saving for their child’s education until they get their own house in order.  There’s no reason to pay for their education only to be a burden on them in your retirement years.

Know your options – There are many ways to put money away for future education costs these days.  You can use something as simple as a UTMA account that allows an adult to be trustee yet provides some tax benefits by taxing the initial earnings at the child’s rate.  There are other types of accounts specifically designed to be college funding vehicles.  One of the more common types of college funding accounts is the 529 plan.  These accounts have specific tax benefits if you use the money for “higher education expenses”, but also have some penalties if the money isn’t used for that purpose.  Every state offers a plan, but you’re not restricted to using that plan.  You can use the plan of any state you would like, but you’ll want to know if your state offers any incentives for using their plan.  Some states will give tax credits to residents for contributing to their state plan. For example, “Indiana taxpayers who contribute to a CollegeChoice 529 account become eligible for a 20% state income tax credit of up to $1,000 on their contributions.”

You’ll also want to understand the fees on the account.  You may have the option of setting the account up on your own or through a financial institution and paying additional fees for their services.  If you’re paying fees, make sure you’re getting your money’s worth.

Provide Accountability

When your child goes off to college, they’re finally going to be able to make independent decisions.  This is both a great opportunity and a tremendous danger.  It’s no surprise that over 40% of graduating seniors have credit card balances averaging $3,000.  Our goal should be to help them make this transition in life while also protecting them from the dangers that try to devour them.  Some simple financial accountability shouldn’t be too much to ask.  If you’re helping them financially, you have every reason to demand financial transparency.  It’s what banks do when they lend you money.  This process is much easier if you start discussing finances with them at a young age and already have a good relationship on the topic.  If they refuse to cooperate, you can always play the trump card and withhold their funding.

If your child wants to sign up for a credit card to start establishing credit, I would suggest making the address on the account your home so you can receive their statements and keep an eye on their spending.  Another way to teach and protect them is to sit down and go over their credit report each year to make sure they’re not a victim of fraud.  This will also reveal any hidden accounts they’ve opened without your knowledge.  Just remember that they are now adults and you should treat them with respect.

Conclusion

While all the things listed above can be important, we must remember to keep a formal education in proper perspective.  No matter how prestigious, it doesn’t hold a candle to the value of the education your child will receive from you.  While in our care, we should strive to raise children that are honest when no one is looking, are not greedy for personal gain, care about the welfare of other people, communicate well and work as if working for the Lord.  If we pass these traits on to our children, the career they choose or the name of the university that shows up on their diploma won’t be a major factor in their lives.  Their success will be measured by their character and how they glorify God in all they choose to do.

Brad Graber, CFP® has been working with clients on personal financial planning and investment issues since 1996.  He invests his time mentoring and educating individuals on ways to be better stewards of the resources God has entrusted to them.

***Disclaimer:  The information contained in this article is general in nature, is provided for informational purposes only, and should not be construed as tax advice.  I am not an accountant and cannot guarantee that such information is accurate, complete, or timely. Federal and state laws and regulations are complex and subject to change.  You should consult an accountant regarding your personal tax situation.