Convergent Financial Group
The True Cost of College
Recently I was honored to be a part of a financial wellness program for a large consulting firm here in Charleston. The average employee I met with was between 25 and 35 years of age. The common thread among these young professionals was a feeling of financial pressure that stemmed from carrying student loan debt. Unfortunately, these folks are not an anomaly. College debt is a huge issue. And with the cost of tuition and loan interest rates increasing steadily, you don’t need a financial planner to tell you that this issue is not going to go away on its own.
Americans owe over $1.56 trillion in student loan debt! Among the class of 2018, 69% of college students took out student loans, and they graduated with an average debt of $29,800, including both private and federal debt. In our area, it is not unusual for young professionals to tell me that they owe upwards of $50,000 in student loans. What is not often talked about is that 14% of their parents took out an average of $35,600 in federal Parent PLUS loans, which have even higher interest rates.
If your kids are in middle or high school, chances are you are starting to feel some pressure about how to assist your kids with future college costs. It’s in our parental nature to want to help our children, to make sure we are doing everything we can to set them up for long-term success. But I want to submit to you that doing “everything we can” towards that end may not actually be what’s best for them. I may be touching a nerve here but stick with me…
Teaching our children by example that it is acceptable to sacrifice our own financial future for their higher education costs is a huge mistake, in my professional opinion. I have even heard some say that they will sacrifice anything - including their retirement savings - for their children’s college costs. At some point, I think it’s likely that these same folks will be relying on their adult children to subsidize their retirement income in some way. So, in the end, I’m not sure if it could really be said that they truly “helped” their kids, even if that was their original intent.
Personally, I didn’t start thinking about college until midway through my senior year in high school. Like many of my friends, I applied to Clemson and The Citadel during the fall semester. A few months later I received my acceptance letters. I had done my part to get in, and I believed it was my parents’ responsibility to foot the bill. Looking back, that assumption was arrogant and extremely selfish. I can’t believe that I felt that sense of entitlement, but I did, and I was not alone. That was over 20 years ago, and the entitlement feeling for free college, or to make it the responsibility of the parent, is only growing in our society. And most of us parents are willingly taking it on without hesitation.
Looking back, did my parents have some responsibility in my assumptions? Yes, they did. Not for my selfishness, but for not ever having had a conversation with me about how the finances were going to work. Honestly, I didn’t speak with my parents about how to pay for college until a few weeks before I left for Clemson. I can remember this conversation being extremely awkward and difficult. To make it worse, my parents were divorced, so I had to have it twice. They wanted to help and were going to help as much as they could, but their finances wouldn’t allow the full ride that I had anticipated.
In hindsight, becoming responsible for the cost of my education had many positive results. It forced me to work while in college, it put me in a position to learn personal finances quickly, and to become a hater of debt. Having to maintain good work ethic at school and on the job helped develop me into who I am and what I do today. And as an added bonus, staying busy with responsibilities and not having an excess of free time helped keep me out of trouble… maybe not entirely, but I’m certain that with extra free time, I would have found more.
I realize that there are many paths to a successful adulthood, but I can’t help but contrast my experience with the going interest rates for Stafford Loans, which you may be surprised to see are pretty high (and steadily increasing):
Some valid questions to ask are: Do I want my child to graduate with debt, especially at these rates? Of course not. Do I want my child to graduate with me carrying their debt at these rates? Again, the answer is no. Could there be another way? Quite possibly!
So, parents, what should you do if you haven’t prepared? Most people consider dipping into home equity or making sacrifices to current retirement contributions to avoid debt. Instead, I would recommend having some difficult, but important, conversations with your nearly adult children. Talk about debt and help to educate them on why it is a burden and what future opportunity costs it represents… for you and for them.
In most cases, the first two years of college are the most expensive. This is because of meal plans, the cost of a dorm, and other incidentals that come along with the new college experience. Consider talking to your children about choosing a technical school or community college as a jump-start to the final college of their choice. You could even consider allowing them to live with you for the first year. And don't forget about loan forgiveness for certain professions, like teaching and military service. Also, we all need to be reminded regularly that there are legitimate pathways to a successful future that don’t include the standard college degrees.
If you have college students now, make sure you have a conversation with them about higher degrees. They need you to really talk through the cost and benefits associated with an advanced degree. Will the opportunities of a graduate degree outweigh their repayment burden over the next 10 to 15 years? Are they willing to potentially postpone their first home purchase or starting a family while they pay back that debt? Starting out in the world post graduation is already challenging. It is much more so when you are starting out in the hole financially.
Likewise, it is already difficult to save for retirement, but it is 10 times harder when you carry the student loan debt for your children. Borrowing for them doesn’t teach them not to borrow. It simply changes the owner of the debt.
My hope is not to tell you exactly what to do in a blog post because there are so many individual factors to consider. But I do want to encourage you to start the conversation with your child well in advance. Start looking at the different pathways to a successful future, and don’t be afraid to redefine what “successful” really means. Together, you can look for ways to avoid debt and the need to sacrifice your retirement. I truly believe that changing the finances of future generations will start with the higher education funding decisions that you and your kids make over the next few years.
P.S. For more on the cost of college, like how much you can afford or how much you should already have saved, check out this Q&A I did with our local news outlet.