Let’s face it – given the current costs of education and the projected growth in costs, which have outpaced inflation and earnings over the past decade, your children’s education is one of the biggest investments you will ever make. Is your investment in your children’s education worth it? Most parents would answer with an unequivocal yes, however, this knee-jerk response must give pause in light of the recent data, which shows that many graduates are not only overpaying for their degrees, but that the degrees themselves end up being nearly worthless because the jobs in their chosen field either require better preparation, or because these jobs don’t pay nearly as much as the students and parents have hoped for.
Usually, the children pick a major and apply to a school of their choice, and the parents are stuck with the bill. Would you let your child select any car (such as Porsche or a BMW) they want to buy for themselves and pay for it? In many cases, parents end up paying enormous private school tuition under the assumption that a degree from such a school would be somehow ‘worth it’ without ever analyzing whether this assumption even makes sense. ‘College education is guaranteed to produce higher earnings’ – this is one myth that keeps getting repeated over and over again. There are several career paths where a college degree (coupled with an advanced degree) can produce a much higher than average earnings, but this is usually limited to technical fields such as engineering, computer science and finance. Medicine and law can also be worthwhile, though recently the costs have outpaced earnings so much that it is far from a sure thing that becoming an MD or a JD is going to pay for itself.
Some parents can’t afford the private school tuition, so their children end up taking huge college loans, which are now offered exclusively by the government. While transferring college costs to the children may seem like a better choice, all this does is shifts the debt burden onto the child with sometimes disastrous consequences. Even some doctors and lawyers are now falling into the education expense trap; with many unable to earn enough to keep pace with the payments they have to make on their college loans. A doctor graduating with as much as $300k in loans is not unheard of – this is the cost of a $50k a year medical school, in addition to having a 7%-8% interest on their loans every year. Many have added the graduate school loans on top of their undergraduate debt. Regardless of how much such a doctor will earn, most will struggle to pay off a debt that currently grows at as much as 8% annually. Even if the doctor earns $200k a year, a good ½ of that will be spent on insurance and taxes, and if they ever plan to start a family or buy a house, this debt would make it very hard for them to achieve their goals unless they take care of the debt first, because if the debt overtakes their ability to pay for it, they will find themselves in big financial trouble. Many families also have both parents with college loan debt, which can lead to even more financial pain in their future.
The following is from Sallie Mae’s website:
“Unless you can show that your education loan payment is an undue hardship on you, your family, and your dependents, your student loans are ineligible for cancellation (discharge) in bankruptcy. It is difficult to prove ‘undue hardship’ unless you are physically unable to work and there is no chance of your making money. To discharge your student loans under this special case, you must file a separate motion with the bankruptcy court and present your situation before a judge. If your student loans are the largest part of your debt, you are better off not filing for bankruptcy because courts are very reluctant to discharge student loans.”
The old paradigm – get a college degree at any cost and you’ll be fine – does not work anymore because the cost of college has skyrocketed, while the opportunities have not increased and the pay has stagnated, essentially making a college degree a big liability in many fields where previously one was able to make a living comfortably. Thus, if you are thinking about saving money for your children’s education, you need to consider two things. The first is utilizing all available resources to save and invest enough money to cover the future cost. The second is determining the return on your investment for getting a degree in a particular field, which involves a detailed study of potential future earnings, job availability, as well as finding alternative programs which can help your child to achieve the same or similar results as programs offered by expensive private schools at a fraction of the cost. While some parents would go into debt to allow their children to go to an expensive private school, many parents realize that this is not something necessary given today’s economic realities. For many families, spending a fortune on their children’s education can result in a much worse standard of living when they plan to retire, while the alternative of having their children rack up student loans is also not very appealing because the parents will be the ones bailing their children out when they get into financial trouble. So what should the parents do?
1) Investing and saving for college, if your finances allow it.
Planning for college expenses can save you a lot of money. Some states allow a limited tax deduction for money contributed to a 529 plan. These plans can be used to accumulate money to cover future college expenses for anybody in the family. Many plans have large management fees, allow for high risk investment choices that can lose substantial amount of money, and the money can only be taken out penalty free and tax free for college expenses. The 529 plans can work for some high-income families to save on taxes, but you must avoid taking any risks in your 529 plan. An alternative that I almost always prefer is to use after-tax accounts to buy municipal bonds. However, if you are not saving enough for your own retirement needs, you probably can not afford to put much money away for your children’s education. Even if you try, it won’t make much of a dent in their tuition anyway. Not everything is lost though – far from it.
2) Selecting alternatives to traditional private college/university.
If the parents do their homework and don’t limit their choices to expensive private schools, they may find that the bill can be made much smaller. In-state public universities offer high quality education for a fraction of the cost of private universities. In many fields such as computer science and business it may be possible to get an online degree from an accredited university that is even cheaper than the public university. A lot of research will have to be done though, and this may not work for the students who are not motivated to pursue college education. Those students who are not ready to pursue their career may benefit from taking time off and trying to find a job instead. The time off can help them figure out what they would like to do, and that is certainly cheaper than paying $50k a year on a degree that won’t result in job prospects in the future.
Not everybody can afford to spend $200k for an undergraduate degree, and not everybody should spend another $200k+ on a graduate degree simply because they have the ability to borrow the money. Parents and children should carefully decide on what type of education would be necessary for a particular career path if the children are motivated enough, and they should allow the children who are not motivated to pursue different opportunities and not go to college immediately after high school.