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Don’t Pay Your Children’s College Education
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You should not sacrifice your retirement, your savings, or your future financial stability in order for your children to attend college. They are fully capable of supporting themselves, just as generations have before them.
The average cost of a year at a private four-year college institution in 2007-2008 was $23,712. The cost of a year at a public four-year college institution was $6,185. Both were increases of over 6% from the prior year and don’t even include room and board! [CollegeBoard.com]
Bottom line (a surprise to no one): College is expensive.
With the college costs soaring, parents are increasingly feeling the pressure to borrow money against their homes (if they can) or raiding nest eggs in order to help their children get the best education available. Children are our future, not some numbers on a statement, so it’s natural that parents feel that “parenting instinct” kick in when it comes to their needs. However, sacrificing your retirement or taking on more debt to help pay for your children’s education is a financial mistake.
It’s Not About Love, Sacrifice, Devotion
Before we get into the financial reasons you shouldn’t take on debt for your children, let me be clear that this has nothing to do with whether you love your kids, whether you’re willing to sacrifice more on their behalf, or whether you’re good parents. It’s strictly a financial thing. Michael Jackson has all the money in the world and he was dangling his kid off a balcony, that dude is a terrible parent. I have no doubt you love and care deeply for your children, otherwise you probably wouldn’t be interested in this article, but this involves thinking with your head and not with your heart.
They Have Time, You Don’t
Even though student loans may be increasingly difficult to get, they are still available and should be your first choice when it comes to taking on debt for education. Your children will have decades upon decades of working years that can pay off that debt, the same can’t be said for you. By putting the debt burden on their shoulders, you can enjoy a peaceful retirement while they can handle the responsibilities of managing that debt. (plus, they may be eligible for one of these education loan forgiveness programs)
Also, your retirement savings should be left for your retirement. This is a maxim that applies whether you’re considering buying a new house, a new car, or a new education for your children. Retirement assets are for retirement. Let your children take out Perkins’ and Stafford loans, let them take out private loans, let them take on the burden of debt to pay for their own education – your retirement shouldn’t even be in the discussion.
Student Loan Tax Deductions
When your child takes out a student loan and begins paying it back, they can get a student loan tax deduction for the interest payments. If you pay for their education or take out a loan yourself, you may or may not be eligible for that tax deduction. Letting them take out the debt makes it that much more affordable. Of course, if you were to fund the education with a home equity loan, you would be able to deduct those interest payments but that’s less than optimal. Also, because it’s not a student loan, you lose the favorable interest rates that many student loans receive.
Improves Credit & Responsibility
Establishing a credit history and improving your score is always a struggle for a young professional. It’s the classic chicken vs. egg scenario where credit cards won’t approve you without a history and how you can’t build a history without debt. Student loan debt is a great way to establish and build a solid credit history. It’s a revolving debt and one that you’ll likely be paying for quite some time, so it gives you ample time to prove you’re a responsible creditor capable of making your payments on-time. It’s also usually a low interest loan, low relative to credit cards and other consumer debts, with a favorable tax deduction so you aren’t paying out the nose for this “feature.” While it’s always better to be debt free, if given a choice you’d always want student loan debt to be the one you’re carrying.
Those are three solid reasons why you shouldn’t raid the nest egg and let your children pay their own way. If you’re set on helping your children pay for college, consider opening an education investment fund like a 529 plan or a Coverdell ESA rather than pilfering the 401(k).
{ 32 comments, please add your thoughts now! }
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The Devil’s Advocate caveat did not make it through to the RSS feed. I had a feeling, though…
Anyway, I have trouble believing those figures for average costs. If they were for tuition, perhaps. I wonder if they are including room and board.
ebow: I wanted it to be a little bit of a surprise.
The figures don’t include room and board.
I don’t consider this a devil’s advocate post at all, since it is actually fairly standard advice in many financial planning circles that people shouldn’t sacrifice their own savings for the sake of college. While it’s encouraged to save and help them pay if you can afford to, if it is taking money away from other goals that are underfunded.
And I know those numbers are averages, but I think they are even a bit low. I went to a public school and I just looked at what it would cost for me to go today, and an in-state freshman would pay $10,264 for tuition alone, and another $7,000 for room and board.
That being said, as Jim pointed out in his post, while it is a little harder to get student loans, they still hand them out to almost anyone if you try hard enough. Not only that, but there’s this little thing called work, and believe it or not, a full-time student can still find time for part-time work or have a summer job and still get good grades.
I did it and I made out just fine. This was a number of years ago, but I found a job on campus that paid 9 bucks an hour and worked about 20 hours a week when class was in session, and worked as much as I could in the summer. I made enough to cover most of tuition and housing costs from working alone.
Kids who have to do a little work to stay in school will usually respect what a great opportunity it is and work hard at succeeding compared to frat boy joe who’s enjoying mommy and daddy’s free ride.
Great article. I’m tired of hearing my friends who are new parents, as well as many other PF bloggers, whine about how they need to set up college education plans, or how paying for their kid’s education is going to wreck their retirement. Honestly, I don’t want to hear it anymore because they have the choice of funding it OR educating their kids to be responsible people and either get tuition assistance via grants/scholarships, or work before and during college, or work hard on getting good grades,etc to help ensure they get a good-paying job after college or preferably all of the above.
Speaking as a former college professor, I could always tell which students had their education paid for by their parents. They were always the first to blame their failing on the professor and say that their mom or dad paid my salary. My un-scientific study of this phenomenon led me to believe that parents should NEVER pay for their child’s education as it leads to laziness and inane threats against professor’s jobs (which only leads to lower grades in the end).
I didn’t have to pay for my undergrad due to scholarships, but I had to maintain certain grades to keep those scholarships so in effect I was working for my tuition. I did take out loans for my graduate degree in addition to scholarships and I think that made me work harder and faster to get through my graduate program in 1.5 years instead of 2 to save money.
My daughter is very young (not yet two) and I am still sitting the fence on this issue. As far as my mode of thought right now, we are going to match whatever she can work to earn. This includes her first car and insurance, new clothes, everything once she is old enough to work.
We have started an educational savings account for her, and we always max our contributions to our own retirement accounts – so we won’t be taking anything away from our future selves to help her.
We are definitely not going to be giving her a free ride, but we are going to help.
My parents paid for the first two years college. If I wanted to continue I was responsible for the last two years – which I paid via a student loan.
Of course this was over 30 years ago.
The Wandering Tax Pro
This drives me crazy how parents are so concerned with paying for their child’s education! What happened to having the child–not even child at this age, he/she is a young adult–work a part-time job and get scholarships (NOT loans)? This combination alone can fully fund a Bachelor’s degree. That’s how I paid for mine, and graduated free from debt in May 2007!
It can be done!
The problem with getting a student loan is that the government limits ($5,500) the amount a student under a certain age, I think 24 YO can get. I think the most So even if you say to your kid, sorry can’t help, the parents are included in the calculations for need.
@Jason H
Agreed! I didn’t start taking my college education seriously until my parents’ funds ran out and I had to support myself. Then I busted my ass.
I also feel strongly that supporting 529/etc plans is just buying into what I consider a deeply flawed educational system.
So, even though we can afford to do so, we will not be contributing to any of these plans…
Definitely not a “devil’s advocate” post from my perspective!
Your children will have decades upon decades of working years that can pay off that debt,
That’s true, I am over 50 and STILL struggling with student loan debt.
I completely agree with this devil’s advocate post. I had to pay for my education, and it made me a better person. While many of my fellow students were out partying all the time, I felt I had ownership of my education. Since it was *mine*, I wanted to take the best care of it as possible. I studied hard and earned top grades, and I even graduated early.
I’m actually surprised at the number of commenters who agree with this post. On other blogs, when this issue comes up, most people tend to side with paying for your child’s education. But many here have made good points. Our educational system is deeply flawed, and we expect the government to fix it.
@grumpy: Not knowing your full circumstances, I might suggest you haven’t worked hard enough to pay off your debt, or maybe you spent too much money getting a “worthless” degree. I paid off $50,000 is student loans within 2.5 years after graduating. I simply lived very simply and frugally during this time, and put every spare dollar I earned towards paying off my debt.
Personally I agree with not fully funding your childs college expenses. If students have a free ticket from mom and dad then they appreciate their education less and aren’t nearly as motivated to get their money’s worth. A public education at the local college should be affordable to a student with loans and part time work. If a child studies hard then they can get themselves scholarships. I’m not opposed to helping children with college entirely though, I just think a free ride is too much. My wife and I plan to help and pay for a portion of our childrens college.
I would keep in mind the impact to financial aid eligibility that the parents income and assets have. If the parents have much money then it is hard for the students to get aid. If you make a decent amount and withold any help from the child then it makes it that much harder for them to fund their education themselves since they can’t get aid or subsidized loans. In that case I think it makes more sense for the parts to help at least some. But if the parents income and assets aren’t particularly high and the student can get aid then theres no reason for parents to go out of their way to spend on college.
Jim
Jim, that’s a good point. The parent’s financial state affects how much aid the student gets. That’s the position I was in. My parents made enough money that I barely got any financial aid at all. And yet other students whose parents made a lot less got to go to the same school practically for free.
That’s why I personally don’t believe in financial aid based on “need” at all. This issue came up on another blog recently, and I strongly defended this position. Financial aid ought to be based on merit, and academic prowess if you will, rather than aid. This would guarantee that the smartest people, those most likely to be able to effectively use an advanced education, would be able to get it.
I disagree 100%.
My parents paid for mine, and I will pay for my children’s.
I know I wouldn’t be on my path to savings/investing if all my money just went into $200,000 worth of loans, and I wouldn’t be pursuing an MBA now. That amount is debt is more than just disheartening to a child that needs to begin getting into the habit of saving money – it teaches your child to be used to being in debt, and severely limits their career choices.
I guess I’ll chime in on the side of paying for your kids college education.
If a kid values education (and money) he is going to be tremendously better off if his parents pay for his education rather than taking out loans, and if he cares about education (and money) he’s going to work to get scholarships to fund his education as well. My parents had a college fund set up for me and I still got scholarships and worked while in school and graduated (I’ve paid something like $1,000 total for a bachelors in engineering, a masters in applied stats and an MBA), they let me keep the money that was left over (that’s called an incentive). I came out of school without any debt and with a ton of money (relative to my peers) in the bank.
If you don’t teach your kid to value education or money they aren’t going to be successfull in college whether you make them work for it or not (they just won’t go. Yay, great success. High five!).
I’d definately recomend funding your retirement first, but assuming you are able to do both then helping pay for college is only going to benefit a kid that is actually prepared to go to college right after high school.
First off I believe you should have a sound retirement plan before even thinking about paying for your kids college.
But after that my thinking falls along the line of pay for performance.
At the end of the semester I’d reimburse based on performance. (Much like a business with a tuition reimbursement.)
A – 100% (maybe even pay a bonus say 5-10%)
B – 90%
Anything below is up to the kid to pay. (Maybe a few exceptions for tough tough courses, or small aberrations but it wouldn’t be expected by the kid.)
This way the kid has some skin in the game but still feels encouraged and supported.
I totally agree that we should not sacrifice our own personal retirement. Plus, I think that the kids who had to pay for some part of their education valued it more and work harder. I will help my children out but I will not make myself go broke doing it!
We do add some money to our children’s 529 plans and put their birthday and holiday money it. As well as use Upromise and earn a little extra with the things we buy at the grocery and online.
My parents always told me I had to study hard and get scholarships. So I did. It didn’t pay for my entire education but it did help out.
My wife and I both paid for our college educations, and spent 8 years or so paying off our loans. Moreover, I had to pay for all my car, gas, insurance, food, housing, everything. I worked 30+ hours a week and went to school full-time with an 3.25 GPA. I have no problems with my daughters doing the same.
However, I understand a lot more about saving and investing now than I did when I was 20, and I want my girls to learn these lessons much sooner than I did. So, we have started teaching our daughters early. Right now, half of their allowance gets automatically invested in mutual funds. Usually, most of the rest goes to a savings account at a bank. Sometimes they get a little more for extra things they do. They also put a lot of their Christmas/birthday money into their mutual funds. By the time they go to college these accounts will be worth several thousand dollars. So, yes, in a way we’re helping them to save for school. From their perspective, they will be spending their own money, and not be getting a free ride.
For anyone that’s interested, Homestead Funds has very low initial investment requirements, and you can make additional investments of almost anything. They are no load funds and you can get started with just $500. My daughters are invested in the Value Fund. Over the last year, their one fund has been kicking the snot out of almost all of my investments. (I am not affiliated with Homestead Funds in any way, I just think they’re a great place for new/young investors to start.
As far as raiding your IRA or 401K to pay for school, that’s just plain stupid in my opinion.
We’re somewhere in the middle of this discussion. We have begun funding our child’s 529 plan but our current plans are to pay for only 1/2 to 2/3 of our child’s education. I think at least a little personal responsibility is good for the child to feel at least a partial responsibility for their own education.
I’d be curious to know who paid for yours and your wife’s college education. CMU isn’t cheap.
Thanks for the reminder. I have 2 kids in college. We want to pay for our kids to attend college, I had a CFP give the same advice you just gave. We will do what we can do. They will have to take out student loans to fund the rest.
Can I agree with both sides? We have given our now high school children a budget of what we’ll pay: they are extremely fortunate in that we sold a house in California 8 years ago and mentally earmarked some of the proceeds for their college expenses. It’s all still in our names and they know that if we need to use it ourselves, we will. But otherwise the rules are “here’s what you get, regardless of what the schools tell you we will give you. If there is money leftover when you present your four year degree, it’s yours for graduate school, travel, moving, whatever. If you run out before that degree, good luck, we’ll be cheering for you.” I spent 16 years paying off my law school loans and if my kids can avoid that, I would like to see that happen. But they get that money only because we got lucky on the housing side; if we hadn’t, they would be getting a minimal amount.
This isn’t a true Devil’s Advocate post because it’s not the prevailing opinion that you should sacrifice your retirement for your kids, though it’s the one I identify as my “right” way. I could have argued either side and labeled it the Devil’s Advocate, right?
Ultimately this is also very cultural. I was raised in a Chinese culture where parents sacrificed for their children because the children were expected to care for the parents when they retired. There was no Social Security or pension, the children were Social Security and pensions.
I don’t understand why you have to sacrifice one for another. My father, a blue-collar worker all his life, an immigrant without even a high school education, completely funded my degree, and still retired at 55 and is very well off financially. To him, a college education was the best thing you could achieve, and he was adamant that I would do so. I am thankful that I received my degree without being swallowed by debt. I don’t have children, but I have begun college savings plans for my nieces and nephew, and contribute to those of other children I know. I’d much rather contribute to that than buy them toys.
Not paying for your kids college education is equivalent to giving them a handicap (in the form of debt the moment they start working). This is not the best example to use but the folks from Drexel use the same argument when they loaded up companies with debt. It forces you to be efficient, focused because you “have to pay your interest!”
However, Warren Buffet said that the advice from LBO guys are absurd because it is like saying we should have a knife sticking out of your steering wheel pointing at you when you are driving. It forces you to be careful. But it only takes one accident??
Contrast this to companies with excessive cash on their balance sheet. When prices are cheap, they can take advantage of opportunities and ride out storms better.
I think the same analogy applies to your kids education. When you don’t have to work part time simply to pay your bills, it means more study time, more time to start a company in your dorm! Obviously, if your kid could take things for granted as well.
But if I have not made a convincing argument, why even bother estate planning and leave your spouse with nothing. Makes him or her not take life for granted, give him or her incentive to work. Don’t buy life insurance then. Hey – so what if you he or she has to look after 4 kids! and has no savings.
Mr Credit Card
My husband is a professor at a large state university, and his experience is that too many students work way too many hours and don’t have the time they need to put toward their classes. He’s even been told by students that they don’t have time to do all the reading because they have to work.
If you can afford it, I think you should by all means help or even pay all college expenses with a very clear understanding that all financial help stops after 4 years or whatever deadline the parents see as appropriate.
i inherited some money from my parents and that will pay my kids tuition. It will not impact our retirement much and will reduce their inheritance only slightly.
My son turned down a full scholarship to the university where his dad works to go to a more prestigious university out of state with very little aid. We told him how much he had in his college account and that he could spend it on his education or have the money for himself after graduating. He wanted the experience of getting away from home, and we supported that, but he knows that graduated school will be on his own. He is a dedicated student and frugal, and I know he will be fine.
My daughter will be given the same choice when she graduates.
Save for retirement and education from the beginning every month and you will be able to help your kids avoid starting out saddle with debt and still retire comfortably. I know one family that devoted all raises to education rather than constantly increase their standard of living.
So I’m supposed to make a decision that profoundly affects my childs future based on one guys opinion and the fact that college is expensive. – Don’t think so- Yes there are immature, bratty and entitled kids that waste their parents money at college. Their problems run much deeper than who wrote their tuition check. I’m not about to punish my own kids for someone else’s stupidity. If you don’t raise your kid to understand the value of hard work, and money, and what it takes to feed, shelter, clothe and educate them, its your problem.
Lets approach this with a little balance here. Not every kid is a scholarship level student, that does not mean they don’t deserve a college education, or deserve to come out of college up to their neck in debt. Having kids means you are responsible for caring for them. In this day and age that means providing for, or assisting them with education beyond high school. That does not have to mean a full perk ride to wherever they think is a interesting school. Sit down with your kid around the eigth or ninth grade and show them how much public and private schools cost per year, and what the benefits of each are. Tell them how much you can put toward their education, how much you are saving and encourage them to save something too. Make them a partner with you in securing their future. Let them decide how much living away, or a private school means to them and how much extra effort they want to put into getting it. Show them what a high student loan payment will mean when trying to budget rent, car, utilities and food on an average salary right out of college, so they know what they are getting themselves into if they take out alot of loans. I worked alot during school, worked in the summers, and started work right after finishing. I’m proud of what I did, but sometimes I wished I’d had a bit more freedom during school to enjoy myself a bit more, and maybe try a few more things, or studied abroad for a semester or a year. I wish I’d had the chance to learn for the sake of learning a bit more. Making a kid work alot during school, or saddling them with excessive student loan debt to handle right afterward takes more away from them than you think.
If you have the resources, then pay you could choose to pay. If you don’t have those resources, then let your child choose a state university or college where the debt will not be crushing. A frugal college student who chooses a public (in-state) institution, will likely be able to leave college with limited debt.
Some doors may be closed by not getting an elite private degree, but it’s impractical for parents who have to mortgage their future for a child to pay for 30-40k a year (tuition alone) private undergrad.
You claim that the student once graduated can claim student loan tax deduction for the interest payments. I can tell you that would only be the case the 1st year out of school, since there is a cap of $50k or so on how much you can earn and still deduct the interest. At CMU undergrads graduate getting at least a 60k starting salary, so they can forget about deducting that money. Because debt is tax-deductible is not a good idea to get into debt, people do that with HELOCs, and mortgages, but in many cases it doesn’t raise their incomes and they still have to pay interest. The amount of Stafford loans one can get is capped, after that students have to seek private loans with really harsh terms, especially now that the credit crisis is going on.
Lifetime Limits
Undergraduate Dependent $31,000 (Up to $23,000 may be subsidized)
Undergraduate Independent $57,500
If you go to a state school with $9k tuition, 6k housing that is 60k for 4 years.
If you aren’t going to help pay for undergrad college you could at least have to admit that the student is the one paying the majority of their costs and allow them to claim themselves independent at least, being a dependent severely limits how much financial aid one can get. But I really doubt you’re advocating letting the student be independent.
I absolutely agree that parents should not feel obligated to pay their children’s college expenses. As a freshman in college, I was lucky enough to have recieved a generous merit-based scholarship that covers all my expenses, including room and board since incidentally my father is a faculty member and my tuition is waived almost 75%. My actual Tuition bill each semester is around $500. Although I realize that I got sort of ‘hooked up’, so to speak, with the discount I got from my father’s employment at the University, there are literally millions of dollars of unclaimed scholarship dollars out there every year! Even if your student does not recieve a large lump-sum scholarship from the university itself, there are many other private organizations and companies that offer scholarships. If you encourage your high-school age student to begin looking for scholarships and applying for as many as possible in conjunction with achieving high grades in school and participating in extra-curricular activities, there is no reason why they should have to pay much at all. An hour of effort a few nights a week looking for scholarships will be well worth it to your children when they realize that they will not have crippling student loans upon graduation. Also, as previously mentioned, I think that having a student pay for his or her own education builds character and is a life lesson that college-age young adults need to learn. Mommy and Daddy aren’t going to pay for you in the ‘real world’ – so grow up and take some initiative and responsibility.
Financial Aid $ is based on the parents incomes… And a student can’t be declared as an independent until he’s 24 (in most cases)…So why hold him to a standard that the government doesn’t even hold him/her to ? You are the one who chose to bring children into this world, and if you have a salary that can afford to pay a portion or all of college, you are obligated to do so. The problem with our society is that it is a greedy one. Some parents would rather stash their money away then use it on their children. Same with the government, rather than provide a free education it would rather pour money into the bloated military budget (which many private companies profit from) or other endeavors. Parents who make the it’ll make them work harder speech or the I had it 10X harder speech, I feel sorry for and notice how all of the arguments start off with ‘I’… shouldn’t have too… with that frame in mind maybe you shouldn’t have had kids to begin with. That way you could afford a better quality life (that could fully support the I lifestyle).
I didn’t go to college and find myself lost when it comes to helping or understanding the whole college funding process. I thought after a 25 yr marriage “we” would be financially fine to “help” our two go to college. Oops! He found someone new (with four kids). Now, I have -0- to help, my children have moved back home, unemployed, going back to college, 24 and 21 yrs old. I have a mid range income and too much debt from divorce/lifestyle change etc. this debt/income keeps them in a very poor range for loans and grants. Out of luck for $ help from me. Dad is off with his new family. They are looking for work and one is on unemployment. I want to help, but at this point concerned about how I will keep a roof over our heads, food on the table, car insurance paid….school counselors are a joke. I’ve been looking for help and all I find are books for sell with a bunch of promises I know better than to buy. Is there anyone “real” out there to help honest hardworking young adults who don’t need to be taught a lesson in life. We have a real grasp on hard work, honesty, gratitude… We’re not waiting for a handout, I don’t know how to help them help themselves. They need real answers, information, resources.