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).

Student loans have been on my mind ever since I read about the latest legislation dropping Stafford rates earlier this month.

Here’s a brief recap of where my student loans are now. I consolidated my Stafford loans years ago, locking in a very comfortable rate of 3.25%, and the balance currently stands at a little over $22,000. The loan had been in deferment as I completed my MBA at Johns Hopkins, which has stopped the clock the last few years, but with my graduation the interest has started to accrue again. We earn too much to be eligible for the student loan interest tax deduction (certainly not a bad thing) and thus bear the full brunt of the 3.25% rate. Once again, I’m revisiting my student loan dilemma.

$22,000 in student loans at an effective tax rate of 3.25%. We also have a mortgage of around $220k at an effective tax rate of 4.3125% (the rate is 5.75% but it’s tax deductible, in the 25% tax bracket the effective rate is 4.3125%; we could consider only the deduction above the standard deduction for couples $10,900 but that begins to get overly complicated). Math says that if we were to pay down a debt, it would be my mortgage first because it’s at the higher tax rate. So I should never make more than the minimum payment on my student loan unless we have paid off the mortgage (which I envision is something that won’t happen for quite some time).

Proponents of Dave Ramsey’s Debt Snowball approach would say that you should pay off the student loan first because it’s the smaller amount (ahh, psychology). I personally don’t subscribe to that idea, I go by the Blueprint for Financial Prosperity Common Sense Payment Strategy (okay I just made that up, it’s how most people who understand interest rates and math would pay down their debt, I just added some color). While I anticipated this result, it’s always good to revisit things as situations change.

So, the student loan is here to stay for the foreseeable future.

Penelope Trunk recently posted seven reasons why graduate degrees are outdated that I think every young professional needs to read. Each of the seven reasons are spot on but I wanted to discuss my own experiences with two of them specifically.

2. Graduate school is no longer a ticket to play. “It used to be that you couldn’t go into business without an MBA. But recently, the only reason you need an MBA is to climb a corporate ladder.” I have two graduate degrees - a technical one in software engineering and a vaunted MBA. In the case of the software engineering degree, I pursued it because job prospects for software developers following the dot-com burst were bleak and because it never hurts to get another technical degree. The MBA? I pursued it strictly because my employer paid for it and because it was seen as another item on your resume, a “requirement” to climb that corporate ladder.

I didn’t pursue an MBA because it would teach me the skills required to fulfill a job function, because it wouldn’t, I pursued it because I knew that at some level it would be required to even be considered for some management position (even if that management position would require none of the skills taught in an MBA course… how does marketing or analyzing internal rate of return help in management?).

What’s my point about MBAs? While some companies may require them for management, you don’t actually need one to succeed at your job. Results matter and companies should promote based on results, not degrees on a wall. If you are at a place that refuses to recognize results, go somewhere that does.

4. Graduate degrees shut doors rather than open them. Penelope focuses on the financial aspects of this - the loans you are saddled with preclude you from working at certain places because you can’t afford it. I believe graduate degrees have a pigeonholing effect. When I applied to become a software developer at my last company, I had been doing embedded software development for about six months. In the interviews, the interviewers focused on the fact that I had been working in the embedded development world for “so long” and how I might not want to or even be able to do application development. Luckily they called me in so I could resolve their concerns because, based on six months of work (it appeared longer than six months because I used the same language, C, for various applications, the last of which was truly embedded development), they had pigeonholed me as an embedded software developer who was disinterested in, or incapable of, application development.

Imagine if you spent a year or two pursuing a degree in a very specific area within your field? Employers would naturally assume you have a singular focus and would only consider you for positions directly related to that field. You might have only gone after that degree because you thought it could broaden your horizons, not make it more narrow.

Lastly, I submit another reason, the eighth reason, graduate school can be outdated.
8. In many graduate programs, the bulk of the teaching is done by textbook. While in some fields this is acceptable, I found that the textbooks used in our business classes were woefully inadequate. We had marketing textbooks that appeared to have last been refreshed in the early nineties, discussing case studies of companies that no longer existing, and really teaching us little that could be applied in the real world anymore. You can learn more reading the nuggets from Seth Godin’s blog, for free, than you can get out of most marketing textbooks.

Finally, and this is unrelated to graduate degrees being outdated, is the fact that there are two things of value when it comes to graduate school and neither involves the knowledge. First, you will, hopefully, increase your network and, second, you’ll get a piece of paper. If graduate school was about the knowledge, you wouldn’t be able to take classes for free from resources like MIT OpenCourseWare and BusinessWeek Small Biz.

I hope you don’t leave here thinking I’m cynical about graduate school or an MBA, I’m not (that cynical), but it’s like what Brian Flanagan (Tom Cruise) said in Cocktail to his professor after a bad grade: “Those that can, do. Those that can’t, teach.”

Want to know how I was able to shave nearly 13% off my college costs?

Advanced Placement classes.

I was able to graduate college a semester early in part because I loaded up on Advanced Placement (AP) classes while I was in high school. Someone got it into my head that I could take these AP classes for free (not counting the nominal fee for the exam) and get college credit for getting high marks on the AP tests. At the time, my brain wasn’t thinking “oh, I can save money on college,” but rather “I can spend time now and have it count twice - once in high school and once in college,” so it was in part the bit of hustle inside of me that spurred me to action.

I took your standard science and math ones (Chemistry, Physics, Calculus, Computer Science) as well as a few “useless” (from a college credit perspective, not from a learning perspective) classes like Comparative Government, English, Art History, US and World History. The net result was approximately one semester’s worth of electives (and most notably skipping out on an calculus class offered at 8:30am only, you have no idea how happy I was to hear that).

For those of you looking to do this, my advice is that you do your research about colleges ahead of time to ensure that your time is spent most effectively. Also, consider taking classes that you may never get credit for but would ultimately enjoy (I was never getting any credit for Art History, but I learned a lot in that class).

Here are some tips:

• Check to see if your potential colleges give credit for high scores and in which subjects, then see what those scores are. I didn’t know this but I was never getting credit for Comparative Government or Art History.
• If they do not but you are still interested, take the class but skip the exam. You only need the exam if you want credit, if you can’t get credit even with a score of 5, just skip the exam.
• The SAT/ACT and SAT II exams are more important. Given a choice, focus on the standardized tests over the AP exams (that’s not to say you can’t focus on both) because those tests get you into college, AP scores just get you farther along once you get admitted.
• To take full advantage, you may need to load up on non-elective classes to finish early. My credits were about 50% optional electives and 50% required electives but none applied to my core or foundation-type classes (CMU accepted my AP CS marks but the class was taught in Pascal and I didn’t know C/C++, which was the language CMU used at the time, so I had to take 15-127) so I had to load up on those in the vacuum left by fulfilled electives.
• Don’t burn yourself out. If you take too many AP’s, you might overload yourself and perform poorly on the exams. Most colleges will only award credit for 4’s and 5’s, so keep that in mind.
• Enjoy yourself. The point of these AP classes is to expand your mind beyond the typical topics covered in high school. Art History isn’t something most high school students have the opportunity to take, so enjoy the classes and broaden your horizons. Without that one art history class, I would know absolutely nothing about art, I’ve never regretted taking that class (even if I got no credit!).

There you have it, AP classes are your way of shaving 13%-25% (you can get, at most, a year of credit according to the College Board) your college costs.

(photo by steven n maher)

Every year, around this time of college graduation, various media outlets report the average salaries various college graduates and this year is no different. CNN and Careerbuilder are reporting, based on National Association of Colleges and Employers data, that salaries are up 4% this year compared to last year and hiring is expected to increase 8%. Take that recession! (cynics will say that employers are hiring cheaper graduates and dumping the more expensive seasoned employees!)

Once again, technical degrees dominate the list of high increases with computer science majors (yay!) seeing a 7.9% increase and other engineering grads seeing a 5.7% boost. As an aside, my wife always told me that computer science “isn’t engineering,” to which I responded with - “you’re a manager, so you’re not an engineer either!” (then she tells me “at least I have a job,” which pretty much ends the conversation because I stuff a sock in her mouth - just kidding, I love you honey :))

Also not surprising, given the high cost of oil, is that chemical engineers once again are number one (my wife was a chemical engineering graduate). For as long as I’ve been reading these types of articles, it seems like chemical engineers have been consistently in the top spot for highest starting salaries. One thing they don’t talk about is that the highest paying chemical engineering jobs involve long stints on rigs in the middle of the Atlantic or Gulf of Mexico. However, if I was a high school graduate thinking about potential degrees, I think you can’t go wrong by going engineering, of any kind, or computer science (even given the ~4 year lead time until you graduate college).

Here’s the full list with year over year increase:

• Chemical Engineering - $63,749 (+6.2%)
• Computer Science - $56,921 (+7.9%)
• Electrical Engineering - $56,512 (+3.5%)
• Mechanical Engineering - $56,429 (+3.4%)
• Economics - $52,926
• Nursing - $52,129
• Chemistry - $52,125
• Civil Engineering - $49,427 (+4.8%)
• Finance - $48,795 (+1.9%)
• Accounting - $47,413 (+1.9%)
• Business Administration, Management - $43,823 (+<1.0%)
• Marketing - $43,459 (+5.2%)
• Political science/government - $43,594
• Human resources - $40,250
• History - $35,956
• Communications - $35,196
• English language and literature - $34,757
• Journalism - $32,250
• Psychology - $30,877
• Public relations/organizational communications - $30,667

(photo by CarbonNYC)

When I was younger (starting around 2nd grade), my mom said that for every 100% I got on a weekly spelling test, I’d get a dollar as my reward. The spelling tests started all the way back in the first grade but really got going in second and third grades, but I’d routinely get a hundred in part because I was brilliant and in part because they told us the set of words ahead of time (my mom knew this). There would be maybe fifty words and then ten or twenty would appear on the test, it was a cinch to get a hundred and anyone who didn’t simply didn’t try or didn’t care. Anyway, as I grew older, the 100s were harder and the prize was made larger until I was in high school when it would be $10 per 100. By high school, though, I didn’t get 100s unless it was something trivial like a health test or something meaningless, so I never went to collect. Anyway, I ended up being a decent student, in part because of the incentive my mom provided, but this is a issue that’s a hot button topic for many parents. Should they “bribe” (or “reward,” as the proponents would say) their children for performance?

My opinion is that you can and should bribe or reward them for performance because that’s how the world works. You get a good SAT score, you are rewarded with admittance into a good college or university. If you get good grades in college, you’re rewarded with a good job. If you perform well at your job, you’re rewarded with more money (maybe!). Giving children incentives for strong academic performance isn’t going to ruin them for the world because the world rewards strong performance with money as well.

What prompted this Your Take post was an article from the New York Times where students were being paid to perform well academically.

What’s your take on this?

Education is a good thing right? So why is student loan interest deductibility phased out when your modified adjusted gross income reaches $65,000? Why are the Hope Credit and the Lifetime Learning Credit phased out if you make more than $57,000? And if your MAGI is greater than $80,000, you can’t deduct tuition and fees from your income. I think there’s a conspiracy by the government to keep rich people as ignorant as possible! Okay okay, I’m being facetious of course with the outlandish conclusion but I think it’s unfair that the phaseouts exist and I’ll explain.

I think higher income workers should be taxed more even though they don’t use more services. While “unfair,” I also think it’s totally acceptable, and preferable, that the government does a little income redistribution through income taxes. There’s no reason why people should go cold, hungry, or sick because they can’t afford heat, food, or medicine while other people are living in million dollar homes and driving hundred thousand dollar cars. We, as a society, should strive for better. While some wealthy people scoff at the thought of their hard work subsidizing someone else, I think there are fewer of those types of people than you would think. At some point in the last 200+ years, the vast majority of families showed up in the United States with nothing and needed a hand from someone.

That being said, I think that many of the income related phase outs make sense because they restrict a high income earner’s ability to take advantage of accounts designed to improve their financial situation. A single filer with a MAGI greater than $116,000 cannot contribute to a Roth IRA, which seems fair (unless you live in Manhattan, then $116k feels like it should qualify you for welfare!), and they are less affected by the loss of this great retirement savings vehicle.

What doesn’t make sense is that education is and should be different. I can understand not extending tax advantaged accounts to the wealthy because they don’t need any additional financial advantage, but why remove the incentive to educate? College is expensive! The Princeton Review estimates that the annual cost of a year’s tuition, room and board, and fees at a private school will be $33,303 in 2008 and at a public school it will be $12,514 in 2008. These aren’t $4,000 Roth IRA accounts here, we’re talking practically a minimum of $50,000 to send your child to an institution of higher learning.

If you see your life as a business, which is a good way of managing it, education is an expense and should be deductible against your income for everyone. If a company can deduct education expenses from its income, why can’t every single person?

Can someone explain why these phaseouts exist?

(For more information about the Tax Benefits for Education, refer to IRS Publication 970)

If your employer offers any tuition reimbursement and you’re not taking advantage of it, you’re leaving a tremendous amount of value on the table each year. In the two jobs I’ve had since graduating college in 2003, I’ve been lucky enough to be offered the opportunity to pursue higher education in return for sacrificing some of my time. At my first job, every educational dollar I spent was fully reimbursed (you were only allowed to take two classes a semester, or six a year) with no requirements afterwards. In my second job, I was afforded $5,000 a year with some continuation of work requirements. Through both programs I was able to get a majority of my MBA paid for (ooooh, an MBA!). In both cases, I took advantage of them to the fullest extent possible and if you have this opportunity, you should too.

Time on the Side of Youth

I can understand if you don’t take advantage of it because you have children to care for and a family to attend to, those are perfectly acceptable demands on your time. If you’re young and have an abundance of time and a limited amount of responsibility, you’re doing yourself a tremendous disservice by not taking advantage of this. After work each day, how do you spend your time? Do you spend it lounging in front of the television? Do you spend it drinking at the bar? Unless it’s volunteering or working towards a higher purpose, I would recommend swapping at least one night of drinking and lounging with a night of classes. After a couple years, you’ll have a degree instead of nothing (or a beer belly!). One night is not too much to ask in return for shifting your path.

Consider It Compensation

Give yourself a raise by taking these classes. In fact, when you’re done, you can take your more competitive resume out into the marketplace and give yourself a second raise. I took twelve classes at my first employer over the course of two years. Each class cost approximately $1,500, so I gave myself a $9,000 a raise onto my base pay each year. In my three years of working for that company, my salary when I left wasn’t even $9,000 higher than when I started! After you are awarded your degree, shop yourself around. Your job isn’t your girlfriend, you can date other jobs.

If your current employer has an attendance requirement, as in you have to stay in your job for a period of time or repay the tuition reimbursement, you can stay on until that’s fulfilled or you can ask prospective employers to give you a bonus for that amount. Good talent is extremely difficult to find, paying a few dollars more to get someone into the door is worth it for a business that’s seriously considering you.

Take Electives to Expand Your Horizons

Don’t want to commit yourself to a full blown degree? Not a problem, signing up for a full menu of classes may be too much for you right now. Consider taking a few electives in your spare time, electives that will expand your horizons and give you more breadth of understanding in your field. Oftentimes the full menu of classes for a degree contain classes that are too basic and broad. This is especially common in programs designed to generate revenue for a college (think part-time MBA!). Does an MBA student really need a remedial statistics class or a basic economics class? Taking electives should give you a laser-focused area of study that you will find immediately applicable.

Networking, Networking, Networking

While education is important, networking is more important. I had a friend whose brother went to an excellent school. It’s a top notch university that has an extensive history of extremely famous and accomplished alumni. My friend’s brother’s roommates were All-American athletes, the children of officers in the armed services or politicians, or ridiculously brilliant. Sure, the school was “tough” but there was a fair amount of grade inflation and a fair amount of intellectual and athletic competition. That institution is a little school in Boston, MA known as Harvard University. (true story, at least as told by my friend)

There are many reasons why you should take advantage of tuition reimbursement plans, I listed only a few. Many people don’t have the benefit of these programs and would give up a lot to be able to have their education partially paid for, please don’t squander the opportunity unless you have a very good reason.

(Photo of Wean Hall at Carnegie Mellon University, my alma mater, by carbon451)

The key to being prepared is to learn about stuff before you need them and learning about 529, for me, certainly falls into that category! A 529 plan is an educational savings plan named after the section of the federal tax code that outlines the rules for them. Basically there are two types of 529 plans, prepaid tuition plans and college savings plans, but they are generally designed to help you save towards college for your children.

Prepaid Tuition Plans
Essentially what you do is prepay tuition at an in-state institution at current rates, regardless of when the beneficiary could potentially go to that institution. Lastly, if your child decides they don’t want to go to that school, you can still use the money for out of state schools but it may be adjusted.

College Savings Plans
The other type of plan, the College Savings Plan, is a little more involved and has more rules but it basically sets up an investment account that grows tax free, as long as you use the money for education, in state, out of state, undergraduate, graduate, it doesn’t matter as long as the university or college is accredited. The account is handled by an investment company, which in Maryland is T. Rowe Price, just like any other investment account. What you’re allowed to invest in will depend on the rules for your state but in general you can invest in a variety of managed investments (so not individual stocks, which kind of sucks for you but is probably a boon for brokerages).

So, as I mentioned before, the growth is tax free as long as it’s spent on eligible education expenses but there are more benefits. While there is no limit, contributions are considered gifts so you’re subject to the reporting and tax limit of $12,000 per year (if you give under $12k, you don’t need to report it) and $200,000 over your lifetime. You also retain control of the account, despite the beneficiery being your child, which is different from other accounts like Coverdell Education Savings Accounts. Lastly, contributions may be state tax deductible.

Whew… it’s scary to think about, especially for me, but it’s good information to know.

I forget what show I was watching, but it was one of those shows where you have all that Bloomberg ticker crap taking up 75% of the screen and little faces jibber jabbering in the leftover space, but the guy talked briefly about how your IRS 1040 (the full incarnation of the form everyone fills out for taxes) gives you subtle reminders of the things you should do to help plan your financial future. I didn’t watch the whole thing but I thought it’d be fun to go through each relevant line (yeah, I’m a sadist) and see how it could be used as a subtle yearly financial plan reminder.

Line 8a - Taxable Interest
Line 8b - Tax-exempt Interest
There are investment vehicles out there that are tax exempt at certain government levels. For example, an EE/E bond is exempt from State and local income taxes but not from federal taxes. This is a reminder that sometimes your most conservative assets may be better placed in a tax-exempt bond than in a savings account bearing 3.0%. Of course, you sacrifice flexibility but you should know tax-exempt investments are out there but you do keep Uncle Sam’s grubby little paws off your loot.

Line 13 - Capital gain or (loss)
This is something you can only capitalize on if you remember it before December 31st. If you have a loss and want to write it off, sell it to offset a gain you may have had. Just remember not to repurchase shares in the same company within 31 days or the “wash” rule will bite you (and you won’t be able to write off the loss). Did you buy shares of JDS Uniphase and got burned badly in the bubble? Yeah, me too, write it off now because they’re never going to break even for you.

Line 15a - IRA distributions
Line 25 - IRA deduction
Contribute to a Roth or any other type of IRA? These lines are a reminder that perhaps you should be planning for your retirement because Social Security won’t be enough to sustain a lavish retirement lifestyle! Retirement planning, especially for young workers, is critical because it is something that benefits with the passage of time. The more you sow now, the greater the benefits you will reap in the future. You want to be living in luxury when you’re retired, not a cardboard box. (You cannot deduct Roth contributions on your return, I just intended for that line to serve as a reminder to plan for retirement)

Line 33 - Penalty on early withdrawal of savings
Tsk tsk! That IRA or 401k isn’t a slush fund you can withdraw on to buy that shiny [whatever]. Let line 33 be a reminder that you will be penalized for mortgaging a portion of your retirement for gratification now. Alright, I’m just kidding about the severity but you should be readily dipping into your retirement for every thing. Sometimes it makes financial sense, but most (90%) of the time it’s a bad idea. (Example of good ideas? In times of hardship, dipping into the retirement savings may be unavoidable)

Line 49 - Education credits
The government will help you educate yourself, even if your employer will not. Learn about Hope Credit and Lifetime Learning Credits and see how you or your dependents may benefit from them.

Unless I’ve missed anything glaring, those 5 “lines” cover a lot of the basic financial planning advice given out these days. Consider all investment opportunities with respect to the tax advantages, plan for your future, don’t mess up your future by needlessly borrowing from it, and always educate yourself. I’m not saying that the dreaded tax form should be your financial advisor, a human being almost always beats a piece of paper, but it gives you a couple subtle reminders for things you may have forgotten or conveniently ignored. Take a look at your return and see if you’ve taken advantage of everything you could’ve.