I will not pay for my children’s college education, part 1

Many of the personal finance sites I read concentrate on a few key areas: reducing debt, making investments, emergency funds, saving for your children’s college education and saving for retirement. I agree that most of these are important topics, but I don’t believe that you should save for your children’s college education. This may come across as a shocking or neglectful thing for a parent to say, but I have my reasons.

Save for your retirement and debt reduction first. Quite simply, there is a good chance that any 529 or savings plan you start today will not have a better return than debt reduction or your own retirement savings. You may argue that a 529 and a 401(k), for example, have a similar pre-tax benefit, but if your 401(k) has an employer match it’s going to come out ahead of a 529. Now, if you have an employer who will match 529 contributions, then it’s probably a good idea (and hold on to that job like grim death because I bet it offers very good benefits in general). But I doubt your 529 will return 15% if your IRA is returning 3%; most likely they’ll both be in the ballpark of the market in general, assuming you have similar funds in each.

Just remember that if you are a burden on your children when you retire, due to debt or lack of savings, much of the money you saved for their education may be lost. You may unconsciously think of putting money into your child’s education as a retirement plan (“my son the rich doctor will buy me a house in Arizona when I’m old!”) but that’s putting a huge amount of faith in a future unknown. What if your child decides instead to work as a doctor for “Medicin Sans Frontieres” or has eight children of their own (i.e. no money leftover)? Or, more brutally, decides that he or she want a vacation home in California and decide to leave Mother and Father in the one-bedroom in Funkytown? I hope that my son will spend his money on himself and his family rather than needing to help me out. I hope that if I really need help, he’ll be there, but more in the sense of physical or emotional or ‘administrative’ help when I’m too old to manage for myself. And it takes a lot of money to pay for the golden years.

Finally, I think it goes without saying that if you’re paying 18% on credit card debt but skimping on debt repayment to fund a 529, and your 529 returns are 10% per year (even considering the tax advantages) it’s probably better to pay the debt down first, then worry about your children’s education.

Student loans/scholarships. Quite simply, nobody is going to give you a loan or a gift to fund your retirement. On the other hand, student loans are easy to come by and scholarships, while not always easy to come by, are plentiful. I was no great athlete, but I received tennis scholarships. I also received a number of academic scholarships. Some were general, but others were award-related (National Merit Finalist scholarship, for example). If your child studies hard and participates in extracurriculars, they will receive scholarships. They may not receive scholarships to every school they want to attend, but I guarantee there will be a college willing to extend “free money” in the form of a scholarship to attract students with good grades or community leadership activities or athletic ability.

…to be continued…

25 comments

  • Bripblap is probably going to be criticized for this post, but I happen to agree. We always told our children, from kindergarten on, that mommy and daddy had their jobs and that they, the children, had a job, too. Their job was to do the very best they could in school so that they could get scholarships. This philosophy paid off big time for our family!

  • Elaine, my parents took that approach and it worked out OK for me, too. I recognize that different families have very different beliefs about this. One of my colleagues told me that both she and her husband had gone to college with 100% of their tuition paid by their parents, so they felt they OWED it to their children to ‘pay it forward’ so to speak. Hard to argue with that, since it’s what’s right for them. But I’m glad that you had the same philosophy and that it worked out for you and your family!

  • I agree with BB 100%.
    I attended a City College in New York, partially on financial aid, scholarships and my own money. My parents could not help me or my sister to pay for our education because back then we were only a year old immigrants. Neverthereless, I recieved an excellent education, graduated with honors and was hired by the top financial company. In my analyst group there were people from NYU, Pace, Lehigh, Fordham, Villanova, etc… Too many to list, but you get the picture. When I graduated I was debt-free (no student loans to pay off), unlike my fellow analysts from NYUs and whatnots…
    Have to add, though, that I had a very rock-solid early childhood education.
    It’s like investment, the earlier you start the less you have to contribute later.

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  • I attended the local community college, an upper division state university, and, finally, a state law school along the way I picked up an A.A., B.S., and J.D. One of the things I learned was that I did just as well, if not better in many cases, in law school as did the kids who had gone to more “prestigous” institutions. In fact, I had one close friend who graduated from the very prestigous and expensive University of Pennsylvania and took a class one summer at my community college. She reported that the community college used the same textbooks and covered the same subject matter as at Penn. She was amazed. The bottom line is that through scholarships, working while going to school, and “bargain” shopping, I graduated after 8 years with no debt and it only cost my parents was $200 in tuition and some of my living expenses.

    In contrast, I hired a recent law school graduate who foolishly insisted on paying big money for private schools (because they were more “fun”). She has more than $100,000.00 in student loans. The monthly payments are $1000. Her starting salary was $40,000. She has to live with her parents to make ends meet.

    You can get an education and a good job without going deep into debt, but you have to be wise about it.

  • Harry, I can’t add much to that but “amen.” It’s amusing that someone would find it amazing that someone could actually order the same textbooks used by the Ivy League – as if there is some private Ivy-only textbook company!

  • Let’s get practial about a few things. Right or wrong, employers do look at the name of the school on a prospect’s resume. A degree from Duke will certainly carry more weight than a degree from NC State. Both are good schools. But in reality the employer will hire the kid with that $200K Duke degree before he hires the kid from NC State ( assuming all other things are equal.

    • @Robert: I suppose it’s a matter of perspective. I work in New York, and I can tell you as someone who’s been involved in hiring for Fortune 500 companies that:

      (a) After your first job, WHERE you got your degree ceases to matter (except for the network you formed there) because your performance at your job far outweighs your degree to an employer. I can guarantee that’s true.
      (b) Assuming all other things are equal – which they can’t be, really – I would say that Duke vs. NC State wouldn’t be enough to sway an employer. Duke vs. Munderbutton, or some tiny institution, maybe. But here in NY you’ll notice a massive imbalance in executives – the vast majority of executives in my clients are the products of city or state schools, not private institutions. Maybe if you go to law firms you’d find more private school degrees, but even at investment banks (where my wife used to work) people with city school degrees were routinely hired over NYU grads, or Columbia grads. Employers understand that a degree – by itself – does not guarantee anything about the individual.

  • to Robert:
    I went to a city college in New York. I was hired into an Analyst program by a major investment firm. There were about 20 of us. Majority graduated from schools like NYU, Georgetown, Villanova, Fordham, Lehigh, to name a few. Nevertheless, we were all given the same salaries, the same benefits and the same starting opportunities.

    • Layoffman Brothers

      What was your position and the firm's name?
      A bulge bracket ibank WILL NOT hire unless you went to elite schools except for operational positions. NYU, Georgetown, Fordham are good schools but not what the upper echelons of society sends their kids.
      Exceptional cases are: personal connections, minority kids, kids of firm's clients, or SUPER TALENTED (like Division I quarterback with 4.0 GPA in Econ)

      Plus, last 3-4 years were a bubble for financial firms. During dotcom bubble kids who majored in English at state schools got jobs as computer consultants making $80-90K. The real test is, how many of non-elite school grads will get a real job next year. And when the analysts get laid off and apply to bschools, where you went to school will matter. Academia cares about reputations.

      The elite schools are for lifelong connections with super rich kids anyway…practical education to get a job for these folks are meaningless. I know my school, 60% didn't qualify for any financial aid, and your parents must make $200k/year to not qualify…so 60% of kids had parents making $200k/year and this was years ago.

      Elite colleges simply give you better chances to succeed.

    • LB, like any undergrad I got a position as a “Business Analyst” in Finance & Accounting about 7 years ago. I am not going to name the company. The BA position is pretty generic name for all undergrads entering any kind of porgrams (at least it used to be when I graduated from College). My two College mates got in to an Investment Banking Analyst program (2 year program) at JP Morgan the same time I did. We were all in honors program in school though. Maybe it helped.

  • to Steve- I agree with your first point. However, that first job will most likely have a bearing on your subsequent jobs. And I think you are correct about my choice of school examples.
    Ultimately, I wish that school name didn’t make a difference. I also realize that the individual is still the determining factor. As far as the quality of education in relation to the school costs, does anybody have an idea on how to realte the two?

  • Robert, I don’t think anybody has a true formula for comparing education to school costs. I am prejudiced – I think I got a great education from a state university (in which I was in an honors college) that cost me nothing thanks to scholarships and low tuition. So I got an infinite return on investment – $0 spent on college vs. a lifetime of increased earnings.

    But as to whether Duke at $20,000 per year or whatever it is now versus NC State at $8,000 per year is a bargain or a ripoff? Hard to say. Depends on the major, what you do with your spare time, etc. I personally think an expensive education is a ripoff unless you either (a) gain the skills to become very rich and pay that debt off in a hurry or (b) get a great network that helps you get rich. I personally don’t understand putting myself in debt just for the privilege of studying at a university – but I’m exceptionally debt-averse.

    Good question, though, and if someone answers it someday they’d have a good career as a college counselor…

  • I agree that going to a prestiguous university will be a great investment only if you create a great network of friends. But if you are a poor kid who studies a lot in order to keep your grades and not lose your scholarship and you work full-time to support yourself, I doubt that you will be able to fully utilize the networking opportunities of a big school. Although I do believe that having an ivy league school on your resume will open doors for you..
    Same as being in a social/business fraternity will open/close doors for you..
    I myself paid for the last 3 years of college myself. My first year was paid by my parents. I knew that they won’t be able to pay my education, so it was up to me to work hard ( academically and labor-intensively) and apply for scholarships smart. What I would encourage my kids to do is to work during summers and save money for college. Then work during college summer and winter breaks 2-3 jobs in order to pay for their expenses. That way the kid would really understand the value of the dollar – and learn to budget hopefully. Since I had to support myself and pay out of state tuition out of my own pocket ( I couldn’t obtain student loans ) I knew I had to cut costs by living off campus.

  • I’m kind of in the middle on this subject. I believe, if you have the money, parents should contribute to your kids college education as much as they can. (BUT NOT if they are going to hurt themselves in the future.) If you cannot contribute money they should be helping junior at a minimum with finding out how to go to college, for example those scholarships and probably by allowing them to live free at home so long as they are in school, etc.

  • My parents never saved for my college education and right now cannot pay for any of it. I was a straight A student, honor society, tons of extracurriculars, 2170 on my SATs, all that good stuff. The school I’m going to is very well known for what I’m majoring in, graphic design, although it costs $40,000 a year. Through my hard work I was able to get $30,000 a year in scholarships. And the other $10,000? Well, I was planning on taking out a student loan. But you need a cosigner with pretty much perfect credit to get a student loan these days. I’m on the computer every day looking for a solution to pay for college college, and I worry and stress all the time about not being able to pay for school. And so, because my parents never saved, there’s a good chance right now that I will not be attending school, despite all my hardwork. So I’m sorry, but I have to disagree with you.

  • Nikki, are you blaming your parents for not saving for YOUR college education? Did they provide good home, stable environment to attend and do well in school? Did you go to a good school, public or private? I assume it was public. Is the $40,000 a year school the only school available for graphic design? It is YOUR choice to go to a $40,000/year school, you are an adult, you know what you are doing.
    I think parents responsibility is to give their children a thriving, stable and stimulating environment at home so that they can have happy childhood and do well in school. Maybe your parents even went as far as moving to a slightly more expensive neighborhood so you could attend a good public school. But they do not have to save for your college, especially if you go for the most expensive school. They need to save for their retirement so that they are not a burden to you later. Of course it would be nice, but it’s not an obligation.

  • starbucksgirl

    Nikki, I have to agree with Bubelah and I have to add one more thing. Paying $40,000 a year for a graphic design degree is insane. Graphic design is a highly competitive field so unless you are VERY well connected in that industry you will never make back the return on your investment for college. Even if you are well connected you will still not receive a good return on that investment as salaries are not that lucrative in that industry (generally). I use to work for Walt Disney Imagineering and the people that were in the graphic design field were the best in the industry and only received their jobs because they had connections and they didn’t make enough money to support their families. You would do better to choose a degree that will enable you to save for your future. Maybe a profession that is in demand where your salary is likely to be raised throughout the years (i.e. accounting). If I were your parents and had saved money for your college education I would not be paying for you to go to school to get a graphic design degree.

  • That's an interesting point of view and being a recent college grad, clearly can't put myself someone's shoes who has children. I understand your approach and see potential financial benefits to that, at the same time that would have to be a very difficult decision for a parent to make.

    You were very fortunate to receive scholarships, but the majority don't even very bright students. Student loans are available, but as college tuition continues to increase, to put 100% financial burden on a young person these days is very difficult. I know my parents were happy to financially help out with my college education so when I graduated I wouldn't have years of financial burden, and could begin saving for my future. I really appreciate it and hope I am in a good financial situation where I can do the same for my future children. I'm curious to hear responses from parents and their take.

    Craig
    http://www.budgetpulse.com

  • I think it's conditional. IF you have your debt and retirement taken care of, then it can be a good thing to help your kids with college. According to The Millionaire Next Door, it's the one form of “financial outpatient care” that actually benefits your kids in the long run: teaching them to fish, rather than handing them one.

    BUT, if you're thinking along these lines, it doesn't have to be college. You could also help them secure an apprenticeship or start their own business, and achieve the same result.

    AND, you shouldn't earmark the money as college savings. That may come back to bite you in the bootie later. As bripblap says, you don't know what your children will eventually do. So if you're going to save the money, save it, but only as regular savings, not as a 529. If your child gets that scholarship then the money's free and clear–maybe you could even take one last family vacation after their high school graduation, before they leave for college. It'll be your last chance to see that much of your kiddo for a very long time, if ever.

  • I went to a state university on a full ride and then a very prestigious (and expensive) law school on student loans. My parents never paid a dime for my education. I wouldn't have it any other way.

    I remember when I was a first-year in law school, talking to one of my classmates and finding out he had NO student loans. This was shocking to me. It had never occurred to me that someone's parents would be shelling out the $40,000/year for room and board. I know it happens all the time, but it was like I was living on a different planet, because it was so far from the environment I'd come from. My parents gave me unconditional love and support, and those were the tools I used to make my own life. After practicing law for a few years, I was truly miserable, so I started to find my way out. I focused on paying down my student loans so that I could take a job that would make me happy. And I did! I still owe some money, but it's manageable. Most importantly, though, I don't feel like I owe my parents or some other benefactor to keep using a degree that they paid for. I wonder how many of my classmates wish they could step into a more fulfilling job, but don't because they would be letting their parents down. I'm really happy my degree has no strings attached.

    • Great story, Shey, and I have to say I agree completely – it's a lot of freedom to “own” your own education, and not feel that it was a gift from anyone. I feel the same way – I paid for and earned my education, so I don't need to feel an obligation to anyone else for that education. If you were miserable, and now you're not – good for you! 🙂

  • I must say, I'm always amazed as I hear people talk about saving for their children's college as though it is a must, even when they are paying off debt. Parents don't owe it to their kids, but I agree that it is nice. I'm planning to at least assist my kids through college, If I can't cover all the costs.

    It seems like parents' first responsibility is to do their best to make sure they won't be a financial burden to their children when they are older. I don't want my children to have to take care of me, because I was saving for their college rather than my retirement. I definitely think that saving for college comes after paying off all other debts; however, I'm flexible on the mortgage. Still, my plan is to pay off the mortgage and then use that mortgage payment to help fund the children's college.

  • May it have some specific reason otherwise its strange.