Paying for Your Child’s Education

by Ouida on May 15, 2010


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My mother recently told gave me a startling statistic:  That $40,000 today buys what $16,000 bought in 1970.  The trouble is that today there is so much more to spend your money on.  Most of it is junk, but when you make that purchase there is so much rationalization about why a purchase that is really a luxury is a necessity. That is marketing.  Does your child really need that $400 dollar high chair you just bought? Of course not.  But what about your child’s education?

Statistics are clear that a college graduate will out earn a high school graduate over his or her lifetime. But graduation statistics for the United States are not good.  As of 2006 68% of high school students graduated highschool.  62% of these students went on to college and the college graduation rates for the United States are all over the map at 22% for Alaska (I’ll censor the Palin jab I had planned here) to 69% for Massachusetts.  The average rate was 56%.  This data was taken from higheredinfo.org

Looking at those numbers, a kid has less than a 50% chance of going to college and only about a 50% chance of graduating with a bachelors in 6 years.  Now there are many reasons for this.  A great deal is written about student indebtedness, poverty and the failure of our public schools.  Unfortunately very little is written about student motivation.  Some kids lack the personal maturity and discipline to enroll in, attend and complete a 4-year degree.  Children are about dreams, not reality and, unfortunately, parents are not very good at recognizing and working with their child’s limitations.  I had a colleague who diligently set aside funds into a 529 plan to plan for his kid’s college. Except as the child got older I was pretty sure his true destiny was to become an arsonist or serial killer.  That child needed resources TODAY.  In that context a 529 plan or any thought of saving for college is silly.

I have seen grand kids not only fail to complete their degree, but default on loans cosigned by grand parents.  I have seen kids drop out of college at the last moment, because they were willing to stay in as long as mommy and daddy were paying the bills, but didn’t value their educations enough to remain in college when the money dried up and they had to find a way to fund the final semester or two of college.  I have also seen the opposite.  I dated a young man in college who found out that the money he thought was going to be available from his parents for college wasn’t going to be.  His parents exhausted the college fund during an extended period of unemployment.  They always thought they could re-build it, so they never told him the money was gone.  Jim didn’t find out until the end of his sophomore year that his family did not have the funds he expected them to have.  Jim returned as a junior using a combination of part time work and loans.  Jim illustrated an important concept.  It is important to have skin in the game and all too often, kids who do not share the financial responsibility for their education have no appreciation for the sacrifices made by their parents and grand parents to help them stay in school and gain a leg up on the financial compensation ladder.  Attaining higher education is akin to obtaining a high-powered insurance policy.  It is about attaining a level of success equal to or better than your parents.  What parent wouldn’t want that for their child?

Having a child, raising that child and paying for a child’s education take real dollars.  The estimates are that it takes $200,000 for a middle-class family to bring a child from infancy to age 18.  That number does not include private high school or college.  Real dollars spent paying for educational expenses are dollars that won’t be available for retirement expenses in the future.  For the first time since the post World War II era, Americans are responsible for the majority of their retirement expenses.  Assuming that a child whose education you paid for will achieve enough financially to support you in your retirement is little more than a gamble.  Given the present college graduation statistics, the odds are that half the time, the money spent on college by parents will be wasted.

I just tweeted about an article on CNNMoney this morning:  Readers to the Rescue.  A father asked if he was being selfish by not paying for his child’s graduate expenses.  The discussion is pretty interesting.  All of the respondents who paid for their own education said that they valued the educational experience more. A few even acknowledged that their educational expenses even bankrupted their parents in retirement and wished their parents had made other choices during their working years.  A few even said that because they, not their parents, were on the hook for the money, they chose careers and degrees they could actually earn a living in.

Should parents pay for their child’s education?  I think it depends on whether or not all retirement needs are being met, but my overall bias is no.  I think it is more important that parents instill the notion of sacrifice in their children and give their children the skills of weighing evidence and making decisions based on that evidence.  If kids had those skills maybe our graduation rates would be higher.

Please comment.

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{ 4 comments… read them below or add one }

tonya thames taylor May 19, 2010 at 6:10 am

So, let me stop telling friends and family to stop doing this. I watch Suze and she tells parents this advice often. I really got it down. Thanks!

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Ouida May 19, 2010 at 11:09 am

You are so welcome! I understand the view I presented may be controversial, but I have run into many financial advisers these days who advise parents to stay away from setting up a college fund. Some of the real-life devastating things I have seen only lead me to believe this is the right move.

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Aimee Wilson May 20, 2010 at 6:25 pm

Ouida,

As much as parents want to pay for our children’s education, the real issue is financial education or lack thereof, before we set aside money for 529 accounts. I also watch Suze Orman and it is helping me tease out the financial issues I personally need to address. I have a 4 year old son and I have started his financial education already. Simply telling him something I heard like “money doesn’t grow on trees” won’t cut it.

Thanks for highlighting our new financial realities, Ouida!

Savor life’s best,
Aimee

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Ouida May 20, 2010 at 8:27 pm

Aimee:

Thank you! You are right. You have to start early. My mom’s advice “money doesn’t grow on trees” made me think it grew on credit cards to some pretty nasty results! My mom sent me an article from the Chronicle of Higher Education, seems educators are waking up to the fact that students need financial education. Here is that link.

Ouida

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