When a young person is accepted into college, it is a joyous moment for them and their family. This is the realization of dreams that began when the child was small, even in grade school. It is an affirmation of years of hard work. It breathes life into the hopes of a young adult who is about to venture off into an exciting new direction. For many young people, college is the actual beginning of adulthood.
But this moment can also produce stress. College is expensive and even families who are financially prepared can feel the pressure. For the last several years, I’ve counseled hundreds of families and young people as they seek to go to college and prepare financially for it. If you’re wondering how to fund college for someone you love, here are five guiding principles that will really help you.
IS COLLEGE YOUR FAMILY’S BIGGEST EXPENSE?
Some families today are fortunate to have affluent grandparents who can pay outright for college for their grandchildren. This relieves a tremendous financial burden for a young, working family who is trying to build wealth and save for retirement.
However, there are many families who have no such luck or who prefer to pay for their children’s college on their own. For these families, college could be the single biggest expense they’ll ever see, even bigger than a primary home.
There are many factors that influence this including how many children you have, where they go to school and whether or not you pay for graduate school. But no matter how you slice it, college is a big expense.
Given the financial impact to families, I believe it is wise to think about college as a major-purchase decision. Like any major purchase, it should be thought through carefully and options should be weighed. Part of that analysis should include conversations with the young person who will go to college so they understand the expense and fully participate in the decision. Many parents find these conversations to be difficult and very emotional.
HOW I’VE COME BY THIS KNOWLEDGE
Over the years, I’ve helped many Whitnell clients develop their financial strategies to pay for college. I’ve listened to parents and grandparents express concerns related to college that have little to do with money. This has given me insights into what worries people. I have come to believe that these concerns are well-founded and reasonable. Here is why.
For the last several years, I’ve been on the board of the Alpha Sigma Association of Theta Xi at Bradley University in Peoria, Illinois. One of my roles is to review the applications of young people seeking financial assistance and scholarships. The board also tracks their performance over time.
My one charitable side-project passion has been to build a scholarship endowment for these students. One of the hardest things for me to see is a hard-working student drop out purely for financial reasons. Thirteen years later, we are distributing close to $15,000 per year in scholarships.
My role has allowed me to witness how scholarships impact students. I’ve heard hundreds of stories. I’ve watched scholarships transform the lives of young people and help them live their dreams. That part is wonderful.
But I’ve also seen the opposite. I’ve seen some people squander the opportunities given to them. I remember, in particular, a Freshman who was awarded a full-ride scholarship. But by the end of their freshman year, they lost the scholarship due to grades and dropped out of school. They simply would not do the work. Their heart wasn’t in it.
I also think of my father. When he first started college at a young age, he performed poorly. He left school, entered the Air Force and got married. He got serious about his life and commitments and, after the military, went back to school. This time, he earned straight As and when he graduated he got a good job and really took care of his family.
FIVE GUIDING PRINCIPLES
After reflecting on these experiences, I’ve come up with five core questions that I believe a family can use to create the best solution for college.
- Why do you want your child or grandchild to go to college?
- What experience do you want your child or grandchild to have in college?
- What are your expectations of your student?
- How will the college get paid?
- How, when and where do you talk to your student about money for college?
You’ll notice that questions relating to funding college actually follow questions regarding motives, experiences and expectations. I believe that money questions are actually easier to address than motive questions.
Once you get clarity on motives and expectations, it becomes much easier to define how to fulfill those financially. But, in my experience, if you don’t put the motives first, you might not realize the outcomes you were hoping for even if you have all the right funding solutions.
One of the greatest fears of parents and grandparents is that their loved one will start college, quit half way through and end up aimless and lost through their 20s and early 30s. Another concern is that the parents or grandparents will pay for an expensive college degree that the young person never uses and doesn’t seem to appreciate.
The questions below will allow you to have the conversations that are necessary to create full commitment and buy-in from everyone. I have come to believe that full commitment from all stakeholders provides the greatest protection from losses related to college expenses.
WHY DO YOU WANT YOUR CHILD OR GRANDCHILD TO GO TO COLLEGE?
Far too many people just assume that their child or grandchild will go to college. In many instances, this expectation can work against you rather than for you. I believe it is important to explore your own motives and then have a conversation with your loved one about what they want.
As a parent or grandparent, you probably feel as if you know what’s best for the young adults in your life. You’re probably right. But what really matters is what they know and what they think because, ultimately, they are the ones going to college and having to do the work. If they’re not fully committed, they’ll lose but so will you, especially if you helped pay for school.
One of the biggest mistakes I see families making is expecting their child to go to college simply because it’s time. The child has graduated from high school or turned 18 and has to figure out what to do with the next phase of their life. This is not a good enough reason to go to college, in my experience.
It’s also usually not enough to want them to go to college so they can earn a good living later in life. College graduates do earn more than non-college graduates. But we’ve all heard stories of successful entrepreneurs who dropped out of college or never went to college. Earning a good income is usually not a good enough reason for a young person to commit to the work and dedication that a college education requires.
I have seen certain family values produce great results. When a family prizes learning, curiosity, personal growth and achieving their full potential, college really works. When a young person sees family photos from their parent’s or grandparent’s college years and looks forward to having the same experiences, college works.
When a young person is self-directed and does their own research, asking for college tours and wanting to explore different majors, college works. When a young person feels like they are in control and making their own decisions, college usually works.
However, when a young person is told they have to go to school, or when the expectations are so clear that they feel they have no other options, college may not work. The investment could be at-risk.
So what are your motives? Why do you want the young people in your life to go to college? How do your expectations compare to what they want?
WHAT EXPERIENCE DO YOU WANT YOUR CHILD OR GRANDCHILD TO HAVE IN COLLEGE?
The cost of a college education is now more expensive than it’s ever been. After buying a primary home, the cost of a four-year degree for one or more children could be the single largest expense a family will face. This is why alternative paths to the four-year degree have become quite popular.
Here are the college paths I often see:
- A student attends a 2-year junior college and then transfers to a 4-year school (typically the least expensive path).
- A student attends a 4-year in-state school (less expensive than the path below).
- A student attends a 4-year out-of-state school (more expensive still).
- A student attends a 4-year private school (usually the most expensive).
- A student attends a trade or technical school that provides, in theory, immediate job opportunities (expense depends on the trade).
While all of these paths have different financial implications, families seem to opt for them based on the experience they want their student to have. For some families, it doesn’t seem to matter if the 2-year to 4-year path can cut costs by 50-75%. They want their child to have the experience of a 4-year school.
Other families have a tradition of attending a certain university and want their child to do the same. Some families prize a degree from a prestigious university and believe the degree will pay for itself over time by way of a better education and more advanced opportunities.
The point I’m making here is that the college experience you want a young person to have will likely be the single biggest determining factor in how much college costs. My recommendation is that you explore the different paths with your student and make sure that you have good reasons for the path you choose.
I also believe it is important to have the money conversation with the young person in your life. As young people begin to mature and understand how much things cost, this is an excellent time for them to begin to practice judgement and tradeoffs.
Here is how my dad handled this. He sat down with each one of his three sons and told them about the budget he’d set aside for their college. He also said that if we came in under-budget, he’d give us the remainder after college, no strings attached. So what happened? All three sons went to college. Two went to private schools on some level of scholarships. One went to a state school. But all three of us came in under-budget.
So I ask you. What experience do you want your loved one to have in college and why does this matter to you? What kind of experience do they want?
WHAT ARE YOUR EXPECTATIONS OF YOUR STUDENT
I do not believe it is wise or effective to pay for college with no expectations of the student other than earning good grades. Thomas Paine is quoted as saying: “what we obtain too cheap we esteem too lightly.” When parents and grandparents pay for everything in college and ask for too little in return, they put themselves at-risk that their student will take this for granted.
Why do I say this? I have seen it over and over again. I know of a person today who earned a bachelor’s degree that took 7 years to achieve. That person now serves drinks in a bar and really doesn’t use their education at all. Was that a good investment of the family’s money?
There is another saying that you may have heard: hard work beats intelligence when intelligence doesn’t want to work hard. One of the best ways to protect your family from losses related to college funding is to require your student to work.
I’m not suggesting that they should work at a job. But they should work to earn your investment in them. They should work to attain the standards and expectations that you set for them. I believe it is important to have these conversations before a young person goes off to school and periodically over time, as long as you are paying the bills.
Here are some questions to consider as it relates to your expectations:
- What grades do you expect them to earn?
- What minimum standards of behavior do you require?
- How much do you expect your student to work to help pay for college?
- If they do not work, how much do you expect them to volunteer in the community?
- How much do you expect them to work and earn an income in the summer?
- Do you expect them to live on a defined budget?
I believe that the clearer you make your expectations, the less your investment in college funding will be at-risk. So I ask you. What are your expectations of your student? How clearly have you communicated those expectations?
HOW WILL THE COLLEGE GET PAID?
There seem to be three primary expenses as it relates to college: tuition, room and board and books. But you also shouldn’t forget about health insurance, medical care and travel. All of these expenses fall under the larger question of – where will the money come from? Today, I see families planning to pay for college from these four sources:
- Parents: 529 plans, cash, borrowing from 401k
- Grandparents: 529 plans, cash, borrowing from 401k
- Scholarships, loans and grants
Parents and grandparents tend to be the single largest contributors toward college education. However, this does not mean that families should ignore other options. Bright and motivated young people may qualify for scholarships even if their parents earn a high income.
It can be very worth it to spend some time researching scholarship programs. My experiences at Bradley university have shown me this. There is probably more money out there for your student than you might realize today, especially if you have not actively researched options.
Loans and grants can also help make college more affordable. I recommend that you research the options available to you and your student. Because students typically do not have the credit history or earned income to make them attractive to lenders, they usually get poor terms after they have maximized the subsidized government loans available to them.
The two most common solutions to get lower rates are for parents to take on a “parents plus” loan which is a debt of the parent, or to have the student take out loans on which you agree to be a co-signor. In either case there should be an understanding between the parent and student about who will be making the payments and when they will start.
Young people who are highly motivated and have good self-discipline can also work and pay for most of their own college expenses. This is far more common when people choose the 2-year to 4-year college path. These are some of the options I help families explore as they think about where the money will come from for college.
So I ask you. What sources do you plan to use to pay for college? What can you do to help your student get some skin in the game?
HOW, WHEN AND WHERE DO YOU TALK TO YOUR STUDENT ABOUT MONEY FOR COLLEGE?
Some parents find it very difficult to talk to their children about money. The bigger the dollar amounts in question, the more difficult the conversation. I’ve also noticed that the more affluent a family is, the less comfortable they seem to be in talking about money to their children.
My colleague Mia Erickson wrote a great article about how aging parents, retirement and adult children are the trifecta of financial stress. Her suggestion is that one of the best gifts you can give a young person is financial planning. I agree.
I think college funding is the perfect opportunity to start implanting financial disciplines in the life of a young adult. However, you may not feel comfortable doing this at home, across the dining room table with just you and your loved one.
This is where a relationship with a trusted financial advisor can really help. We have these sorts of conversations on a regular basis at Whitnell. We serve many multi-generational families where our goal is not only to preserve family wealth, but also to help pass along the value of financial discipline.
So I ask you. How, when and where do you plan to talk to your student about college funding and what you expect of them?
I believe that these five questions can help you and your student develop a strategy for paying for college that protects your investment and helps them become a mature and responsible adult. If you would like to explore any of the options I’ve outlined in this article, let’s have a conversation.
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