How do parents pay for college? This is one of the questions I get asked more by moms than just about any other. We obviously all want the best for our children’s future, but the cost of our children’s future education is astronomical (and growing larger by the year). It is no wonder it keeps many of you up at night. Parents should evaluate, and encourage their children to think about a college education as an investment decision. Below is a framework for how to think about it, as well as important statistics and data points to consider, and links to numerous resources for college savings plans, student loan options, and more.
How Do Parents Pay for College?
Have you ever heard people talk about market bubbles? They occur when people are willing to pay far more for an asset that its intrinsic value, or when they validate asset prices based on implausible, or unrealistic, views of the future. They happen repeatedly throughout financial history – there was a tulip bubble in Denmark in the 1600s, and more recent bubbles have included the Dot Com bubble of the late 1990s, and the US housing bubble of the early 2000s. They happen when people believe they “can’t afford to miss out,” even when the price is irrational and they can’t afford it at all.
For years, the cost of college has grown at rates far outpacing the growth in wages, making the cost of a college degree, the asset, so high, parents are left wondering how they will ever pay for their child’s college. But it leaves me asking a more important question – is college still worth paying for?
Is College Education the Next Market Bubble?
A key element that occurs during a bubble is an economic disconnect between what you pay for an asset and the value you get in return. I believe this is going on today in the secondary education market. It is why if you are asking how parents pay for college, I would strongly encourage you to examine the following statistics and begin instead to evaluate your child’s future education as an investment decision – one that is absolutely worthwhile, but that needs to be examined relative to the return on that investment.
Key College Statistics
Before you can evaluate how much to pay for college, you need to understand what you will be getting in return. The hard part is that there are no guarantees come graduation day… or that there will even be a graduation day. So you have to inform those return expectations based on general statistics broadly available. The following statistics about the general population, wages, and graduation rates are important to consider when determining how much to pay for college.
The statistic most are familiar with is that a college degree leads to higher earning power. This is absolutely true. Full-time workers over 25 with a bachelor’s degree earned an average of $59,124 annually, 67.7% more than those with only a high school education. It also means greater job security, with higher levels of education having unemployment rates significantly below the national average.
These earnings and employment metrics are the ones everyone talks about, and why so many people pursue a college degree. What fewer people talk about before going to college, however, is that not everyone goes to college… and not everyone who goes, graduates. Today, it feels like EVERYONE goes to college. But the reality is only about 1/3 of the population over 25 has a bachelor’s degree, based on the most recent census data.
And of those who go to a 4-year college, less than 60% graduate within 6 years. This is based on data from students entering college in 2009. Women are more likely to graduate than men, and for-profit colleges graduation rates are less than half the national average.
The more selective and competitive a school is, the higher the graduation rate, while schools with open enrollment are graduating the fewest percentage of students.
Before sending your child (and thousands of dollars with them) off to college, it is important to weigh these statistics. Will they graduate? Will they achieve their earning potential? Or will they be left with significant student loans they can’t afford and living at home while they try to figure it all out?
How Much Does College Cost?
Before you can determine how to pay for college, you have to know how much college costs. The answer? It varies greatly… and it’s a lot more than when I graduated! Per the Annual Survey of Colleges, the average cost for Tuition, Fees, Room & Board for the 2017-2018 school year was $20,800 for public schools and $47,000 for private schools.
As with any average, the cost at individual schools can vary widely. As a few specific examples, for the 2018-2019 school year, the University of Texas will cost you approximately $25,000, the University of Connecticut $28,0000, both public universities. The University of Notre Dame, my alma mater, will cost $72,000 next year, an increase of 140% from when I was in school less than 20 years ago.
Assuming growth continues at current rates, a kindergartener today going to college in 2030, would expect to pay, on average, $35,000 per year at a public college and $75,000 per year at a private college.
How Do Parents Save for College?
If you have the means to save for your child’s future college education, you absolutely should. Given the numbers above, if you hope to save enough to pay for your child’s education in full, just for their undergraduate studies, you will need $130,000 to upwards of $300,000 or more.
Related Post: Are You Worried About the Cost of College?
There are tax-advantaged ways to do this – 529 plans – that allow the earnings on your savings to compound tax-free, and remain that way so long as you withdraw the funds to pay for school. You can learn more about college savings plans here, how specific 529 plans in your state may offer state tax benefits here, and a whole new type of 529 Plan, the Private College 529 Plan, that allows you to pay tuition at today’s rates.
What If I Can’t Pay for My Child’s College?
Not every parent can afford to send their child to college. And thousands of students go to college every year without parental assistance thanks to student loans. I was one of them. I had no college fund, and I paid for my entire 4 years at Notre Dame through scholarships, work-study programs and student loans.
The Federal government is one of the primary providers of student loans in the United States. When looking to obtain student loans, you should exhaust ALL federal options first, before taking on private loans. Federal loans offer flexible repayment options, loan forgiveness porgrams for some future careers, as well as subsidized loans, none of which are available via private sources.
Stafford loans offered by the government come in two types: subsidized and unsubsidized. Subsidized Stafford loans have no payments until after you graduate and the government pays interest while you are in school. You must have demonstrated financial hardship with family income less than $50,000 annually to obtain a subsidized Stafford loan. There are annual loan limits and total debt caps for undergraduate studies.
Unsubsidized Stafford loans also defer payments until after you graduate, but you are responsible for all accrued interest. These are available to all students, and also carry annual limits and total debt limits for undergraduate studies.
Stafford loans are federal loans to students. The Direct PLUS loan program offers federal loans to parents of undergraduate students. The borrower is the Parent, and unlike a private loan, the interest rate is set regardless of credit. For the 2017-2018 school year, PLUS loans are charging a 7% fixed interest rate. You may have other means of financing, like home equity loans, that are more cost effective.
Finally, the federal goverment also offers Direct Consolidation Loans. These are great when you graduate, and allow you to consolidate all your federal loans from all your years of school into one, leaving you with one payment to a single servicer per month. Private loans are not eligible for consolidation in this program.
Given the rising cost of school, and caps on federal loan programs, you may have to pursue private loans as well to fund your degree. Private loans require credit checks, are not subsidized and do not offer loan forgiveness. Most private loans are to students with parents (or other credit-worthy adult) co-signers. Some private loans now have cumulative debt limits that vary by intended degree program.
How Much Student Loan Debt is Too Much?
Student loans are a big part of what is fueling the college education bubble. The Federal government funds billions in student loans each year, primarily based on financial need, with no concern for ultimate academic achievement or future earnings potential.
Investing in the education of the population is valuable – however, when it’s done without any concern for the end result, the impact can be devastating, most especially to the student (and their families) saddled with thousands in debt they cannot afford to pay back.
About 45% of people who are no longer in college and have student loan debt said that college was not worth the cost, according to a survey from the Consumer Reports National Research Center. And students who don’t finish college are four times more likely to default on their student loans, representing 63% of all defaults.
Seven in 10 seniors who graduated from college in 2014 had student loan debt, with an average of $28,950 per borrower. Over the last 10 years, the share of those with debt rose slightly (from 65% to 69%), but the average debt balance at graduate rose at more than twice the rate of inflation. This basically means while it is costing more and students are taking on more debt to graduate, the future earnings they will earn in exchange are not keeping pace.
As a general rule, you shouldn’t allow your child to borrow more than their expected first year’s salary. Based on current low-interest rates, it will cost about 10-12% of their salary to make their loan payments if they borrow equivalent to their first year’s salary.Rule of thumb: Borrow less than your expected first year's salary
This means your child needs some idea of what they want to do when they graduate, as well as a vested commitment to school and graduating. With college costing thousands of dollars per year, gone are the days of going off to school just to find yourself.
Related Post: Money Monday: Saving for College
You can check out Payscale’s Annual College Salary Report to get a general sense of what your child can expect to earn upon graduating based on where they are going to school, as well as what degree program and eventual career they plan to pursue. Also, keep in mind the specific stats at the college you are considering – what is their retention rate, graduation rate, and average salary for the specific degree program?
A Personal Example
It can be very easy to get lost in all the statistics and data out there, so I’m sharing my personal example when I graduated compared to the experience today. When I went to Notre Dame from 2000-2004, the total cost of my degree was about $120,000. I graduated with $60,000 and my first year starting salary as an investment banking analyst was $55,000 (before my year-end bonus).
With debt just over my starting salary, even after consolidating them all at then historic low interest rates (around 2%), I was barely making ends meet when my student loan payments kicked in 6 months after graduation. I realize $55,000 is a lot of money – but big finance jobs require living in big, expensive cities. I was paying for rent, dry cleaning, and my student loans.
I even turned down my offer in NYC at the end of my internship because I knew I couldn’t afford to live there – instead, I took an offer, earning the same salary, living in less expensive Chicago.
Let’s fast forward to today – assuming the same degree and career path. The same Notre Dame degree today would cost nearly $300,000 – a 140% increase over the last 14 years. If I again had to finance half of that with student loans, I would graduate with $144,000 in student loan debt. But the same job would only earn $75,000 in my first year, only a 36% increase, and with student loan debt nearly double that.
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