Wednesday, October 10, 2007

Will you send your kid to college?

Bankrate has an excellent article about a survey of parents on whether they can afford to send their kids to college. It also looks at why they may or may not be able to.

Most striking is how they intend to pay for their kid's college. Many are willing to forgo their own retirement plans. Almost half of them plan to take out a personal loan, and a quarter of parents want to use a home equity loan. Together, this is a whopping 3/4 of parents who plan to fund their children's college tuition by borrowing money.

Here's a nice college tuition calculator, which shows us that a 4 year in state college will cost around $140k assuming you have a baby now, and he or she will go to college in roughly 20 years.

At a meager 5% with a 20 year term, that loan will cost those parents about $900 a month after their young one graduates. The 40% of parents who plan to take extra jobs will certainly need them to pay that bill.

Now here is the difference between being in debt, and saving and taking control of your money.

That same tuition would be paid in full, with cash, if the parents saved just $250 a month from the time that the kid is born.

Taken as a whole, the results seem to point to an unavoidable trap where parents either secure their children's futures or their own. "The poll illustrates that for many households, paying for college will mean sacrificing their long-term financial security by taking out second mortgages or personal loans," says Draut. "This is particularly true for those parents on the cusp of retirement age, who need to focus on securing their own financial future for retirement."
The real problem is that they didn't plan ahead. They didn't save. They didn't manage their money. Instead of looking at the big picture, they spent all they had and made themselves utterly dependent on the credit industry.

$250 a month vs $900 a month...for 20 years. That's what embracing debt has in store for you. Is that an unavoidable trap? No, this is a trap that you build yourself.


Mike, Nicki, and Josh said...

My favorite comments are from fellow parents who say that it's the kid's responsibility to pay for his/her own college costs; saying that the kid won't appreciate it unless they do it themselves, or that the parent had to pay his/her own way and although it may be hard their kids will have to also.

Ridiculous. Since tuition costs are increasing at a rate much higher than inflation, it's comparing apples to oranges. A few years ago, it was do-able for someone to pay for their own schooling. In the future, it won't be if things continue as is. America's already losing a lot of tech-savvy college grad foreigners who go back to their native lands after getting educated in the US. If parents don't help foot the bill later, we'll be falling behind the rest of the world even further when our kids won't be able to afford the education in the first place.

I was lucky to get help from my folks... and despite what some people say, I appreciate the heck out of that help. And now, I'm paying forward that help to my own kid so that he doesn't have to do it all on his own, too.

Mrs. Micah said...

I intend to help my (hypothetical) kids become well educated in highschool and before so that they can get scholarships (like I did). But I also plan to start saving for them, say in 529s, from early early on. I don't want them to end up with more debt than they can bear.

Beyond the Consumer said...

I don't like the idea of relying on possible scholarships, myself. Getting meaningful scholarships is pretty competitive. It would be great, but I have to accept that my future kid just might not be that bright. :D

Jim said...

My parents did not save or pay for my college education. Should I have expected them to? Since college is expensive, they suggested I save money for it. So I started saving in my teens and went off to college. After three semesters my entire college savings was depleted. I resorted to the federal student loans at a low APR under 3%. Along with scholarships and grants I was able to get through.

It has been a few years now and I am slowly paying back the debt from college along with my credit cards. If my parents would have paid for college for me, I would not owe 2/3 of my debt. My wife saved nothing and borrowed everything so we will be paying those long after mine are gone. Our kids will have some form of college savings so they do not have to go through what we are. That's my two cents on this.

Mike, Nicki, and Josh said...

Great thing about 529s is that they are in the contributor's name, not the beneficiary's. So when it comes to college time, if my son is smart, lucky, or athletically talented and can get scholarships or loans through those means, then the savings we have in his 529 don't impact his ability to qualify for those other goodies. If my kid isn't any of the above, then we'll have a safety net for at least part of his education with that 529 savings. Seems like a no brainer to me.

Jim, IMHO, your parents did not have an obligation to help fund your college and, no, you didn't have any right to expect them to. to me though, it's a no brainer. In this day and age, college graduates seem to be moving back in with their parents for years after graduation because they can't afford to get started in the real world. What better gift to a kid than to help with college costs, because I don't want my son moving back in with me once school is done unless its absolutely necessary.

Kudos to you and your wife for getting through on your own and I respect that you're planning to help your kids after taking the hard road yourself.