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.

Investopedia

This is a little gem, an online "encyclopedia" of investment/financial terms.

Investopedia.com

It has some articles, but I found the dictionary most useful. List of Personal Finance Terms.

Very nice.

FREE Practical Money Skills educational materials

Want to teach your kids about money but don't know where to begin? Go to http://www.practicalmoneyskills.com/english/resources/about/classroom.php and click "Classroom Resources" and "Download 2 CD-Rom set (75 mb.zip)" to download and burn to a CD (cd burning software required - usually comes with a home computer), or just load right on your computer.

Some of it is repeated material. For example, the "Practical Money Skills for Life CD-ROM" is the same as Disc 2 of the classroom resources. There is also a pamphlet series, but it has only general info and I consider it more of an introduction to the more detailed lesson plans.

Disc 1 is where the good stuff is. It contains lesson plans for kids in 5 groups, preschool-2nd grade, grade 3-6, 7-12, graduates and college students, and a special needs section (the addition of this last section scored big points with me). The Macromedia Flash interface they give you is a bit clunky. Basically all the material is in html, pdf, and powerpoint files. You might find it easier to just browse the files in the directories themselves, print the pdfs and htmls, and load the powerpoints manually (I couldn't get the Flash interface to launch the powerpoint presentations). Disc 2 has some practical but basic info for financial situations you might encounter at home, all in html format. There are also some games that kids might enjoy, but the only one I tried at length was the Quiz.

It wasn't very good, and some of the information wasn't quite correct. The credit card section also didn't quiz on the most important aspects of credit cards - reading and understanding the terms. It was also very flashy and loud, and not in a good way. I would stick with disc 1.

Also, its very disorganized and difficult to find the referenced materials. Although you can download the lesson plans to a CDROM, it doesn't contain just about all of the actual materials needed to learn anything. For that you apparently need to download them individually from here . There also did not appear to be any way to take the quizzes without being online.

Even so, the lesson plans are a useful guide, but expect to do most of the actually learning materials on your own. If anyone has had any experience with this program, please share it. For the conspiratorial among us, this program was created by VISA.

Also available is the Jump$tart Coalition, an education program for children who recently issued tests of financial literacy. It is sponsored by Citibank. If there are any consumer financial awareness/education programs out there that are not created by credit card companies, please let me know.

529s get even better!

Congress recently added new advantages to the popular 529 investment plan for college savings. The savings vehicle can now accumulate interest and be drawn tax free. This is a great advantage to parents who are saving for the children's college expenses because they will not have to pay taxes on the account as it grows. Another benefit? A child can still qualify for financial aid (grants, scholarships, etc) because it is not included in their total assets. All students must submit a FAFSA that lists their assets and, in most cases as dependents, their parents assets to determine what kind of financial aid they qualify for. Once again, the 529 comes out ahead as the ideal college fund.

If you don't already know what a 529 is, you should definitely read up on them.

Why save for your children's college? I find it incredulous that some parents do not believe in saving for their kids college education. College is no longer optional, and the cost continues to rise. It is absolutely impossible for a student to work their way through college anymore. As is the case now, and will be more so in the future, the basic tuition will be more than any part-time high school graduate could possibly make.

That leaves 3 options: Scholarships, grants, and loans.

Scholarships are the ideal solution to paying for college, but here's the rub. Not all kids are going to qualify, and just because you can't get a scholarship doesn't mean you won't do well in college.

Grants are great for low income families and they can sometimes pay a very large portion of tuition. I myself used grants during college.

Loans are the worst possible way to finance college, yet everyone seems to take them for granted. You not only pay far more for your education over the long term, but you put a young adult fresh into the business world already in a mountain of debt. Graduate students, borrowing money all through college, will likely have a monthly loan payment higher than their parent's mortgage. Face it, college isn't a guarantee at a job, and everyone starts at the bottom. Despite recent polls of students whose expectations are far too high, most college grads won't be making six figures out the door. Yet that $1,000 a month loan payment is still going to be coming in the mail whether your kid is making $30,000 a year or $100,000.

If you are ready to start, you can open up a 529 online at sites such as Vanguard.com.

Moms Most Influential in Teaching Finances

Some not-so-great news for moms comes at us in this article, moms more influential than dads at teaching Americans about money.

Way to go moms! But maybe being influential isn't enough. Why? Because a Jump$tart Coalition for Personal Financial Literacy survey found that graduating seniors scored a 52% on a personal finance and economics literacy test. Oops.

Obviously these skills are not being taught in school, and although Janet Bodnar praises women for teaching Americans about finances...their kids failed. Looking at the debt and mortgage problems we adults have put ourselves in, I think we need to work a bit on our own education as well.

Do we dare ask what score parents would get if they were given the same test?

In case you didn't know (I sure didn't) April is Financial Literacy Month.

How much are we messing up our kids? - Part II

To recap, we're 20s, 30s, and 40-somethings living like our parents did 30 years of hard work later. And to do it we plunged right into a pool of consumer debt to cover our excessive spending. Negative net worth became the norm. Every time the ship begins to sink, a new loan package emerges to keep us afloat. The real estate boom gave us the cushion we needed as we refinanced to pull cash out of the equity we built in our homes. The loan officers made it sound so great. Free cash. A loan touted as a return in an investment.

Not only did we live like our parents, we surpassed them. Our generation thinks it quite normal to spend $100 a month on cable, $2,000 on a plasma screen, $150 on a DVD/VCR combo, and let's not forget the TiVo subscription and Netflix deliveries. And that's just to watch TV! Add on the high speed Internet, commercial-quality kitchen appliances, luxury bathrooms, GPS in the leather-clad SUV; and $130 a month for telephone? A cellphone is a basic necessity for all living organisms, right?

And college? 50 years ago if you couldn't afford it, you didn't go, or your worked your way in and paid with cash. Now the average student loan is around $25,000, and it's going nowhere but up. Into this upside-down financial world enters our children.

You couldn't imagine growing up without a microwave or air conditioning. Picture not being able to live without 200 channels of entertainment, contact with anyone right at your fingertips, and all the best luxuries credit can buy all the time. Our 2005 national savings rate was negative. Negative. We have it all. Financed. Our children see us not in debt and struggling to make interest payments, but as a model of how personal finance works. Debt isn't bad, it's a way of life. I can have anything I want, instantly. I deserve everything I desire. After all, we were taught how special we were, it makes only sense to pass that along to our offspring.

But what is going to happen when our children grow up and they hit the wall of the real world? How will a kid with $100,000 in student loans, $10,000 in credit card debt, $15,000 in car loans, and no savings make it on a $30,000 a year job? Unlike our generation, they won't have the option of coming to mom and dad for rescue; we'll be just as broke as they are.

TiVo doesn't look so great now. (continued...)

Who's getting rich from college?

According to the National Center for Education Statistics, 50% of all students how have financial aid loans. The average loan balance among them is $10,000. In addition, these students also have a credit card and the average balance among graduates is $2,000 (from Wiki). This is 27% of the population, who have at least a bachelors degree (source), and they're all making an average of $45,400 a year (although I certainly didn't make that much right out of college).

That's an average of $12,000 of debt on a $45k income - ie, about 27% of their yearly salary. If they consolidated that debt into a 5 year low-interest loan at say, 6% (a bit higher than college loan averages but MUCH lower than the credit card average of 13%) they would have a monthly payment of $230 on a $2600 monthly income, a debt load of over 8%.

These are averages. There are many with very low loan balances. I myself have a student loan of around $2k. I know another recent graduate however who has a loan balance (from graduate school + undergrad) of over $200k! That's almost twice what my house cost! What I wonder is, among all these graduates (who make an average of $99k/yr) how many have $150-200k in loan debt, plus credit card debt, but don't have any job? A degree is by no means a guarantee of a job?

So where is all of this money going? Tuition is skyrocketing at an alarming rate, by 14% some years and an average of 4.2% over the last decade or so after adjusting for inflation. 6-7% increases! And is college really preparing them for the real working environment? Many twentysomethings don't think so. They just know that they graduated, are trying to get a job, and may have to move back home because all their income goes to their debt. If you're on the wrong side of the bell curve for those national averages, getting a start in life can be tough indeed.

What needs to happen? In my opinion, credit card companies need to be banned from campuses. 18 year olds with the new found power of being considered "adults" are coerced into credit cards and high priced cellphone plans with gimmicks like free backpacks and beer mugs. If a company wants to set up shop somewhere and get financial-unsavvy students to sell their souls, do it off campus. They pay the colleges to educate them, not sucker them by luring them into contracts with little to no knowledge of what they mean. Educate your students about credit and debt, don't throw them into the lions den so they can "learn the hard way".

Colleges also need to be scrutinized for overspending. Where is the money going? Should university research be forced to rely more on privately funded grants instead of university funds? Why not let some students opt out of paying for those ridiculous sports teams. Are ticket sales for the football games really covering the expense of the multi-million (billion?) dollar stadiums or are the students? And if they are, do they also cover all the unprofitable college sports as well?

Professors aren't exactly getting rich, but how about the administration? What kind of salary does the dean pull in? Are they living lavishly like the local ISD superintendents who are given $300k+ a year with $80k bonuses?

Is college really costing what it needs to? Or are people getting rich off of young students coming into their careers already upsidedown?

How much are we messing up our kids? - Part I

If you haven't already, bookmark this website: http://www.federalreserve.gov/releases/. It contains a mountain of financial statistics for the country. We have a revolving outstanding credit card debt in this country of about $3,000 per person. When you look at the economy and how the average American is keeping themselves in the middle class by spending more than they earn you have to wonder what kind of message this sends to our kids.

Maybe parents don't even let their kids in on their dirty little secret: we're in debt up to our eyeballs. And herein lies the problem. Our generation (20s-40s) grew up out of the economic boom and social revolutions of the 50s and 60s. We grew up with microwaves, cable TV, air conditioning in every home and two cars in every garage. The feminist movement and medical breakthroughs in easily-accessible contraceptives meant that couples were having children on their own terms, later in life and when they were more financially stable.

The result is a bunch of kids who never knew the 'lean years' of their parents, when it was a tough job just to put food on the table. Dad (and usually mom) had one good paying job, a nice pension and/or 401k and looked forward to a social security check. Before the sudden slew of sneaky credit cards, their credit was relatively good and their revolving debt low. "Debt" was a mortgage, and a car payment. Add to it the self-esteem movement where every kid was drilled into believing they could do anything, could have anything, and could be the best at whatever they wanted. And thanks to mom and dad's financial successes, we actually did have it all.

So here we were, born into this lavish lifestyle, and suddenly we're out on our own. But something went wrong. Where were the six figure jobs? Where are the assets to buy that new car? Wait...I have to build credit? However the struggles, we were told from the beginning that we were entitled. We deserve that great job, that big house, that luxury car. We can't have it? Blasphemy!

Enter the credit card industry, our caped hero to rescue us from harsh reality. Can't afford college? Finance it! Can't afford that car? Finance it! Need groceries, gas, a rent payment, some new clothes, a fancy dinner, but don't have the cash? Finance it! Interest? Don't worry about that, your monthly payment for all this is only $20 a month. Look at that! We can live just like our parents, right out of the gate!

And then we started having our own kids. (continued...)

Mandatory financial education

I would fully support mandatory financial education at all stages of schooling, from elementary on up to high school. I would also happily accept an increased property tax to cover the cost. Consider it an investment. A few dollars today to ensure that I'm not suffering through inflated interest rates caused by the poor financial decisions of the upcoming generation.

There was never any real finance classes when I was growing up. A few teachers spent some time teaching us about stocks and managing a checkbook. No one ever mentioned what a W2 was, or how to fill one out, or what all those "tax" things it mentioned were. Every kid knows what taxes are, the government takes some of our money to do...well, whatever it does with it. But how many kids are explained to that taxes are fully 100% their responsibility, right down to the fees and interest they are charged should they make a mistake and short-change uncle Sam. Even if the IRS makes a mistake it falls to the taxpayer.

Taxes are perhaps the most important aspect of financial planning, one that can have a profound affect on your security. Defaulting on a credit card may leave you with bad credit but unlike the IRS, Citibank can't dip its hand into your savings account and take whatever it feels you owe it.

How many kids these days are going to graduate from High School knowing how to choose a 401k plan? Or understand how a two-cycle average daily balance interest charge works? Or how much mortgage amortization costs for a young loan? Not many, I'd imagine.

A week out of high school and these kids have entered a world where their contracts are binding, one mistake can put them into debt for decades and the burden for retirement savings is placed squarely on them. Suddenly they have to build credit but know what compounded interest is, let alone how it's calculated. Many adults have trouble with all of it.

It's no wonder we're in trouble. We're a nation of uneducated consumers breeding uneducated consumers surrounded by money-hungry corporations and institutions whose terms and conditions are constantly reviewed by a panel of experts with the single goal of taking as much money from our wallets as possible. How are we supposed to compete with that?

Education is the only line of defense we have against the onslaught of confusing contracts and hidden fees. The best place to begin this education is early in the classroom, or better yet; at home.