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Should You Save To Pay For Your Kid’s College Expenses?

10 November 2006

It’s a pretty standard accepted practice for parents to sock away money to pay for their children’s college expenses. But Suze Orman raises a good point in a mostly unrelated article:

Instead, a good financial advisor will assess whether you should be saving for college at all. If you aren’t already maxing out on all your own retirement savings options, or you have a big chunk of high-interest credit card debt, you have no business putting your kids’ college costs ahead of getting your own finances in good shape.

A financial advisor who has your best interests at heart — and your kids’ for that matter — will explain that if you retire without sufficient income to live on, or in serious debt, you’re going to be a financial burden to your children.

This is kind of an obvious point, but it’s become pretty much the standard for all parents to try to save money for their children’s college expenses. My suggestion is that there are a lot of other reasons why you might not want to, and you should think through this instead of assuming it’s your duty:

1) Student loans are easy to get. True, college is more and more expensive. But it’s gotten to the point where unless you’re making a ton of money, it’s a big sacrifice for a normal family to save the hundred thousand or so that it takes to get through a four-year private school. But consider the alternative – these days you can get student loans for almost the full amount at low interest rates.

2) Multiple children make it a lot harder. Are you really going to save $100,000 for each kid? They’re going to expect roughly equal assistance, and you may not be able to give it.

3) There are cheaper options. In my experience, in going to graduate school you should pick the most prestigious school, even if it’s more expensive. That’s assuming you are going into a career where you can pay back the loans – if you’re getting an art history PhD, it’s not a good idea. But for your undergraduate degree, I don’t think it matters all that much if you went to a state school versus an elite private university. Admission to graduate school will weigh your test scores a lot more heavily than the brand name. There’s some benefit to it – but I’m not sure it’s worth the cost in the long run if you really can’t afford the more expensive school. The state version may be a few thousand a year versus $30,000.

4) They don’t have to go for four years. Graduating in three is easy. That cuts down on the expected expenses by 25%, immediately.

5) You may genuinely not be able to afford it. If you aren’t saving 10% of your money for your own retirement, minimum, you shouldn’t be saving to pay for your kid’s college. Sounds harsh, but think about the ways the world is changing. The traditional safety net in old age was having your kids take care of you. You saved no money, you had fourteen kids, and a few of them lived and were successful enough that you could live with them when you got older (if you got older). That doesn’t work anymore. You may only have one or two kids – and they may not WANT to take care of you in old age. It’s not as normal to have a random grandparent living in the house. Your kids may die, or get sick or disabled, or be shiftless bums who can’t even take care of themselves, let alone you. With only two shots at it, your retirement just isn’t safe that way. You have to be prepared to pay your own way. And if you’re on an average income, it will be very hard to do that when saving for college for multiple children.

6) You can make smaller investments that will pay off down the line by reducing college expenses. That $400 SAT prep course could get your kid a scholarship, and then you’re saving tons of money. Those Advanced Placement courses? $50 to take the test – and eliminate $5,000 worth of college expenses by not having to take another course at full price. Making the cheap investments down the line will help hold down costs to a level where your children can manage it on their own.

7) Some kids treat college as if it’s just a four-year party. You won’t know until it happens, and you may not even know then. If your kid isn’t assuming some of the responsibility themselves, they may not worry too much about partying on your dime. If they’re paying for some of it, or taking out loans, it’s a different story. Why pay a ton of money for someone to get drunk every weekend and get a credential at the end?

What about the reasons why you might want to save for your kids? There are some situations where I think that hands-down it’s a good idea. Here are some of those:

1) You make so much money that you wouldn’t even notice it missing. If you CAN pay for your kid’s college expenses, why not? It’s not a bad thing to do it. Making sure they get a good education and a head start on life is something all parents want – which is why so many pony up. If you’re not going to miss the money, then I’d go ahead and do it. If you’re worried about personal responsibility, then condition the checks on good grades (or more realistically, condition any money given for “fun”).

2) You make enough money that it hurts your kid’s ability to get financial aid. This is true to some extent – parental salary can reduce eligibility for student loans if it’s too high. You’re damaging your child’s ability to get these loans, and if you’ve got enough income that your kid can’t qualify for financial aid, you probably can figure out a way to pay for at least some of their expenses.

3) It’s so cheap that you can afford it easily. If little Susie goes to the $2500 a year state school, then why not pay for it? You don’t have to make a big savings effort, you just have to cut back a little.

4) You save for part of the costs, but not all of them. I think this is ultimately the best approach. Most people just can’t save the full amount it would take at the most expensive college. And in reality you’re making a rough guess when you make this decision. You may have a four year old, and you have to decide whether they need enough money to go to Harvard or junior college. You just don’t know. I would try to save a smaller fund that would help them get started. $10,000 or $15,000 in today’s money seems about right. It won’t pay for everything – but it will give them a guaranteed minimum that if they pick a cheap school, they’ll be able to go. If they want something more, then they can borrow, get a scholarship, or work. Those aren’t bad options – they may not all be viable for any particular person. But there will be a lot of ways out there to supplement the money you’ve put aside – and in the end, most people are going to have to bear at least some of the responsibility themselves. All you can do is try to put your kids on a steady footing when they first go out on their own.

Discuss this in the Free the Drones Forums.

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    9 Responses to “Should You Save To Pay For Your Kid’s College Expenses?”

  1. Jeremy Says:

    The way I see it, you can get a loan to buy a house, buy a car, or buy an education. You can’t get a loan to pay for retirement.

    That should come first, and if you can save for college education without hampering your retirement savings, then go for it.

    And if someone really wants to go to college and their parents didn’t save up thousands of dollars for them, they can still go. Student loans, grants, scholarships, and the easiest way to afford college… get a job. When I went to college, most of my friends had no assistance from their parents. A combination of some student loans and working part-time was more than sufficient to make it through 4 years.

    While I’d love to be able to provide for my kids a full education and allow them to enter the adult world completely debt free, I’m not going to bet my retirement that they will graduate, become successful, and count on them taking care of me when I run out of retirement assets.

  2. Lazy Man and Money Says:

    “Graduating in three is easy?” If it were that easy, I think more people would do it. I think it was less than 1% at my private college.

    I think your undergrate theory depends on career choice and if the person is going to graduate school. I don’t think a software engineer from MIT (undergraduate) would get the same kind of job offers as one from U of Mass (undergraduate). Of course at some point skill takes over and one would hope that there might be more skill or connections developed from the more elite university

  3. NLG Says:

    I think the last option is the best choice. IMO, a child will be more successful in life and school. Also, if their money is going to pay for the classes, I think they will take them more seriously, and be less inclined to waste it on beer or otherwise. This was the case in my situation.

  4. kneukm03 Says:

    I’ll stand by the statement that I think it’s not that hard to graduate in three years, although with the caveat that there are some majors where it is more difficult to do so. If you take summer school (which at least where I went was far cheaper than classes during the regular school year) or take an extra class each semester, it’s not that much more work. If you’re going to school full time and not taking on a job to pay for it, most of the recommended schedules are a little light.

    Why don’t more people do it? It’s not the fun option, for one. According to this article, at public universities only a minority of students are even graduating in four years anymore:

    It’s a trend, and it’s partly because of the financial aid. No immediate costs and no accountability means people want to stick around for the free ride as long as possible. I certainly don’t think it’s hard to graduate in 5 years, but lots of people aren’t even doing that.

    I will grant you your point about MIT, though. Mainly I’m thinking of it from a liberal arts perspective because that’s what I did – I got a useless degree that required grad school to make it financially viable. No one was going to hire me out of undergrad for a good salary regardless of where I went. But as you point out, there are some fields where your undergraduate degree is actually training for the job – all the engineering degrees come to mind, as well as computer science, and I’m sure there are others. In that case, I think you’re better off with the more prestigious degree. Don’t get me wrong, I went to a good, expensive, private university – I just think I’d have been a lot better off saving my money.

  5. Becky Says:

    This post surprised *and* intrigued me. Good post.

  6. DivaJean Says:

    We have a different way that we are saving for our kids college.

    We have adopted kids from NY State’s foster children services and receive a monthly stipend for two of our 3 kids. We do not use this money AT ALL. It gets divided into 3 and banked for their college. The kids are very young now and we really can get by without needing to tap into this money- we might need to use some of it for tutoring, specialty classes, whatever when they are older (one will definately want music lessons and shows talent already; higher level classes will cost $$$).

    Meanwhile we are saving our 15% of my income (I’m the only working parent right now) for retirement and my stay at home partner economizes like crazy.

  7. The Financial Flow » Should You Save To Pay For Your Kid?s College Expenses? Says:

    [...] Should You Save To Pay For Your Kid?s College Expenses? It’s a pretty standard accepted practice for parents to sock away money to pay for their children’s college expenses. But Suze Orman raises a good point in a mostly unrelated article:Instead, a good financial advisor will assess whether you should be saving for college at all. If you aren’t already maxing out on all your [.] (more) [...]

  8. kneukm03 Says:

    That’s a great plan DivaJean. Obviously not available to everyone but it’s a really commendable bit of budgeting to manage things so that the checks get saved up to start out your kids without interfering with your own retirement.

  9. John E Says:

    Saving every little bit is really important imo. you should check out the college savings sites like UPromies and Little Grad, and Baby Mint.