Taking care of your offspring

I may have given the impression in yesterday’s story closing that there are real ways out of the catch 22 when it comes to spending retirement savings on off spring college tuitions, but in truth there are no escapes if you did not plan the eventuality long in advance, like starting to put a college fund together the day your children are born. Short of that there is only advice about steps you can take to avoid having to use savings for retirement for college education and while everyone’s family and finances differ, you may consider taking some or all of the following eight steps.

1. Be Smart and Shop Around

It all starts with shopping and pricing smart. In conjunction with The College Board, most college websites include a net price calculator. Parents and students can use them to compare approximate costs of attendance, estimated grant and gift aid, and the net cost families should expect to pay out of pocket or via loans. These calculators require students to enter financial details about themselves and their parents to best predict costs, and they also factor in non-tuition expenses. USNews put an extensive list of net price calculators together.

Be real, you wouldn’t buy a vacation trip without knowing the cost, so why commit to paying for a specific college without seeing the real price tag? In real life, some parents can afford the cost of prestigious universities, and some cannot. While non-need-based financial aid is sometimes available for particularly gifted students or athletes, most children and their parents shouldn’t rely on that. Most of the above net price calculators open their communication with the advice to get the previous year’s tax return, which makes it abundantly clear that education is still a prosperity game here in the US. In today’s world it seems to be the required admission level to the middle class. It’s hard to deny your off spring anything this important, but…if you can’t pay for your child’s top-choice school or if you can only afford to pay in part, tell him or her. Your love and support as a mother or father is far more important than your spot on the economic ladder. Plus, being upfront about what you can and can’t afford will teach your children to do the same—an invaluable lesson. Shop around and price out alternatives. Graduates of prestigious universities may often earn more in this “class-less society”, but nowhere on any diploma is there an asterisk noting, “you first spent two years at a junior college getting excellent grades before you got accepted.”

2. Select Majors Carefully

Of course if you can afford to indulge your kid’s socio-intellectual whims and have no problem paying for an education that results in a job as bartender, great! If not, you should take stock of realistic post-college job options as well as your kid’s aptitudes, skills, and desires. A bit of ability testing in advance of majors’ selections, would be money well spend.

The Center for College Affordability and Productivity (CCAP) published a fascinating report titled Why Are College Graduates Underemployed?”,  in which it analyzed how students with different majors fare economically. Though this of course isn’t the whole story, this sort of information is nevertheless very important for students to consider when choosing a major. And yes, it’s important to encourage your kids to do what they love to do. If they have the passion that it takes, they’ll be good at it and make a good living. After all life is a one time opportunity much bigger than the sum of its components. And a college degree is merely a component.

3. Avoid the Country Club College

The CCAP study highlights what college life is for many: a really expensive party. For a large portion of the college-going population, attendance is only partly motivated by human capital investment criteria, namely a desire to ultimately obtain a good job and a ticket to a relatively affluent middle class (or better) life. Those students go to college also to have fun—to meet new friends, to use top-of-the-line exercise machines to relax, to party, to get drunk, and have sex. The “country-clubization” of higher education … is important to many, particularly for the relatively affluent families who can afford to let their kids indulge in such activities. Some schools explicitly cater to students for whom this social/consumption dimension is very important.

Those who came of age in the ‘60s and ‘70s saw college as a fun rite of passage. They were fortunate to graduate into a growing economy where jobs were plentiful. A lot has changed since then. In 1960 almost 60% of the population had less than a high school diploma; another 33 plus percent had high school diplomas and only a little over 8% of the population had a bachelor’s degree or higher. Well that market has become vastly more competitive as is shown in this figure.


So ask yourself the question: Is a four- to six-year party with no job at the end worth the price? Will the college experience described above prepare your kids to be financially and emotionally independent? Not likely. Of course, that doesn’t mean college shouldn’t be fun. However, setting ambitious expectations for your child’s academic performance, capping the number of semesters you’ll pay for, and requiring your children to cover at least part of the tuition—whether from summer jobs or part-time work during the school year—can make college a good investment for everyone. Your kids will still have fun… trust me.

 4. Every child should be a stakeholder in its own education

Even if you can cover 100% of your children’s college expenses without flinching, students are more responsible when they’re spending their own money. It’s basic human nature. There are countless ways to make your children financial stakeholders: requiring them to cover a set dollar amount each semester; creating financial incentives for good grades and timely graduation; or only paying for tuition, room, and board, but not beer, spring break, or a car. Pick your flavor.

5. Sit down and Budget together

Oh I’ve listened to many a parent’s horror story about giving their kids a credit card without a daily expense monitor and the pictures painted were devastating. So here is a piece of advice. Write a college budget with your children, no matter whose money you’re spending. Learning to budget for food, clothes, gas, and fun is essential to adulthood. Help them prepare and monitor monthly and annual budgets and insist on regular updates. Be explicit from the outset that there are strings attached to your money, including sticking to a transparent budget. Don’t fuss over every pizza purchase (or your children will quickly learn about creative accounting), but do review ways to save on larger purchases and suggest places to cut if they routinely cut it close each month. If you don’t teach your children to budget during college, expect them to be on your household budget long after graduation.

6. Don’t you Dare touch your IRA/401(k)

While it is relatively easy to tap into IRAs, 401(k)s, and the like, just don’t do it. They’re safe havens for non-taxable compounding, which is how retirement money grows fast. The deal you want to cut with your children is: you will take care of your retirement so they won’t have to support you in old age. Keep your end of the bargain.

7. Start Preparing Early

529 plans, which are operated by the states and some educational institutions, provide a tax-advantaged way to start saving early. Consider replacing an over-abundance of toys received during birthdays, special holidays and so on to be dropped for contributions to college funds. Of course don’t deny a toddler a toy tool to learn, but don’t have a room full of toys either. I’m in the phase of being ‘papa’ to a growing number of grandchildren and sometimes I just have to shake my head when I see the number of toys received on a birthday; we’re talking a combined value of many hundreds of dollars per event. Of course I’m standing lonely in the dessert with my opinion but most of the money grandchildren receive from their grandparents and even uncles and aunts should go into a college fund. It’s an easy way to introduce kids to saving and helps put an early dent in college expenses.

8. Don’t fret if you just can’t pay

If you simply cannot fund a college education and retirement, don’t ignore the facts. Talk to your children and show them the numbers. It’s a teaching opportunity parents shouldn’t overlook. Most kids get it. Realign their expectations early, and most will take on some or all of the responsibility for college costs without complaint. Once the plain facts are clear, you can build a plan together. Maybe a part-time job, a less expensive school, and/or community college is in order.

There are ways to fund a college degree without drowning in student loans. Here is a list of Best Values , put together by the Center for College Affordability. The only warning I see is that the top 5 value schools are all military related, which seems to be a sign of the growing empire (but that’s another story for another day).

Do not give up your retirement savings to send your children to college.

Any child who would ask or allow you to do that has a distorted sense of life’s values. Compromise where you can, but there comes a time when you must cut the financial cord so you both can survive. My parents summed it up this way: “It’s the job of parents to help their children learn to survive and grow on their own.”

They installed in us the understanding that every generation needs to carry its own load. I grew up in the 50s and 60s; in my home country college was mostly paid for by public funds with a small contribution from the parents. I fear for our kids and grand kids when they come face to face with the reality of the enormous unfunded liabilities that have been created since. The first scenes of this drama are already unfolding as the Class of 2014 enters the labor market. But that is for tomorrow when I will tell you about ‘the Commencement Speech Nobody Wants to Hear’.