At first glance, it might seem like a great gift for parents to fund 100% of their child’s college education.
College can provide a leg-up in the world, and what a joy for a student to graduate without loans! Especially now, when students in the class of 2015 graduated with an average of $35,000 in student loan debt, according to an analysis of government data by Edvisors.
This line of thinking is reasonable if the parents can afford to pay for college in full. However, when students don’t have any financial skin in the game, an opportunity for an impactful teaching moment is lost. Deciding on a career track, applying to college, and learning how to pay for it are the first major financial decisions a young person has to make.
It’s a great time for parents to educate children just when kids need financial education the most! After all, there is a reason financial planners, like me, when advising parents on their estate planning documents, never recommend leaving an 18-year-old full access to life insurance proceeds or an inheritance.
At age 18 or 19, most kids don’t have the experience to handle big money decisions. So use their college experience to teach them.
Paying for college is serious business. According to the College Board, average “total charges” for an in-state public college for 2016-2017 is $35,370. For private colleges, that figure jumps to $45,370 per year. If you are able to get your bachelor’s degree in four years, a degree can cost over $140K.
For many parents, the cost is a huge sacrifice. In fact, according to a Forbes article, many millennials end up paying those loans back for their parents. This kind of investment must make business sense for both parties, the parents and the student. Involve in your teen in the process and provide guidance.
Whether it’s taking out student loans or working part time or summers to offset the cost of an education, parents need to use the college experience to teach their kids important money lessons.
Here are a few ideas:
Taking out loans gives students a reality check, even if the loans are small.
There is a grace period of six months after a student graduates for federal student loans. This means they will need their college degree to directly translate into employment that compensates them well enough to make the payments. The six-month timeline is a positive monkey on the back for students.
Work with your student to research the current employment climate and determine which careers are supported by which college majors. Consider a track for top-paying jobs in the current economy that fits your child’s interests and skills.
The money lesson: Return on investment.
Students (and parents) need to consider return on investment when allocating significant resources to any investment, especially toward your most valuable financial resource – your lifetime income potential!
The money lesson: Keep your overhead low.
The money lesson: Never borrow without the ability to pay the money back, and at least a plan to do so. Lenders are using a student’s future earning capability as the collateral for the loan.
Work on a plan to graduate in four years versus five to save tens of thousands of dollars. A report by Complete College America reveals that only 50% of full-time students at a huge majority of public colleges graduate in four years. Many take six years or don’t complete their degree at all.
The money lesson: Take out as little debt as possible to get the job done. Along the same lines, spend as little as possible to get the job done.
I might be preaching to the choir, since 7 out of 10 students graduate with some kind of student loan debt, according to a 2015 study from The Institute for College Access & Success. If your student takes out loans because they have to, the financial education component is even more important.
Parents, don’t waste this opportunity.