Hi there everyone.
I have been going through changes. Since my last post, I experienced the loss of my father, prayed as my mother dealt with a bout of pneumonia that would not go away, and finally, experienced the loss of a dear aunt who in all respects was the glue that kept my maternal family connected over the last 40+ years. I have spent the time dealing with a roller coaster of emotions and, in full circle fashion, I find myself back here to get back into discussion mode. I am very sorry about the hiatus and hope that we can pick up on things. The experiences in question have given me many topics that I want to discuss in upcoming posts.
Now, let’s talk about today’s topic – College, the financial impacts of the decisions being made, and why we need to rethink the way we approach it.
College – A Voyage to Higher Learning or A Rite of Passage?
As the end of the summer months are past us and the fall is underway, many families have completed an annual rite of passage otherwise known as college move-in. It is a time of pride, satisfaction, appreciation, and anxiety for what lies ahead – college. In 2017, 64.5% of US high school graduates matriculated to college, slightly lower from a high of 70.1% in 2009. As the statistics suggest, college is now identified by many families as the main pathway to a professional career across the US labor market. For many families, it is believed that in order to get a good paying job, you have to go to and graduate from college.
Being a college graduate myself, I totally agree with this sentiment. However, time and my experience as a financial advisor has taught me many things about the journey into higher education – (1) it can be an expensive trip (college tuition and fees have increased by 63% between January 2006 and July 2016; college textbook prices increased by 88% and room and board expenses increased by 51%), (2) bad choices can have effects that will haunt you and your kids for years to come (imagine paying student loans for a class that you dropped 10 years ago), and the toughest pill to swallow, (3) college is not for everyone.
With that said, I feel that a post is warranted to have a frank discussion about higher education and the mindset parents need to have when it comes to making smart, educated choices concerning one of the largest investments of your (or your child’s/dependent’s) life.
Let Me Tell You a Story
To illustrate part of the issue, let me start off things with a story. To protect privacy, I will not reveal the client’s name or sex, the client’s child’s name or sex, or the educational institutions involved. The only thing that I will reveal is that the schools in question are located in New Jersey.
In April of this year, while returning a tax return and records to a client, the client appeared distraught and withdrawn.
“What’s wrong?” I asked, sensing the client’s distress.
“[Child] didn’t get into [School A].”
“So sorry to hear.” was my reply, as I tried my best to be sympathetic. “How did [child] fare with the other choices?”
“Well, [child] got into [College B], but [child] would have to do a summer program out of pocket just to be able to take regular college courses in the Fall.”
Note: College A is a public university with an estimated annual cost (in-state tuition with room and board) of $26,000. College B is a private university with an estimated annual cost of $58,000. Both colleges are lower tier nationally ranked (i.e., ranked 100+) and comparable in college rankings with no distinguishable difference in the quality of education.
As the client is a tax client and not a financial planning/investment advisory client, I could only do my best console the client with encouraging words like “Congrats on the acceptance.” and “I’m sure that once the acceptances come in, you guys will make the best decision.” However, the advisor and financial counselor in me would have another conversation, and it would touch on the following topics:
A Different Take on Higher Education
In looking at the scenario I presented, along with other issues that I think are pertinent, here are the areas that I want parents and students alike to consider as they make decisions with respect to College:
Choosing a college based emotion is not a good idea – I see it too often. Parents and their children making a choice in college based on pride – focusing more on the name, the perceived prestige of the school, and the “experience” that the young adult will have vs. the education that he or she will receive. And colleges are in on the masquerade as well, by spending inordinate amounts of money on amenities rather than on strengthening curriculums with tenured professors, etc. Remember that college is not “young adult sleepaway camp.” It is the place that you are investing money to prepare your child for the professional lives that they will embark upon. The key words are “investment” and “education” here. While making friends and being in an environment where your child will feel comfortable and thrive are important, the ability to develop core 21st-century workplace skills like public speaking, collaboration, growth mindset, and teamwork is much more critical for long-term success post-college. Keep your eye on the ball.
Be careful with name brands – Did your child get into Georgetown and MIT? Which school would you choose? All logic would point to MIT given its name and eminence. What about getting into Georgetown and Brown? Brown is an Ivy League school, so would you choose Brown, right? Not necessarily. Studies show that students that get accepted to top schools like Harvard and MIT, but for one reason or another don’t attend (i.e., go to Georgetown or Emory instead), have had similar career success/outcomes relative to those that did go. So, rejoice that your child got into a top-tier school, but take a hard look at academics, costs, college quality of life, and career prospects when making your ultimate school choice.
There’s nothing wrong with Community College – In the past, I’ve heard jokes about community college. Chris Rock’s joke that community college “was like a disco with books” come to mind (“Here’s ten dollars. Let me get my learn on.”). All jokes aside, with the mounting costs of college and with a cohort of graduating students unsure of what they want to do and whether they will succeed in college right out of high school, enrolling in community college is a relatively inexpensive and prudent way to stick your toe into the deep end of the college/university pool.
It’s not how you start, it’s how you finish – To add to the value of community college, if a student does well and desires to continue on, most state colleges and universities guarantee acceptance of a quality student (GPA of 3.0 or better) and the credits they earned while in community college. Imagine getting a Rutgers University degree for nearly half the cost by doing two years in community college, doing well and transferring over. This is also an ideal approach for families who don’t have the funds for college and prefer to not take loans. Students can work and take classes, earn credits on their schedule and as they progress, matriculate to a 4-year college and make it work financially.
All kids are not built for college, and that’s ok – In his controversial book, Real Education, Charles Murray has argued that 50% of the students currently in college don’t belong there. His rationale is based on the historical population that colleges once housed – 20% of graduating seniors nationwide. The other cohorts historically went to professional school, apprenticeships in certain vocations, factory jobs or marriage and homemaking for young, newly wedded women. Obviously, those days are gone, and the US economy has moved from a manufacturing one to a service-based one. However, as Murray argues, archaic school systems have been incomparable in educational development, leading the production of graduates that are not ready for the rigors of college ( see the attached article). As there are no places for these graduates to go in this economy, colleges have stepped up to take them in. By admitting students who require more remedial courses before even engaging in college-level courses (more than 50% nationwide), it is argued that these students water down the rigor of college curriculum for those that do belong there (the aforementioned original 20%), and the nation’s education system suffers for it.
What is also lost is that students that otherwise would make excellent mechanics, plumbers, electricians, and construction workers miss the opportunity to develop in this vocation, while current professionals age without competent successors. In evaluating “no college required” vocations as an option after college, have a heart-to-heart conversation with your children. See what their passions are. Many careers can be realized without college (or very little of it). Exploring such opportunities while taking a community college course or two can be one way to test the waters on such vocations. The key is to not close your mind to the opportunity.
Important Financial Planning for Families with College-Age Children
Please make sure that you take note of the following financial planning tips when considering college with your young adult children:
- Wrinkles in the new Tax Law – The Tax Cuts and Jobs Act of 2017 have temporarily changed tax deduction rules to limit home equity borrowing to (a) home acquisition and improvement purposes and (b) the difference between $750,000 and the 1st lien mortgage outstanding. Therefore, it is important to know that you cannot take out a home equity loan for educational purposes and get a deduction on that interest. Consult your tax professional on how to deal with grandfathered HELOCs that were taken out or established prior to 12/15/2017.
- Avoid Private Loans – While many of the private loan companies have designed their products to match the look and feel of federal student loans, many of them lack key provisions that borrowers benefit from, such as deferments, forbearances, forgiveness provisions, and programs like the Public Service Forgiveness Program that only come from federal loans. Private loans should be a funding source of last resort.
- Protect yourself from Loan Liabilities – If you find yourself co-signing on a private student loan, consider securing term life insurance on your child to ensure that the insurance pays off the loan in the event that the child dies unexpectedly. As a future post of mine will discuss, securing permanent coverage for a college student or a new graduate is a sound financial strategy to execute for your children’s benefit.
- Critical Financial Planning Documents – All Parents that are providing financial assistance to students should ensure that the following financial documents are in place: (a) a Durable Power of Attorney on file both locally and in the state where your child attends school (if the child attends school out of state), and (b) a valid Health Care Proxy (aka power of attorney for health care). Why? When your child turns 18, your child is an adult (at least in the eyes of the law) and is afforded certain rights of privacy, namely their financial and healthcare affairs. These documents allow you to assist your child in the event your child is unable to attend to these matters due to incapacitation. The Durable Power of Attorney allows you as the financial supporting parent the ability to step in to deal with your child’s financial and school affairs on your child’s behalf. The “durable” element to the power attorney specifies that this power remains in place in the event that your child is incapacitated (either due to a medical emergency, accident, or illness). The Health Care Proxy allows the parents to receive your child’s information from health professionals and make medical decisions for your child. The cost to draw up these agreements range from $300 – $600 and should be in place before your child steps foot on a college campus.
Well, that’s all I have to share for now. Thank you so much for allowing me to share my post with you. Please feel free to reach out with questions or suggestions for new topis that you would like more information on in the future.
SAM