Here’s the latest post in the Rockstar Finance Money Match-Up series where two money bloggers argue opposite sides of an issue.
Today’s issue features another interesting debate — should you pay for your kids’ college education?
We’ll begin with the Finance Stoic who says you should…
Paying for Education
When Laura suggested our debate be on the topic of whether to pay for your child’s post-secondary education or not, I was willing to take either side of the argument, but preferred to take the side in favor of paying for college.
It immediately reminded me of a quote from one of my greatest figurative mentors, Marcus Aurelius, who said his grandfather taught him to avoid the public schools, to hire good private teachers, and to accept the resulting costs as money well-spent.
Education Costs are Very High
I wrote a post earlier this year in my daily finance stoic blog that talked about some of the challenges that people are facing with mounting student debt, and it’s astounding.
Higher education continues to affect lifetime earnings, as does choosing the right major; however, the cost of tuition for students continues to escalate. While I want my two sons, aged ten and seven, to have every opportunity in their life, I do not want them to become indentured servants to the for-profit education system.
I recently completed my online interview for the millionaire interview series at ESI Money and the final question was what I wanted to leave as an inheritance for my children. While I don’t know what may be available for them as an inheritance, I focused on two objectives as a parent, which were helping them pay for their education and helping them purchase their first home.
The cost of education and housing continues to rise, which places millennials behind previous generations in being able to start their life on solid footing. The average student debt has increased from under $10,000 to over $35,000.
Housing and Education Costs Versus Earnings
At the same time, the average cost in our city for a one bedroom apartment has increased from $200,000 in 2003 to > $600,000 today.
I want to compare and contrast what my personal situation would have been on graduating versus a student today. When I graduated, my student debt was under $10,000 and my girl-friend’s was zero. We started our career earning $36,000 each and were able to save enough and borrow from our parents to put a $40,000 deposit on a $200,000 apartment in 2003.
Assuming my oldest son graduated today, without our help he would be $30,000 in debt and would need to save $120,000, or more, to purchase that same apartment I purchased. Well then, you might say, he’s probably going to have a way higher salary given how much housing prices and school costs have inflated…No, he wouldn’t. My son, assuming he started at the same big 4 accounting firm, would earn slightly more than I did. While I earned $36,000, I would expect him to earn $41,000, an increase of only $5,000.
Let’s do the math on this:
- Increased cost of education – $30,000
- Increased cost of housing – $120,000
- Increased earnings – $5,000
Does something seem wrong with that picture? Without financial assistance, how would my sons be able to attain an education and work and live in this City? I don’t think they could.
Setting Kids Up for Success
For me personally, contributing to my sons’ education is more important than anything could be in setting them on their future paths. Fortunately, there are tools that can facilitate that in Canada and the United States.
In Canada, we have RESPs and in the United States, there are 529 savings accounts. Both accounts allow your investments for your children’s education to grow tax free. In Canada, the program provides a 20% matching of your contribution, to a maximum amount; whereas, in the United States the amount you are able to invest into the 529 savings accounts is much higher.
While I plan to be able to backstop my children’s education and housing to start their lives, I do not ever intend to do it in a way that leaves them entitled, which is often an argument from those that say young people should pay their own way, which to me doesn’t account for the fact that paying your own way today is completely different than it was ten years ago, twenty years ago, or more.
Our boys are pushed hard academically and physically to be their best, to excel at whatever they do. Education in our household is prioritized so that ideally they will have either academic or athletic scholarships when they attend university. Further, they will both have jobs starting in their teens, which will contribute towards their savings for post-secondary education and housing.
While I hope that our money won’t be needed for them to achieve an education, I want them to know that it’s available to help them get the same starting hand in life that I had when the cost of tuition and housing was reasonable for youth starting their life journeys.
Now let’s hear from Laura at Pretty Minted who says you should not pay for college expenses…
Not Paying for Education
Have you ever considered paying for your child’s college education?
As a parent, it is natural to want to help your child succeed through life. Having likely experienced debt burden yourself, you would want to alleviate your child from the same financial hardship you once experienced. The protective role of parenting lends itself the intuitive desire to eliminate anything that may risk harming our children, financially or otherwise. And as you are likely in a better financial position than your children, who are yet to enter the workforce and earn their own income, if ever there was a time to be generous would it not be towards our own?
A quick thought-exercise made me consider that maybe paying our children’s way through college may do more harm than good.
1. Our children need to learn to be savvy consumers.
For most young adults, deciding which college to enroll at will be the first major financial decision they will make.
Because college education varies not only in price but also its quality and benefits across the US, your child will need to weigh the pros and costs of each choice, in line with their personal preferences, long-term goals, current circumstances and affordability. Similarly to any major purchase, the consumer will need to make decisions based on these factors. This requires thorough assessment and comparison of the options in front of them.
Now, like many of us, we have all done the research but ended up with what turned out to be a crappy decision that yielded very pricey consequences, such as a mortgage, car loan or investment plan. But if anything, lessons were learned. And likely once you have learnt them, you will never make the same mistakes again. You will become a more experienced and conscious consumer the next time you have to make such a big decision.
By paying for your child’s college education, you are taking away this valuable opportunity from them that may serve them well for the rest of their lives. You may be happy to let your child make their own decisions autonomously, and to pay the bill when the time comes. But you then run the risk of either the child making decisions that are not entirely their own (could you really say they wouldn’t be influenced by their parents?)The benefits of making a consumer decision are lost because the weight of the decision is not the same when it’s someone else’s money they have to worry about aside their own. Personally, I’d be making very different decisions if it was my own $5000 at stake, as opposed to Bank of Mum and Dad’s $5000.
2. Not all debt is bad debt.
Unless you have a pile of money hidden in your basement, it’s likely we’ll need to encounter some form of debt at some point in our lives.
Although owing money feels like a bad, dirty, yucky, thing, not all debt is bad! Some forms of debt are necessary, for example to acquire a mortgage.
Similarly, student debt is not necessarily a bad for of debt. Few of us would argue our education is a poor investment. Instead of touting the idea that debt is bad, we would serve our children much better if we taught them how to differentiate good from bad student loan debt. By focusing on return of investment in terms of career progression, education, interest rate and cost we can teach our children to be more conscientious buyers overall.
3. Would you be sacrificing your retirement?
Without a doubt, we are living longer. What used to be 10 year retirements are turning into 30, even 40 year retirements as the standard. More than ever, we urgently need to consider if we have enough savings in place to sustain us for decades after we have left the workforce. Add in a dash of health problems into the mix and you have a big problem.
You’re already on the right path, you’re on a personal finance blog! But for the rest of us, we are still ill prepared for funding our retirement. And for those who don’t have much in savings, may be tempted to take money out from their pension to pay for their child’s college education.
Your children have the rest of their working lives to pay back their student loans and create their own wealth. If you’re nearing retirement, you don’t have the luxury of time to recoup those costs. Then you put yourself in financial vulnerability to impending illness, loss of a spouse, or having to forcibly work well into retirement because you can’t afford not to work; making for miserable living.
You may have paid for your child’s college education, but this financial responsibility would then be replaced by them having to look after you into your old-age because you’re struggling for money.
Rather than put your retirement at risk, and subsequently place burden on adult children, it is much better to give them the knowledge and tools to quickly pay off their own debts. They have the time – you wouldn’t. This is the unfortunate truth.
This is not only a personal finance question but also a moral one. At what point do we withdraw the reigns of our parental duty and allow our children to become financially independent of us, to navigate the world on their own? We read personal finance blogs, like Rockstar Finance, we triumph and share our debt stories, we become enlightened with our new found financial literacy. And our lives are all the more better for it!
Why would we deny our children the same opportunity to learn for themselves? Having to pay their way for their college education may be the first stepping stone towards their own financial independence story.
So, those are the two sides of the issue. What do you think?