Money Match-Up: Should You Pay for Your Kids’ College Education?

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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.

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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.

Don’t!

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.

Final Thoughts

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.

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So, those are the two sides of the issue. What do you think?

17 thoughts on “Money Match-Up: Should You Pay for Your Kids’ College Education?”

  1. Both my kids will be debt free within six months of graduation from college. When they were in high school, I sat them down and gave them an outline in writing showing them that we had a little to give them from the sale of a vehicle and that their ghrandmother was givign them a smal amount also.

    They were straight A students with good ACT scores snd lots of work and extra curriocular experience. They also wenet to a charter high school.

    The key was telling them that they could attand any school they wished but how much debt they had at the end was going to be totally up to them and they were exopected to have a job during school and in the summers.

    It was hard to watch their friedns attend school and travel the world on their paretns $$$ but with their own skin in the game our kids learned a lot about budgeting and needed tpo keep a very high GPA to keep their college scholarships in place for all four years.

    I agree with Suze Orman who says never pay for your kid’s education unless you have fully funded your own retirement.

    A family member put his two kids through private college at the insistence of his wife to impress the neighbors and friends. 500 k down the tubes. That and two divorces and he is 70 and will be working until he dies.

    How many kids attend expensive schools and get worthless degrees and can’t get work?

    College used to be a place to keep warm and fun between high school and real life. Not any more as the world is too competitive. If your kids don’t know what they want to do for a career, they should intern or work or go to a community college to do the pre requisite courses until they figure it out.

    1. “How many kids attend expensive schools and get worthless degrees and can’t get work?”

      As someone with a BA in musicology who makes 6-figures at my day job and owns a successful small business, I’ll say this: No degree is worthless. If you think yours is, then you’ve chosen for it to be.

      I learned a great deal in college, and parlayed that knowledge into great jobs. It was harder than if I’d majored in Engineering or something that you no doubt would consider worthwhile. But I have no regrets.

      (I don’t even need spellcheck!)

  2. My parents paid for my college education and my husband paid for his own. So we started on opposite sides when talking about our son’s education. I started saving almost from the moment he was conceived, sometimes only being able to add $25 a month. But I always put something aside. As our income grew, so did the amount I contributed. Eventually, after looking at soaring college costs, joined my way of thinking and was very supportive of saving for college. We basically had two reasons for deciding to foot the bill. First, as parents we thought it was our responsibility to educate our children. And second, we didn’t want our son to start out with a ton of student loan debt. We had a couple of requirements for him such as working during summers and attending a public in-state school. We all worked together as a team and we were able to finance his entire college all the way through graduate school.

    1. I like that it was a family effort and you still had expectations for him.

      I do see starting young and allowing the power of compounding to assist as a key to finding the future education of my children.

  3. My parents helped with college, but they felt I needed to have a lot of “skin in the game” as well. As such, I worked during a good portion of my college years and I also hustled to find scholarships. One scholarship paid for an entire semester. I’m saving for my kid because I’m in a position where I can – but she’ll definitely not know exactly how much is saved and we’ll definitely find a way for her to have some skin in the game as well.

    1. I totally second this approach. It’s the way it happened to me and I think it would be the best for our kids as well. We are saving for them, but we don’t want for them to take money for granted. It’s only when you earn, save and then spend your money that you really understand its value (and start using it responsibly)

  4. We split the difference…..As a high income earner their access to loans is limited. We funded their 529 to the equivalent of 3 yrs of in-state public education. They were very involved in the management of those funds and are in complete control now that they are out of the house. They have had to make hard choices with regards to balancing cost and desires, but have learned a tremendous amount in the process. Since are all going out of state (maybe we were too hard on them :) ) and have $75k in their wallets they have been very astute at tracking down scholarships, jobs and paying internships. We couldn’t be more proud. They may have a small amount of debt when they finish, but I doubt it. It is amazing what kids can do when they are focused.

  5. I wholeheartedly agree that if you have limited finances you have to be selfish in this case and look to fund your retirement vehicles to the maximum even before you start thinking of saving for your kid(s) college expenses.

    In fact I would venture to say that even if you are fully maxing out all retirement vehicles, you probably still won’t have too much to enjoy your golden years (and really need to invest some outside of these tax deferred areas such as in a brokerage (taxable account).

    Your child will always have an option to take out student loans or even get scholarships to reduce the burden of college costs. You will not have as many options if you run out of money in retirement. No one is going to lend money to someone not bringing in a paycheck (and especially in the financial state you would be in needing a loan in retirement).

    The only option I could think of in this case would be to take on a reverse mortgage and that assumes you have a fully paid off home to start off.

    Now if you have your bases covered and using a 3-4% rule of retirement feel you can live adequately on that nest egg, then by all means funding your kids education is a great benefit. It will give them a head start and really make their lives easier down the road. It would be a great gift to give but again only if your personal situation is taken care of first.

  6. We’re planning to help fund a good chunk but would like them to be invested in it as well. Maybe some type of ratio… we pay $2 for every $1 they put towards it or something like that depending on what our 529s and tuition do over the next 15-20 years.

  7. In lieu of paying for college my parents did a few things to help me to save up.

    1. When I worked in high school starting with babaysitting and then working as a CNA starting at 16 (which holy cow was that an eye opener) any money that I earned at those jobs, I was not able to spend. Thus by the time I left to go to college, I had over $20,000 saved.

    2. The college I went to was over 8 hours away from my parents so they provided me a decent running car, and paid my insurances (health, dental) while in school. They also paid for my cell phone.

    I worked 1-2 jobs nearly the whole time I was in school which paid my living expenses. During spring breaks while my classmates were out partying, I applied for scholarships. Even if it was only a $100 scholarship, I still applied. One year, I had seven scholarships that paid for all of my tuition and books. Those scholarships made it so I could get through debt free.

    Many of my peers’ parents or grandparents payed for their schooling and the sad thing is that they never filled out scholarships. They tended to party more because mom and dad or whoever would pay for it. Honestly struggling and hustling to pay bills at such a pivotal point of my life has made me respect money so much more than if it were just handed to me. There were times I wish I could have enjoyed college a bit more in lieu of working and studying all the time. But I am now leaps and bounds ahead of my peers when it comes to retiring and I am okay with that.

    For the record, I attended a technical school in which the cost of attaining an engineering degree was half of what you would pay at a state school. I went to school out of state as it was half the price of staying in my home state for school. Also, there are still schools and towns out there in which a degree doesn’t cost more than $10,000 and you can buy a house for under $100,000.

  8. I graduated from undergrad in 02 and grad school in 09. My parents helped pay for both and with scholarships and grants I ended up with no college debt period. The reason why my parents paid is because their parents both paid for them to go to school. Basically they were paying it forward for me and I plan on doing that for my kids. There will be some caveats however and it will depend on what type of degrees they are seeking. Also I will only pay for a class one time so if they fail or drop it the cost to retake it will be on them. That was the rule my parents had for me so I would not waste their money.

  9. No right or wrong answer on this topic. It’s a personal choice. My dad paid for mine, which allowed me to immediately enter the work force back in 1993 debt free and begin earning and saving. I have 3 teens and plan to pay for college for all – but must approve their major and college choice – it’s not an open checkbook. It must make sense with good return based what they want to do as a career. I do agree that one’s own retirement should be in good order before paying for full time college for kids. If not, there are many ways for kids to go to college for a reasonable amount (locally part time while working part or full time, military, getting a job for a company that pays for it, etc). I do not believe in the notion that kids must go off to full time college, live on campus, and take out loans for school. This is an absurd concept that so many do and pay for dearly with debt afterwards. Insanity!

  10. As 2 parents that had their college paid for by serving in the military, we give our kids two choices, “Army or Air Force.”

  11. my son is in junior year of state university now. I never was able to start an education fund for him as I graduated college myself as a single mom in ’06 when son was about ~8 yrs old. We filled that fafsa out for him for fall 2016 enrollment and what i discovered was the parent gets 80% of the tuition loan (parent plus loans) and the student gets 20% of the loans. this is a kid that had such an activity filled schedule in HS so that a college would accept him that i never asked him to work a job too on top of trying to keep grades and extra curricular activities in a successful state. I did make him work his high school senior summer but at 40 hrs per week at the local grocer he only earned ~$2500 and since he still qualified as a dependent, there are no loan prospects for a kid in that situation. I think this is where many parents and kids are going to find themselves when the time comes; ignorance is bliss, it certainly was for me. Yes, there’s the alt college programs where the student works one semester and then studies for 2 semesters which could help them pay some of that tuition but very few youngsters that age can earn nearly enough. I’ve also had parents suggest to have the kids volunteer for peace corps or simply work for a year so they become ‘independent’ of their parents; I suppose this could help limit the loan liability that parents take on. I simply choose to help my son and try to set him up for success as best i’m able to.

  12. Here is my college experience.

    I did not have help from my parents bc they couldn’t afford to help. I worked during the year and the summers. Every year I worried whether I would be able to attend my college the following year, trying to apply for scholarships yearly, while studying and trying to make straight A’s to get into a good graduate school. Quit honestly, it was a bit of emotional hell. I felt disadvantaged and jealous that my peers had the luxury of focusing on being full time students while I had to struggle to keep good grades and to fend for myself financially. Unfortunately it led to a lot of anxiety during my college years and resentment towards my parents especially when I returned home on vacations to find new pieces of furniture and new fancy stereo systems in our house.
    I was a responsible child who knew the value of a dollar having worked in middle and high school.
    As an adult with two kids I plan to do things a bit differently. Since I am fully funding my retirement, I can afford to help my children with their education. I plan to fund their tuition and basic living but extra money for fun, clothes, dating…they will need to work. I want them to feel assured they would never need to drop out due to lack of finances. I also will engage with them in conversation prior to college about what they think is fair for them to be responsible for during college. I want their buy in and full understanding of expectations, both theirs and mine. College should not be the only time to have children start making good choices, they should have started earlier with parental help. College while exciting is also scary for kids as it is the first time they are away from home. They deserve to know that their parents have their back.

  13. I’m not sure the infatuation with 529 plans. To me they are a waste of time when there are better alternatives especially if you make upper middle to upper class money.

    I bought each of my kids 120 hours at any state college in FL, which included fees etc. I purchased at age 2. My total cost for a college education was therefore $22K. This education was guaranteed so there was no need for “extra” life insurance to cover college costs. In addition at age 3, I put $20K in a UGTM in mutual funds to grow over the ensuing 20 years. Net cost for college was therefore $42K/kid. I made too much money to qualify for grants or tax write offs. By choosing tax efficient fund options I never paid any taxes on the UGTM. The UGTM grew to 60+K, and I slowly started to dole out the money once the kid hit college. Since I never sold the whole thing, the cap gains was under the minimum each year and the remaining investment continued to grow as I slowly cashed out the account over 4 years. The fund paid for semester abroad, vacations, a monthly allowance, air fare etc so my kid had a great college experience primarily on the interest in the UGTM and was not limited to “educational expense”. Once the plan was created I could kick the bucket any time and college was assured. Limitations? Only state schools were funded. The plan was for an education not an all expense paid stint to party at at Brown or NYU or some other pretentious nonsense. At 18 technically the money belongs to the kid so the kid can theoretically go buy a vette. The Kid never knew where the money came from cause I never told her, it just showed up in her bank account every month and was strictly spent for her benefit.. If she needed a little extra, or a new cell phone or a camera, no problemo. Once graduated I spent the remaining on a 2 year old Honda with 20K miles to get her started. During the course of college I decided to retire. Her 4 year college needs never encroached on my retirement funding. My second kid is in her second year at a state school and is funded the same way. How you gonna pay for a car out of a 529? You could even put the dough in and never tell the kid for 60 years and never crack the nest egg and as long as it was tax efficient she would have a $650K stash for retirement.

    Let compounding do the heavy lifting. The kids got plenty of “life experience” managing their budgeted allowance. Both of them can make a rock bleed quarters and neither is crushed by debt.

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