Paying for College

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By Rick Kahler MS CFP® ChFC CCIM

Rick Kahler CFPDo you want to give your children the best possible chance to do well in college, earn higher salaries, and save more for their retirement? Then, don’t pay for their college education.

One of the most popular money scripts I encounter is the notion that being a good parent means paying for your child’s college. Many parents do this at the expense of taking care of themselves in retirement, which is a very high price to pay.

The most popular reason I hear from clients for funding children’s’ education is empowerment. They want to spare kids the burden of repaying school loans after graduation. They also want them to be able to focus on their studies without the distraction of having to work to put themselves through college. For most parents, allowing students to concentrate on classes so they can perform well, make better grades, and obtain better jobs, is a sacrifice worth making.

The Myth

There’s just one problem with this scenario. It’s a myth.

In most cases, parents who fund their kid’s’ college education are insuring they will actually do worse in school than those who have to pay their own way. This is the finding of new research conducted by Laura T. Hamilton, published January 7, 2012, by The American Sociological Review under the title “More Is More or More Is Less?” Her study shows that students whose education is funded by parents or through student loans actually have lower GPA’s than students who in some way must work to put themselves through school.

Hamilton found that students who have to “do something” requiring them to take personal responsibility for obtaining the funds for their education do best and carry higher GPA’s. This includes those who receive grants, scholarships, or veteran’s benefits, or who participate in work-study programs.

Parental funds or borrowing “provide the time, money, and proximity (i.e., living on or near campus) necessary to delve deeply into college peer cultures,” Hamilton notes. The gift of time that student loans and parental funding provide isn’t usually poured into studies. Instead, students tend to focus that extra time on increasing their social life. The average college student receiving money from loans or parents spends less time on studies in college than in high school. Even though they spend about 28 hours a week attending class and studying, the research found they devote a full 41 hours a week to social and recreational endeavors.

Put more succinctly, students who have to work to pay their way through college spend slightly more time studying and significantly less time partying.

The Results 

The net result in this is a big personal and societal lose-lose. Those of you who have sacrificed your retirement to help your children through college have potentially done harm to both your children and yourselves. Your kids have probably done worse in college, thus obtaining lower paying jobs. This loss of potential income has downsides for both children and parents. Previous research has shown that parents who don’t fully fund their own retirement years will actually end up costing their children five times as much as the kids would have spent by funding their own college education.

Understandably, a few of you are now choking on your last sip of coffee as you read the last paragraph. This is not at all the outcome you intended.



The evidence is clear. Parents who take care of fully funding their own retirement instead of sacrificing to pay for their kids’ education are not being selfish. Instead, they give their children something far more valuable than the cost of tuition: the gift of success and achievement.


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9 Responses

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    Students and parents are learning their college fates this week and then having to address whether schools are actually affordable.

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    According to Marian Wang, the Consumer Financial Protection Bureau just announced increased oversight of the companies that act as go-between for student borrowers and lenders.



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  5. FAFSA

    The federal financial aid form can be tricky to navigate, but here are 10 mistakes to avoid when filling it out.

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  7. Do College Loans Beget More Debt?

    Young adults who took out loans for college have significantly more overall debt than those who didn’t have to borrow for their education, researchers report.




  8. Understanding College Financial Aid
    [A Review]

    Earning a college degree is one of the best investments you can make in your future. College graduates may have many more opportunities available to them and, on average, the earning potential of a college graduate exceeds the earnings potential of without a degree. Think about it from an employers prospective: if you were choosing a job candidate from a stack of 100’s of resumes, who would make it to the top of the stack?

    It’s crucial for you as the student or parent to understand the process of student financial aid to make sure you explore all the options available to you.

    The options begin with a FAFSA: Free Application for Federal Student Aid. All students are expected to contribute towards the cost of their college education. Just how much depends on your financial situation and the financial situation of your family. This is referred to as the Expected Family Contribution or EFC.

    The Free Application for Federal Student Aid is the form that the Department of Education uses to evaluate and determine the EFC (Expected Family Contribution). Therefore, your process for determining how you will fund your (your child’s) education starts by filling out a FAFSA. The analysis that is then performed by the Dep’t of Education is based upon your assets, income and other household information. You need to only fill out the FAFSA one time and the Department of Education will communicate directly with the College(s) and University(s) of your choice. You can list these on your application so that the application is transmitted directly to these schools. The FAFSA is the standard that nearly all colleges and universities use to determine eligibility for federal, state, and college-sponsored financial aid which includes loans and GRANTS.

    Types of Student Financial Aid

    The cost of education continues to rise. Therefore, figuring out how you’re going to finance your education can see like a tough task. The good news is that nearly every student is eligible for some type of financial aid regardless of your income circumstances.

    If you qualify, the options available may include:

    • Federal Pell Grants
    • Stafford Loan
    • Parent Plus loan

    FAFSA Eligibility

    To be eligible for some form of student financial aid, you must:

    • be a U.S. citizen or an eligible Non-U.S. citizen
    • have a valid Social Security number
    • have a high school diploma or a GED
    • be registered with the U.S. Selective Service (if you are a male between the ages of 18-25)
    • complete a FAFSA promising to use any federal aid for educational purposes only
    • not owe refunds on any student loans
    • have not been found guilty of the sale or possession of illegal drugs during a period in which federal aid was being received.


    Quick information on Pell Grants:

    • A Pell Grant, unlike a loan does not have to be repaid.
    • The maximum Pell grant for the 2011-2012 award year (July 1, 2011, to June 30, 2012) is $5,500 – The amount depends on your financial need, costs to attend school, status as a full-time or part-time student, and plans to attend school for a full academic year or less.
    • The US government also offers student loans to fund your education. You can pay these back at very low interest rates.




    The daughter of one of my clients left home right after high school graduation for a full-time job and part-time college classes. As she was settling into her first apartment, she told her mother, “I never thought I’d be the person who had to buy things like toilet paper and toothpaste.”

    She had discovered one of the realities of moving into adulthood: the need to take responsibility for money matters we previously took for granted or never noticed at all.

    For anyone stepping out into the “real” world for the first time, here are a few suggestions to help you create a healthy and secure financial life.

    1. Understand the difference between your parents’ lifestyle and a new-adult lifestyle. Many middle-class families take for granted a variety of amenities like lots of electronic devices, dozens of TV channels, eating out regularly, and plenty of private living space. It’s a mistake for new adults to assume they can or should continue to have all these when they’re first out on their own. Don’t compare your first-apartment lifestyle with the way your parents live now; compare it instead to the way they lived when they were starting out.

    2. Learn to budget and prioritize.

    A. Traditional wisdom says to “pay yourself first” by setting aside money for future needs before you spend a dime. That’s excellent advice. Unfortunately, there’s someone else you have to pay before you pay yourself: Uncle Sam. Always take income tax withholding and FICA (Social Security) taxes off the top first, then create your budget based on your take-home pay.

    B. Develop a habit of saving for the future, even if it’s only a small amount. One of the most important strategies you can ever practice for long-term financial success is to get used to living on less than you earn.

    C. Become a smart and frugal shopper. Look for sales, shop second-hand stores, clip coupons, read labels, and comparison shop. You may be surprised at how well you can live on a mix of creativity and thrift.

    3. Invest in yourself.

    A. Invest appropriately in education for a career you’re excited about. This doesn’t mean a boatload of college debt is automatically a good choice. Be realistic about the relationship between your borrowing and the earning potential of your chosen field.

    B. Consider investing time and energy instead of money. It might be better to take six years to graduate from college with minimal debt than to finish in four years with high debt. Or taking a temporary second job to build up savings or pay off debt might help you build a stronger financial foundation.

    C. Take advantage of a variety of learning opportunities. Look for ways to learn on the job and through organizations or hobbies. Find mentors to teach you about money and help you learn to become a valued and valuable employee. Build your communication and customer service skills.

    4. Understand the difference between being broke and being poor. Living on the cheap while you’re in school or at the beginning of your career is not a sign of failure. Often, it’s a sign of future success. Having the discipline and common sense to do without some of the things you’d like to have now can greatly increase your chances to enjoy those things comfortably later.

    5. Take responsibility for your own finances. It’s your life, your career, and your money. No one will ever care more about your financial well-being than you do. The reward for accepting that responsibility is financial competence, self-sufficiency, and independence. Right down to choosing your own brands of toilet paper and toothpaste.

    Rick Kahler MS CFP® ChFC CCIM


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