When I graduated from college, about a generation ago, I and my kind were released into the world, which must have been very kind to us, because we immediately found good jobs and began climbing the veritable company ladders. We were very good at it, apparently, so good that our generation had a nickname. Much like today’s Millennials, and yesterday’s Generation X, Generation Y and the Baby Boomers, we were YUPPIEs – Young Upwardly-mobile Professionals (who pulled that acronym together? And, yes, I owned that coffee mug, above.). We were the coveted marketing group at the time – we made decent salaries and (as you can see on the mug) spent heartily on our VCRs and dinner reservations.
Then, it got even better. The YUPPIES started dating each other and soon we became DINKs (a much better fitting acronym) Dual Income No Kids. If marketers thought that the YUPPIEs had money to spend, they hadn’t met the DINKs.
Well, apparently, we grew up, had kids and spent all of our money because our kids are finding a very different world as they graduate from college today.
Statistics show that college grads today are moving home in droves, spending their parents’ retirement money, and trying very hard to pay-off their student loans. I meet these Millennials every day in my practice, some with student loans the size of a mortgage at rates as high as 7%. How in the world will they ever get out from under that?
What happened?
Several things have changed from a generation ago.
College costs as a percentage of family income has risen
Anecdotally, this seems to be the case. Clients tell me stories like, “I put my college education on my credit card.” And, most of us had parental help or had much smaller school loans. When we got married, my husband’s student loan payment (for a private 4 year college) was $36 per quarter! We also had fewer bills back then. None of us had cell phones, let alone additional monthly charges for wifi, few of us had cable (and if we did, it cost some ridiculously small amount of money compared to today), a portable computer was something that weighed 20 pounds and was lent to you by your employer for very important meetings. We certainly did not know what an iPod was or could ever be!
Digitally, we can see the changes in household income over the past 25 years has risen incrementally, yet, the cost of college has risen dramatically. The median household income, 3 year average 2011 – 2013 in the United States was $51,847, up the tiniest bit (adjusted for inflation) from the 1984 – 1986 number of $49,0381. In stark contrast, tuition, fees, room and board at a public 4-year college in 2014 averaged $18,943, up from $8,427 in the ’84-’86 time frame2. In essence, our household income has risen by nearly 6%, but, higher education costs have risen by about 125%.
Student loans are free
Clearly, student loans are not free – they can be at outrageous interest rates compared to current market rates. That’s because they can be high risk – heaven knows they are given out to anyone who asks.
You don’t need to be “approved” for a student loan based on your ability to pay it back, though, like you are for your mortgage or home equity loan or small business loan. The loaner never asks what you intend to study or determine the chance that you will be able to pay off this loan as a reasonable part of your future salary. You get the loan, you spend the money and then you get out of school with a debt that you (sometimes) cannot possibly pay-off.
Families do not look at the price of school as an investment
Face it, if parents are helping to foot the bill for their kids’ education, then they are making the second or third largest investment of their lives (the first being saving for retirement and the second being the family home), depending on how many kids you’re putting through school. When I first forayed out to college my mom proudly shouted – Go Girl, an education is never wasted! Meaning (to her) spend the money on college, you’ll be better for it in the end. That still may be true today, but, spending money and borrowing money are two different stories. The question you need to answer when little Johnny (or Susie) wants to go to Harvard is: Will the degree Johnny gets, and the job and salary it leads to, pay off the investment we make in him/college?
Rule of thumb: Don’t borrow more than the first year of expected salary.
Families don’t start the discussion until it’s too late
Talking to Johnny about what type of school the family can afford when he’s filling out his applications for college is too little too late. He’s already got his heart set on that 4 year private school that is out of the reach of the budget. Start the discussion much earlier – little by little. As early as 8th grade. Talk about family values of private vs. public school. The types of schools that are within financial reach and not. Give Johnny a chance to have a little skin in the game by working part-time or applying for scholarships.
What can you do, today?
The first thing that parents needs to do is prioritize where a formal college education falls within the spending goals of the family. This includes the expected price tag of the type of school you envision your child attending (private vs. public, local vs. across the county…).
Rule of thumb: Save for retirement before saving for college.
Then, if parents want to help their children pay for their education start early. 529 plans allow your money to grow tax-free as long as it is used for proper college expenses. For example, let’s say that the day your child is born, you start with a $3,000 deposit and contribute an additional $200 per month to her 529 account. By the time your baby is 18 and ready to go off to college you will have contributed $46,200 to the account which has now grown to $88,000. On the other hand, paying for that same $88,000 with student loans would cost you or your child a total of over $110,000 to pay it off over 10 years. Let me clarify: $46,200 (saving) vs. $110,000 (borrowing) for the same $88,000 education3.
And finally, talk about it as a family often. Don’t let a lack of communication keep your child from attending the school of their dreams.
1 United States Census Bureau, Median Household Income by State, – 3 Year Averages, 1984 – 2013
2 College Board, Tuition and Fees and Room and Board Over Time, 1974-75 to 2014-15, Selected Years
3 Earnings assume 6% growth rate, $3,000 initial deposit, $200 deposited monthly thereafter. Loan is at 5% payable over 10 years.