Should Parents Help Their Kids Pay For College?

When i attended college back in the mid 1990s, the cost of college was nowhere near where it is today, in fact the average cost has more than doubled over the past decade.  When I attended the University of Minnesota the cost for tuition and fees was just under $6,000/year.  Now it is closer to $13,500/year.  If you add in room and board and other miscellaneous costs – it’s much higher. I had some help from my parents in paying for my schooling, especially my first year, but my schooling wasn’t completely paid for.  I had to hustle to get scholarships and grants, and I also worked during school and got student loans.   When I graduated I had just over $10,000 in student loans, and I had them paid off within a few years. The question is this.  With costs skyrocketing over the past 15-20 years, and college costs outpacing inflation, do students of today  need a lot more help in paying for their schooling?  Should parents be paying for their children to go to school so as to keep them from acquiring crushing debt? Or should they focus first on their retirement? paying-for-college Here’s a discussion we had about this topic on the Money Mastermind Show this week.

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How Much Does  College Cost?

Let’s take a brief look at some stats at just how much college costs have grown in recent years.

  • Costs to attend college have more than doubled in the past decade.
  • The cost of attending a public college grew at 6.5 percent a year between 2001 and 2010, according to the U.S. Department of Education. (source)
  • According to the College Board, 4 years of tuition and fees at a private college will cost about $129,700. In 18 years it will be around $312,200. Tuition and fees at a public university (in-state resident) currently costs about $38,300. In 18 years it will be closer to $92,200 (source). (Assuming the historical 5%/year inflation of costs). The figures above do not include room and board, transportation and other costs.

The average graduate in the United States and Canada has tens of thousands of dollars in debt when they graduate.

  • Average debt of 2014 U.S. four-year grad $33,000.
  • Average debt of 2014 Canada four year grad. $26,000

In the past year we also surpassed over 1 trillion in outstanding student loans for the first time.  The amount of debts held by students and graduates is staggering. Many graduates are having a hard time paying back those loans due to the soft job market, underemployment and a variety of other factors.

  • More than 7 million borrowers are in default on their loans (source)
  • The Project on Student Debt, a non-profit, says that 15% of borrowers default within three years of entering repayment. At for-profit colleges the rate is 22%. (source)
  • 2012 data from the credit bureau Equifax, determined that 35 percent of people under 30 who were supposed to be making student loan payments each month were actually 90 or more days delinquent.

So students are borrowing money to pay for the rising costs of college, but in the end they’re having a hard time paying it back because it’s so hard to find a good paying job.

How Does the Average Family Pay?

So how does the average family pay the cost of a college education?  According to Ipsos Public Affairs the average family pays 100% of the cost of college through the following means:

  • Grants/scholarships 30%
  • Parent income and savings 27%
  • Student borrowing 18%
  • Student income and savings 11%
  • Parent borrowing 9%
  • Relatives and friends 5%

So up to a third of the cost is typically covered via student or parent borrowing, and the balance coming from savings, income and scholarships and grants.

Should You Pay For Kids College?

So as the numbers above show, the cost for college is high, and it’s rising.  Should parents feel obligated to help their children cover the cost of their education?  According to a survey released this week by  Discover Student Loans, more parents are saying no.

more parents are saying no when it comes to helping their kids pay off student loans.While 58% of parents in 2013 said they were very likely or somewhat likely to help out with student loan payments, just 52% said that this year — the lowest percentage since the survey began three years ago (it was 55% in 2012); the national survey was of 1,000 adults with teens planning to attend college. (source)

Granted, over half still say they would help, but less parents are saying that they will help their kids with student loan payments.  Is the reason that they aren’t helping because they don’t want to, or because they just can’t? Helping Out Is A Good Idea, But Consider Your Own Retirement First Helping out with your child’s education costs is a great idea, but many parents in age groups with teenage kids in the U.S. have saved far too little for their own retirement:

A survey released last year by the National Institute on Retirement Security shows that households with teens, college-aged kids and older are vastly under-saved for retirement . Households where the head of household is 45 to 54 that have saved anything for retirement only have balances of $60,000, and those with heads of household that are 55 to 64 that have retirement savings have only saved $100,000.

So families with teens may actually have more saved than some other groups in their age brackets, but they are still woefully behind in saving for retirement.  If you figure that you’ll need on average 10 times your annual income in retirement, both of those groups are extremely behind – and I think they might be better served saving for their own retirement first, before helping out their kids with college costs. After all, you can borrow to fund college, but you can’t borrow to fund your retirement.

Consider Helping, But Have Your Kids Put Some Skin In The Game

If you’re in a position where you are saving for retirement – and you’re on track, you may want to consider helping your kids fund their education. There are good reasons to have your kids pay for at least a portion of their schooling, however. One study by Laura Hamilton, assistant professor of sociology at the University of California, Merced,  found that kids that had their schooling completely paid for – did worse in school!

kids’ GPAs actually dropped when parents were footing the bill for college. I call it “satisficing”—in other words, kids were doing just enough to stay in school. They dialed down the academic effort, and did less than other students who were paying part or all of their own way. When parents fund your education, it’s a no-strings-attached situation. Kids are completely in the dark about what they’re receiving, and how expensive it is. Parents also don’t tell kids what they have to do to keep receiving it, and since paying for college makes it possible for students to spend a lot more time on the social scene, there’s no motivating factor to make them focus on academics.

I think what it comes down to is talking with your kids as early as you can, and helping them to realize what the true cost of going to college is. Get them involved in planning for their education, and make sure that they understand that you will help them if you can, but that they will have a big part in paying for their own education.Start talking with them about these ideas early in high school – or even in junior high so that they know they’ll need to apply themselves. If they realize they’ll be paying for at least part of their own schooling, the hope is that they’ll work harder in school to get academic scholarships and grants once they graduate. I had to pay for part of my own education, and doing so really helped me to mature, promoted responsibility and a better work ethic while I was in school, and taught me the true value of a dollar.  In the end, there’s no better teacher than real world responsibility.

How Much Should Families Save For College?

How many families are actually saving money for their kids’ education?  According to Sallie Mae’s “How America Saves for College 2013” study, just 36 percent of middle-income families and 29 percent of low-income families have set aside money for college costs. So there are a lot of families not saving for education costs. How can you figure out how much you’re going to need?  A good start would be to check out one of the many college costs calculators, like this one:

The calculators can take different things into account including tuition, fees, room and board, the cost of inflation and more.  Try a few of them and see what kind of a range you can expect. Figure out how much will be needed, high and low end, and then figure out how much of that cost you want to help pay for.  If you can help with 1 year or 2 years of school, set that as your goal.

Where Should You Save For College?

So how can you save for your child’s education?  There are a lot of good ways to that.

  • 529 College Savings Plans
    • Tax deductible in many states
    • Flexible – you can usually invest in any state’s plan.
  • Roth IRA:
    • 10% early distribution penalty is waived for college expenses.
    • Contributions always available.
    • Roth IRA value not considered for financial aid.
    • You still have the money if child doesn’t go to college.

The 529 and Roth IRA are the two main ways that I would save for education here in the United States. In Canada you may want to consider an RESP.

Setting Expectations With Your Kids Early

I think it’s key for parents and kids to have discussions about money from an early age, and once they get a bit older – in junior high or high school – to talk about college and how much it costs.  If you plan on helping, start saving early, and let them know. But also let them know if you have expectations.

  • Set expectations with your kids early.  Tell them they’ll be responsible for getting good grades, and working hard in high school – and applying themselves in order to get scholarships and grants.
  • Encourage the child to examine the ROI of a certain major and school. Discourage high cost schools for wrong reasons (my friend is going there, party school)
  • If you’re going to help with costs, set clear goals for continuing to help. For example, one father set a goal for his son of having a 3.5 GPA the first year in school (which the student paid for), and if it was maintained he would pay for the following three years. Be clear about what the money is going for (not for spring break!) and offer help in budgeting, goal setting, and so on.
  • Have them put skin in the game: Students that have something invested in the process tend to do better academically because they have more at stake. They realize better what the cost of their education is.  Encourage them to work hard to get grants, work 20-25 hours a week and pay off as much of their school debt as they can while they go to school.

For me it comes down to this. If you can help your kids pay for school, go for it! If you’re struggling to save for your own retirement, however, focus on that first.  When you’re on an airplane the airline attendants give instructions that if the plane is going down, put your own oxygen mask on first, then your child’s. The same goes with paying for college. Take care of your own retirement first, and then worry about helping your child. What are your thoughts?  Should parents feel obligated to help their kids pay for college?         

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Last Edited: 9th July 2014

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Comments

    Share Your Thoughts:

  1. says

    I don’t think parents should be completely obligated to help pay. If parents already are on track with retirement and have additional money to help with college costs, then I think it’s fine but of course it is their decision. I went to college with no help and I did completely fine, and my student loans are paid off as well.

    • says

      Yeah, I think a lot of people talk about it as if it’s child abuse if you don’t foot the bill for a full college ride at a private university. I think that we don’t often talk about the side-benefits of having to pay part of your own way, including increased grades, more attentiveness to studies and an appreciation for the true cost of college.

  2. Kerrie Peacock says

    I had several friends in college whose parents payed their entire tuition and those friends while coming out of college debt free also came out of college not knowing anything about money and savings. I think a lot of paying for college teaches our kids about learning to stand on their own when it comes to money.

    • says

      I agree, having to pay part of your schooling definitely will give you a better appreciation for the cost of your schooling, and help you to get on the right track as far as managing your money on your own – without help.

  3. Vis Moody says

    As a student whose parents did not help with college costs at all, I can say that it sets the child’s progress for many years. This, in addition to the low morale. But parents should also not pay the total college cost for their child, so that the child learns the value of money.

    A good balance is for the parent to strike a deal with the child that the parent will pay a percentage of the fees, which varies based on the previous semester’s GPA. I have seen other parents do this for their college kids and this seems to be a good mix of helping their child and teaching them to budget right and pay the balance for their college cost.

    One of my friends told their daughter that she will be given 50% of the college cost, and the remaining is her responsibility. She can choose to cover the remaining 50% by scholarships, a part time job or student loan. In case she is able to cover more than her portion of the 50%, her parents will let her save the balance of her parents’ 50% portion in a savings account that she can use to progress her life after she graduates. This has been very helpful to the parents and their daughter.

    • says

      You shared some interesting ways for parents to approach it – from paying a percentage of the fees based off of GPA, to covering part of the cost – but encouraging them to pay as much as they can and giving them a cash bonus if they do – love that idea!

  4. says

    I think that if you have instilled in your children throughout their life that debt is not acceptable, then it would be almost hypocritical to then abandon them at their time of most need and say, “welp, sorry.I guess you gotta get a loan”. However, paying for the entire thing, no questions asked is no way to go about it either. Young adults need to learn how to manage their money, and paying for college is often their first real life experience in how to manage their finances. Ideally, the parents would be financially sound and have retirement savings on track. Then, the student should be required to apply for as many scholarships as they can and also work a job in college to help pay for their living expenses. Then, if the student has done all of these things, and the parents are capable, they should help the student stay out of debt. This will give them such an advantage upon graduation to start their careers debt free. However, there should be stipulations and if the student starts to get lazy, pull back the financial help. This promotes the idea that if you don’t work for it, you don’t get the benefits.
    Another idea is to make a deal with your kid. My friends parents paid for her living expenses if she kept her full ride scholarship. She did, all 4 years and graduated with no debt. Pretty cool. I think you’ll know if your kid is mature enough to handle this type of arrangement or not.

  5. says

    Lots of great points mentioned here!
    My mom was not in a position to help finance my college costs, so it was a combination of scholarships, grants, work-study, and loans. I graduated with $28K in student loan debt which I quickly consolidated and just recently initiated a plan to have it paid off in the next 3 years (woo hoo!)

    What I lacked in finances, was not as valuable as what I lacked in financial education. I was ignorant to debt, interest, loans etc. I didn’t “see” the financial impact until it was time to pay back.

    I missed opportunities like community colleges for general classes, and applying myself more in my AP/IB classes in high school to get college credit.

    I didn’t bother to pay off anything while I was in school, and I deferred as long as I could….not fully understanding the concept of interest.

    But I’m a (little) wiser now, and I’ve vowed to make sure my son understands these things. Unfortunately, they were not taught to me and I learned these lessons on my own once I got older.

    Retirement should definitely come first! I believe a child paying for some of their higher education will help them value it.

    My son is only 2, so the tuition is projected to be astronomical by the time he is ready to enroll in college. My more immediate concern is a good education in the early years. I’m strongly considering a private Christian academy and/or moving to a better public school district. But that’s a whole different topic!

  6. says

    If parents are in a financially safe place and they are able to help, then by all means. But if it is putting them in a financial blunder and leaving them with a heavy burden, then I do not think parents should feel the need to be obligated to help their children pay for college.

  7. Anita says

    I went to university part-time for 12 years, earning two undergraduate degrees. I paid for it out-of-pocket with no parental assistance, working full time while attending university in the evenings. After about 4 years, I started receiving $100 per semester scholar’s “scholarship” because I had a very high GPA; about the 7th year, I obtained a new clerical position (in part, due to the “stick-to-it-iveness,” as the hiring manager phrased it, of my undergraduate pursuit). The new position paid partial tuition reimbursement (but the $100 per semester had to be shared with the employer — which seemed fair to me). Despite graduating with the highest GPA the year I graduated, I did not count — to the university, to campus recruiters, to those granting post-undergraduate scholarships — because I was not full-time and I was older than my graduating peers. I always rather resented that…it really was NOT easy to go for so long and not rack up steep debt.

    I write not so much to grouse, but to point out that there ARE other options. When I’ve stated this to other parties, the complaint is that it causes the young woman/man to start so late on their careers. What does THAT matter if you end up having to pause your life anyway to pay those exhorbitant student loan payments for 20 years (or more?)! Either way, your life is on pause. Mine was paused for a mere 12 years (and it probably would have been closer to 9.5 years had I pursued a single degree).

    Perhaps, then, we need to redefine what “to graduate” means. Even now, you’re not really counted as graduating “on time” if you go for longer than 5 years, but part-time education has worked beautifully for all of the people I know who took that route. I’m in a managerial position with a very good income now and I am totally, wholly, and happily debt-free and a plump retirement account. That last sentence isn’t a pat-on-the-back contortion, but just to buttress my claim that my method of educational pursuit — while not the initial preferred method! — was was well worth the extra time. And I am thankful that my parents did NOT pay for any of it, as I came out of college knowing the value of my education and having a sense of my own capabilities.

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