Earlier this week, a former colleague alerted me to a post on LinkedIn that's right up my alley: "11 Tips to Raise Financially Savvy Kids," written by Winnie Sun. As both a father and a financial planner, I was naturally drawn to the recommendations - everything from giving kids an allowance to teaching them about delayed gratification - and it's well worth a read for any parent. In a world that's increasingly financially illiterate, it's a noble goal to raise kids who know how to balance a checkbook.
What caught my attention more than any other recommendation, though, was this one:
5. Involve your children in major family purchases
When your family is planning on making major purchases such as a home, new car or kitchen appliances, include your kids in the process. You can teach them about the importance of doing research before making a big purchase, the factors that go into your decision-making and how you compare products and prices.
I totally agree with that advice, and it brings to mind a conversation that I'm frequently having with clients, regarding how much to contribute (or not) to their kids' college tuition.
After all, for most families, college tuition will be one of the largest single purchases (or investments) they'll ever make, second only perhaps to their house. And yet, for most families, the conversation regarding the financial aspects of the decision is sorely lacking, leading to some inevitable regrets down the line when the financial impact comes home to roost.
It's vital for a family to discuss the financial aspects of the college decision before the student whittles down his or her college list and begins sending in applications. Once those applications have been sent in (and fat/skinny envelopes received), it can be difficult if not impossible to change your mind about which flavor of college education to "purchase."
As Winnie Sun suggests, with college tuition, as with any major purchase, it's important to engage your kids early and often, and to encourage them to consider the full costs and benefits of the various options.
Of course, even once the decision has been made, there's still one important decision to be made: who pays the bill? Let's consider some of the pros and cons of the different approaches to college tuition financing.
How much do parents want to pay?
When advising clients on how best to save (or not to save) for college costs, the first step we will take is determining how much the parents are willing to pay towards their kids' education. Do they want to pay 100%? 50%? Nothing at all? Or are parents willing to pay up to a specific dollar amount (say, the equivalent of the tuition at the local state university), with any balance to be covered by the student?
All of those options are valid, and parents can have very good reasons for choosing each one, usually stemming from their own values, experiences and knowledge about their children (and how best to incentivize their future success).
Whatever the parents choose, however, it's vital that they communicate their decision to their children, and that they do so early. All too often, the kids aren't involved in the conversation at all, or at least not until very late in the process. The kids thus make their college decision in a financial vacuum, choosing their educational destination based only on the academic and lifestyle factors, with financial figures deliberately omitted from the equation.
While encouraging our kids to think of the college choice with cost not being an object might be well-intentioned (and might make us feel like good parents), it's not necessarily in the kids' best interests for the long term.
How much should parents pay?
Even if parents do decide that they'd like to pay the full cost of whichever college their kids choose, that doesn't necessarily mean that it's a good idea. There is, in fact, a growing amount of research surrounding the advisability of asking students to cover a portion of their own college tuition costs.
One influential study from University of California-Merced professor Laura Hamilton (cited in both Forbes and The New York Times) found that the more parents contributed to their children's college costs, the worse those students' academic performance became. In other words, if the students had no financial "skin in the game," they tended not to take their studies as seriously, and they presumably focused instead on some of college's more "social" aspects.
For children whose parents were more affluent, the long-term impact on the kids' career outcomes was muted, presumably because they were able to rely on their parents' other connections and relationships to earn jobs that overlooked their subpar academic performance. But for the kids from lower-income or middle-income families - families who most likely had to seriously strain themselves in order to make the additional financial contribution - that academic underperformance had real consequences in the long run.
From the perspective of the parents who placed such a high priority on education, and who worked hard and made sacrifices to give their kids the best possible opportunities, those career setbacks represented a particularly ironic side effect of otherwise well-intentioned parenting decisions. Sometimes even the best-laid plans can have some nasty unintended consequences (Bernie Sanders, take note).
What's the kids' role?
So, if it's a good idea to have kids cover a portion of their tuition, what's the best way for them to contribute? Term-time employment is one common option, but another study suggests that term-time employment might also have negative impacts on academic performance.
According to the research, then, in order to maximize your college students' chances for academic success, you want them to pay part of the way, but not to do so via term-time work. Are student loans the answer, then? Unfortunately, probably not.
First of all, taking on debt to cover tuition doesn't engage the emotional pain centers that are so important to respect when making major financial decisions. By the time the student feels the actual pain of making the payments (thus internalizing the impact of the financial decision), they've already long since left the verdant lawns of their college campus, presumably having traded them in for the soothing buzz of their office building's fluorescent lights.
In a sense, then, they might as well have never contributed anything at all, since they won't actually be making the payments until their academic performance is already spoken for. For many kids, paying for college with loans is no different from having their parents pick up the tab entirely (at least until the loan statements start showing up).
Furthermore, student loans come along with their own set of complications, as a generation of debt-burdened millennials are now beginning to learn. Indeed, student loan debt is having a wide impact on the financial decisions of the younger cohort. Studies have shown that millennials are delaying marriage, shunning homeownership, and having children at increasingly advanced ages. Debt-related stresses are contributing to, if not entirely responsible for, all of those dynamics.
I'll forgive you if you're throwing up your hands in frustration at this point. I've told you that your kids should pay for part of their education, but that there are significant drawbacks to both term-time employment and student loan debt. How, then, are they (and we, as parents) actually supposed to avoid the "no skin in the game" achievement trap?
This brings everything right back around to where we started. Engage your kids in the financial conversation early, before the college decision has been made.
Get them thinking about things like return on investment, desired career paths, and how their choice of school might impact their post-graduation decisions. Does their "dream school" actually help them achieve their long-term goals? And - if that school will require them to take on student loans - make sure they understand how much they'll owe out of pocket after graduation, and how that monthly payment might fit into the budget of an entry-level employee.
The sooner you're able to engage your kids in the college costs discussion, the more of a sense of ownership they're likely to take over their decision. If they know at age 15 or 16 that they'll be on the hook for a portion of their tuition, they may even be encouraged to take a job during high school, which can be a good thing for multiple reasons; the sooner your children develop good work habits, the better.
Regardless, it's important to be clear with your expectations of your college student, and to follow up on those expectations. If you want to raise a financially literate child (and who doesn't), then it's vital to involve them in the largest financial decision they'll ever make. Chances are, they'll thank you for it sooner rather than later.
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