How to Help Your Kids Avoid Student Debt
Today we’re talking about college. Specifically, how to help your kids make it to age 25 without six-figure
regret debt. College is something that I have a lot of experience with. Sometimes I’m actually embarrassed to tell people because of the way that they react, but I have four college degrees.
My higher education experience runs the gamut from a small, unaccredited Bible college to online competency-based education to an NCAA Division 1 school—roll tide! On top of my experience in seemingly every corner of higher education, I’m now a parent as well. My oldest is already into the double-digits, so my focus has now shifted from my own education to his.
Set Expectations Early
While my kids still have a while before they’ll be packing their bags for the dorms, one of the most valuable things I can do for them starts now. The expectations I set now will have a major impact on both their college experience and the cost of it.
Let me ask you something. What is the purpose of going to college? You know you want your kids to go to college, but have you ever stopped to think why? There are countless possible reasons and your answer likely reflects your own college experience. Do you want them to go so that they can have marketable skills to provide for themselves and a future family? Do you want them to expand their minds and broaden their horizons? Do you want them to experience the deep relationships that develop by living in close proximity to their peers? Do you want them to carry on the family tradition or develop valuable connections? Do you feel it is a rite of passage, a necessary coming-of-age experience? Do you just not want them to be left behind?
There is no right or wrong answer, but how you answer will shape the expectations you set, both consciously and subconsciously. Your expectations will affect the kind of school your child is interested in, the cost of education, and their willingness to take on debt.
Your expectations are not the only ones that are shaping your kids, either. They are also shaped by the culture that they are living in; their peers and the school they currently attend. In some communities, any teenager who even makes it to a community college is admired and encouraged. It isn’t that way everywhere, though. At my high school, the expectation was to go to a University of California (the better of the two state university systems) or Ivy League. Anything other than that was looked down upon. Be careful what kind of expectations your children are learning from those around them. If they don’t align with your own, you’ll have to work even harder to impart your own family values to your children.
Guide Your Children
More than just imparting your values, you should teach your kids some of the practical aspects of higher education. Teach them the importance of their choice of major. Not all college majors bring about equal results, from both a pay and satisfaction perspective. Degrees in science, engineering, technology, math, and healthcare usually lead to better-paying jobs. This article from the Wall Street Journal shows how different degrees from different schools compare regarding earnings one year after graduation and debt at graduation.
ZipRecruiter surveyed thousands of job seekers and found that there are vast differences in satisfaction based on major. The least satisfied were the Philosophy/Religion/Theology majors, where a quarter of them regretted their choice. As a Theology major myself, I have no regrets but I also didn’t take on debt and never got a job based on that education. If you have a teenager, I would encourage you to read that Wall Street Journal article together and discuss it. It could be life-changing for them.
Teach your kids about debt and what it actually means to pay it off. If your son or daughter takes out $15,000 of student loans each year for four years, they will graduate with $60,000 worth of debt. On a 10-year term at 6%, their monthly payment will be $666, or about $8,000 a year. That may seem pretty reasonable and affordable since the average new graduate earns about $55,000 per year. At that rate, though, the first 25 hours they work each month is just to pay back their loans. That’s giving up about a month per year of their lives for 10 years, just working to pay back the debt.
What if instead they graduated debt-free and invested that money? Investing $8,000 a year for 10 years starting at age 22 and earning a 6% return would result in having almost $860,000 at age 67. Show your child that $60,000 worth of school loans will cost them one month a year of their twenties or over $800,000 at retirement. Teach them what paying off student debt means in practical terms.
It’s also important to help your kids look beyond the obvious and broaden their horizons. Just because you live in Minneapolis doesn’t mean your kids have to go to the University of Minnesota (though there’s nothing wrong with that, we’ve got a great alum on our team). Help them to explore multiple options and understand the costs and consequences of each. Maybe the University of Minnesota is the best place for them to graduate from, but going to a community college for their first two years is the right thing for their finances. It’s unfair to expect a teenager to be able to make such big life decisions on their own. As their parent, it’s your job to lead them and guide them.
Lower The Costs
Scholarships & Grants
If cost is a major concern for you, then there are a lot of things you can do to mitigate it. The first one, that everyone knows about, is scholarships and grants. There are tons of scholarships out there just waiting for someone to claim them. Put your kids to work researching scholarships online and applying for them. If your daughter spends ten hours researching and applying to ten scholarships and only ends up getting one for $500, that’s still a very productive use of her time. How many other teenagers can earn $50 an hour? Treat it like a part-time job and give your teenager a quota for how many scholarship applications need to be submitted on a weekly basis.
The other obvious way to combat cost is for your child to work. Working brings in money that can go towards tuition. Also, holding a job develops responsibility, people skills, and work ethic, all of which will help in a future career. Working can also help cover the cost of college in a less obvious way. Some employers provide educational benefits, such as Uber’s and Starbucks’ programs where they pay 100% of tuition for their employees at Arizona State University. Some employers also offer scholarships. I worked in a grocery store while in high school and was able to earn a pretty nice scholarship from my union.
A lesser-known way of cutting the cost of college is through dual enrollment, where students can earn college credit while still in high school. Many states offer programs where high school juniors and seniors can take college courses for free. I know a number of diligent students who were able to graduate from high school with an Associate’s degree already in hand because of these programs. Every college credit your high schooler earns in these programs is one that you now no longer have to pay for.
Even if your state does not have a dual-enrollment program, many individual schools do. Liberty University offers a steep discount to 11th and 12th graders through their Online Academy. The Arizona State University Universal Learner program allows anyone, regardless of age, to take college courses for a mere $25. At the end of the term, if you like the grade you can pay $400 to add it to your transcript and get college credit for it. For a three-credit course, that saves you up to $1,558 over their regular cost of tuition.
One final way to save both time and money earning college credits is through credit-by-exam (CBE). The most well-known CBE program is the Advanced Placement program where students take college-level courses in their high school and then can pass an exam at the end of the year to earn college credit. Way back when I was in high school, I took one course, AP Spanish Language, and ended up earning 6 college credits for it. AP exams now cost $96 and the school I went to currently costs $396 per credit, so if I did the same today it would save me $2,280. It also enabled me to move directly to upper-level Spanish courses as a college freshman.
Other popular CBE programs are the College Board’s College Level Examination Program and the DANTES DSST exams. While many universities and colleges accept CBE, it’s important to note that not all do, and even those who do sometimes limit the number of credits that can be earned by CBE. You’ll need to do some research to see what can be transferred to your child’s school(s) of choice. If credit-by-exam has piqued your interest, I would encourage you to listen to this podcast from Radical Personal Finance. I can personally vouch for what he describes because I actually earned the exact degree that he uses as an example, a good portion of it through CBE.
Now we’ve come to what most financial planners talk about, saving for college. If you save money now, you can use it to help cover the cost of college later. We usually recommend saving for college in a 529 plan because you can invest the money for tax-free growth and many states offer tax deductions for 529 contributions.
The downside of 529 plans is that the funds must be used for qualified educational expenses or you’ll have to pay income tax and a 10% penalty on the earnings when you withdraw them. Because of that, we usually only recommend saving half of the expected cost of college into a 529 plan. Anything else can be invested in a taxable brokerage account that doesn’t have restrictions on usage. We don’t recommend saving in a traditional bank savings account if your child is more than a couple of years away from college because they don’t pay enough in interest to keep up with inflation.
Not all kids go to college, which can make parents nervous about putting money into a 529 plan. What can you do if you want to help your kids with college but don’t want to tie up your money that way? Here’s an out-of-the-box idea: pay off your mortgage. If you take out a 15-year mortgage when your son is three years old, then it will be paid off by the time he’s entering college and you’ll have freed up cash flow to go towards tuition. If he decides to join a rock band instead of going to college, you can use your extra cash flow for something else!
Of course, this is just an idea and may not be the best move in your situation. The best way to approach the college funding question is from a holistic view of your entire financial situation alongside your goals and values. We can help you do that with a comprehensive financial plan.
As I just mentioned, not all kids go to college. Some join rock bands. Some join the military. Some become electricians. Some start businesses. Some just go to work. Some kids go to college and then come back home without a degree to show for it.
Accept your kids as they are and love them. Not all kids are meant for college. Not all kids will make wise decisions or listen to reason. Do the best you can and love them anyway, just like God does with us.
You don’t know what the future holds regarding your kids, their education, or your finances, but you can still do your best to prepare. The first step in helping your kids financially is getting your own finances in order. The first step in getting your own finances in order is to develop a financial plan to guide you. If you want help developing your own financial plan, we are here for you. Schedule a free introductory call with us today.
About Amy Artiga
Amy Artiga is an Associate Financial Planner and Operations Manager at Guide Financial Planning, a financial services firm focused on helping people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. The Guide Financial Planning team works with clients both locally in Minnesota and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.