College education costs a pretty penny.
This is precisely the reason why even though college education puts graduates a better chance of employment and better salary than their non-college graduate counterparts, many start out their journey to the real word by crawling their way out of debt.
Here in the U.S., total outstanding student debt has climbed over $1 trillion. Over a 4-year period, a college student accumulates a whopping $29,000 in student debt on average.
No wonder why some youngsters would rather find a job rather than proceed with a college diploma.
As a parent, however, you might not like the idea of your kids foregoing college for some other adventure. There is, after all, a big pay gap between degree and non-degree holders in the employment world. An analysis by Economic Policy Institute based on Labor Department’s data has found out that college graduates earn 98% more an hour on average than those without a degree.
What should you do then, as parents, to help your kids obtain a college education without taking on too much debt, and without sacrificing your retirement, as well?
Don’t pay for everything
Thinking of just splashing out the cash for your kids? Not so fast. Your own future could suffer if you do that.
In the Philippines, parents paying for college education is a norm. This is probably due to the limited options that students have in funding for college. Student loans are rare and at a very minimal amount, if any. For students to afford their own education, they would have to work full time and save, which means stalling time for real professional employment.
In the U.S., student loans are the norm rather than the exception. In such case, chances are your kids will likely understand the situation. Many of their own friends are probably taking on student loans, as well.
Communicate with your children way before the need arrives
Communication is important so as to set expectations and avoid confusion and disappointment. Talk to your kids way before they enter college (when they enter 9th grade or when they start high school, perhaps) that you won’t be able to afford everything come college time.
For example, let them know that at this time, mom and dad can only afford to raise X amount ever year. That you would need some help from them, in both saving money and controlling household expenses.
How much do you expect him or her to contribute?
Different colleges will differ in costs but it won’t be that difficult to research on a projected cost by the time your child goes to college. How much will you be able to raise in X number of years? Which costs are you going to cover –board and room, wardrobe (or dating expenses), perhaps? Is she going to pay for the full tuition herself?
In that case, try to give her a target amount to set expectations. This will also set her mind in motion in finding ways to achieve her own target.
If she plans to go to a relatively expensive school, let her know that she would need to finance the rest with a student loan.
Open a spreadsheet or an online student loan calculator to demonstrate how student loans and payments work. For example, if she plans to borrow $18,000 at 7% rate on a 10-year repayment plan, she would be paying be $209 per month.
Make sure that she understands the seriousness of the matter. After all, there is really no guarantee to a handsome paycheck that will allow her to speed up paying off debts. Not to mention, there is no escape from student loan debt.
While you are at it, why not discuss with your child the subject of saving and investing for college, too? Teaching them ways to save money will not only help them prepare for their own tuition, but will also control their lifestyle and spending habits at a time when they are largely responsible for their own finances. College is, after all, the first real test of money management skills.
Now in your case, you might consider getting a 529 plan for your child. While you and your spouse make your contributions to it, encourage your child to help you, too.
She might even find ways to raise money for her future such as working part-time for neighbors or at a local restaurant. To you this might seem like you are abandoning responsibility for them, but don’t think that way. You are actually raising self-reliant and responsible kids. Letting them out into the world will help them build self-confidence, knowing that they can do things on their own while away from mommy and daddy.
Aside from a 529 plan, another option is the Roth IRA. The advantage of a Roth IRA is that your contributions can grow tax-free. Moreover, you can withdraw your Roth contributions without penalty any time, and educational costs are qualified for such withdrawals.
Your children’s education and your own retirement are both important. It would be terrific if from a financial perspective, there are no conflicts between these two. Unfortunately, however, it’s rarely the case for majority of us so it only makes sense to find a middle ground for these needs and responsibilities. Communication is key in the process…and so is understanding among family members.