Who Pays for College?

Hey Paul: Our daughter is headed off to college next year. Scholarships and financial aid will cover half the cost of college leaving $15K each year that we have to pay or borrow. We have some savings and ability to pay but certainly don’t have the full amount to cover all her college expenses. Should we pay for her college education or have her take out student loans?

College is the biggest investment most people will make other than their retirement and home. As you are experiencing first-hand the costs of college are staggering – we could buy a ski boat or take an around-the-world vacation each year if we didn’t have tuition payments to make. But then we would fall into one of Jeff Foxworthy’s definitions of “you know you’re a redneck if…. you’ve got more invested in your pickup truck than your college education.”

The decision of whom to burden with paying for college – either along the way out of savings or who is saddled with the student loan debt – is a tricky issue. An analogous decision is how to pay for government programs – should the rich pay higher taxes based on ability to pay or should those who are directly benefiting from the program foot the bill (e.g. toll roads)?

In your case the total bill over four years is $60,000. As I’ve mentioned in prior columns a college degree is worth about $1,000,000 in higher lifetime earnings. Of course the sole reason of attending college shouldn’t be solely to secure a large future earnings and even if that is the goal it isn’t always realized. Based on the premise that college is going to more than pay for itself, your daughter should take responsibility for paying her student loans off out of the proceeds of her future earnings.

It sounds like you have an aversion to debt and also want to limit how much debt your daughter is forced to accrue in getting a college education. Keep in mind that an undergraduate degree is usually just the beginning of a very pricey decade in her life. Many careers require a couple years or more of graduate school where the price tag is higher and the financial aid is sparse. Then she’ll meet some guy (also in debt) and have dreams of a big wedding on your tab. My point isn’t to forgo college or marriage but to keep in mind the bigger picture in how future expenses and debt can mount up.

Since you are willing and able to help pay for college, I suggest that you set up an incentive system to reward academic progress. As much as we talk about college graduates burdened with hefty school loans a bigger problem are college dropouts who have big loans and no diploma. So what we’re working towards is a payment split that balances your daughter being connected to the educational finances but not necessarily fully responsible for paying for college herself.

The first thing to establish is your own ability to pay. The standard advice in financial planning is to fund your retirement first. You can borrow to pay for college but not your retirement. I would add to that if you have any high-interest debt to make that your priority in eliminating before funding for college. Let’s assume you can devote $5000 each year towards paying your daughter’s college.

As I alluded to earlier the biggest problem facing parents isn’t paying for college. The biggest challenge is making sure your financial investment pays off with your daughter completing college. One life event you’ll soon face is that your 18 year old is no longer a minor and various privacy laws mean that you won’t be able to track how she’s doing in school the way you have for the previous dozen years. That is, the school is not allowed to divulge her grades to anyone without her permission.

Given that you will be partially funding her college experience I think it is entirely reasonable to be briefed on how that’s going by asking to see her grades. Most students won’t have any problem with this. If they do you can likely assume poor grades or they have become a Libertarian consumed with “their rights”.

There is no magic formula but a reasonable agreement could be that you’ll pay $5000 and take on half the student loans if your daughter is making progress toward graduating with a B average in four years. College expenses beyond the four years will be her responsibility.

The college experience is certainly intertwined with financial issues and challenges. Although my advice is to approach it as a “business decision” the greatest gains can be found by keeping involved in your daughter’s life. Conversations about hard topics like paying for college or how she’s changing her major (again) will likely be more important than who is signing the promissory note.