Why is it a Bad Idea to Pay for Your Kid's College?
Jan 14, 2023
Why is it a BAD idea for you to pay for your kids to go to college?
We think it's a good idea. Our kids won't have student loans to pay back, or they'll have less than their peers. They won't have to work during school. THey won't have to worry about where next semester's tuition will come from. They can STUDY! Get good grades.
Most would think I’m talking about attending college being a bad investment and while that is definitely true for some, that’s not what I’m getting at.
(1) Parents are not doing the math. regardless of whether you are significantly financially well off,
You sacrificed and saved, or you’re finding other methods (loans, home equity loans, borrowing from investments, etc),
There’s something missing from this equation.
It’s the math. Parents are not doing the math.
The average 4-year cost of attendance (tuition, fees, room, board, and books) to a state flagship university is just over $100k. For many families that might be either pocket change or in a dedicated fund. That’s awesome. But do the math. For every $100k removed from your investments at age 40, you lose more than $800,000 at retirement age, 67.
I have 2 kids. I didn’t realize it but my husband expected we’d pay for college using our investments. Thank goodness we didn’t have that opportunity since a turn of financial events cut that idea short. If we had paid that $100k each, for 2 kids, and I later realized that we gave up 1.6 million retirement dollars, I think I would have had a heart attack.
And that’s just for one kid, for only 4 years, at a state flagship college. The time value of money. It gets significantly worse with more kids, younger kids (because costs increase every year), attending for 5 or 6 years, and with pricier institutions.
A client with little kids (3 under the age of 8 ) did the math with his wife. Projecting the cost increase over the next 10+ years, his cost would be $1.2 million dollars to send his 3 kids to college. If he pays 1.2 million, what is he losing at retirement?
He loses more than 6 million dollars!
You can imagine he called me in a panic the next day. For him, the good news is that he’s thinking about this earlier than most and is doing something about it NOW. He took ACTION. He now has a PLAN.
(2) The second reason it’s a bad idea for parents to pay for college: Studies prove there is an inverse relationship between parents financially contributing to their kid’s education and their college student’s GPA. As little as $8000 has a significant detrimental effect. Double it to $16,000 and the teen’s college GPA drops below a 3.0. This is a problem for post-graduate employment. College GPA matters.
So what’s the solution?
Start EARLY (as early as middle school) with a proven strategy to avoid these pitfalls