Funding An Education
Article by R. Joseph Ritter, Jr. CFP® EA
Funding your child’s (or your own) college education can seem like a daunting task, especially if you do not have the cash to walk into the finance department of the college of choice and pay for all four years in one shot. So, how do you best tackle funding an education? How do you tackle funding multiple education bills if you have multiple children?
Let me say first that I believe college education is over-rated. Many colleges have become very profit driven and motivated around raking in as much revenue as they can. This is not an environment conducive to providing the best education available. An example of this is the vast number of majors available. How do you even go about choosing the best major? Many majors do nothing to improve your or your child’s marketability in the workforce, although they may prove fascinating in the classroom.
In fairness, not all majors are profit-driven. Some majors have emerged as new needs and fields emerge. One example is a major in advocacy for victims of sexual exploitation. This is such a unique and specialized field that is much needed to relieve suffering in our world, yet it does not lead to a financially productive career. Some majors are necessary to develop people into the best servants possible, and there is absolutely nothing wrong with that.
Before I give you my thoughts and recommendations on funding an education, let me tell you my story. When I graduated high school, my parents told me they did not have the money to send me to college. They could essentially contribute nothing toward my education. With my whole life ahead of me, I was not sure what to do, so I spent 18 months after high school working, until I got tired of the hot summers in a warehouse with no air conditioning. It was then that I decided a college education was necessary to climb the ladder.
From the small savings I put away and while continuing to work full-time, I enrolled in the local community college. For about $1,200 per year plus the cost of used text books whenever possible, I completed two years of education. As a step toward achieving my bachelors degree, I did go away to college for one semester, but found it was too expensive for me. Dorm life and I also did not get along very well together.
With the help of some local scholarships and support from my church, I went to a local college to complete my bachelors degree. Although my parents could not contribute financially to my education, they did provide me with a place to stay and all the meals I could eat. The decision to stay local for the majority of my education saved me tens of thousands of dollars.
While studying for my bachelors degree, I continued to work part-time. When I graduated college, I had about $12,000 in student loans, while many of my peers had loans approaching $100,000 because they lived in the dorms away from home and did not have jobs.
When I first enrolled in the community college, I had no idea what I wanted to do or what to study. This may be common, I really don’t know. All I can say is hats off to those who do know from an early age what they want to study and do with their lives because the decisions facing young adults can be overwhelming. I bounced around in several majors, all having to do with criminal justice, psychology and business until finally settling on business administration. My father gave me a very wise piece of advice to study business. His reasoning was that business was a versatile degree and would provide a well-rounded foundation for future work in nearly any field. He believed that specialty education could be obtained in graduate school. My father was a pastor and rubbed shoulders with many pastors who did not know the first thing about managing a church, managing people or conducting business meetings. Many of them had studied religious majors in college and those who continued their study went to seminary, never having any exposure to business fields.
My bachelors degree is in business management, and I owe that to my father. I must say that he was right in his advice.
One last thing to add to my story is that upon graduation I found there were no jobs waiting for me. In my mind, I was now qualified to be hold a management position somewhere or at least sign up with a company working toward a middle-level management position. Not so. Wherever I went, I was told that I had to begin in an entry level position. Thus, I cannot say enough about having work experience or being employed before you start your education. The company you are with may very well support you in your educational endeavors and find ways to advance you as you become more experienced and gain educational achievements.
So, with that in mind, here are my recommendations:
1. Get a job. As soon as your children are old enough to work (15 to 16 years old in most states), have them get a job. I have worked along side people who did not work at all until they completed graduate school. Their first job was in a professional field, and they had no foundation on which to build. Getting a job in even the most menial position – janitor, bagging groceries, flipping hamburgers – gives you interaction with co-workers, an appreciation for what it feels like to be a low level employee, guidance from supervisors to help you become a better worker and person, and an appreciation for the people who are often unseen but play a very integral role in making the world go around every day. A job has the added benefit of providing you with spending money, money to put toward your education, and money to save for future expenses (car, engagement ring, apartment, etc.). A job helps to build your self-respect and character. Finally, being able to hold a job and complete your education lets your prospective future employer know you can juggle difficult schedules and focus on hard work. If you think about it, prospective employers are taking a much greater risk with someone who has no work experience at age 22 than they are with someone who has a demonstrated ability of hard work while completing an education on a full-time basis.
A job will also help you or your child start to understand what you would like to do in life. Finally, getting a job that has the possibility of leading to the work you or your child eventually wants to do will complement your education much better than simply hoping there is a job waiting after graduation.
2. Stay local and stay home. Dorm life seems to be an alluring prospect for many students. While it does present an opportunity to flap one’s own wings in life, it is expensive, and not always the best environment to experience freedom. Many people live within the reach of a college or university that would provide a solid education and allow the student to continue living with his or her parents. If living at home is not feasible, then you may be able to share an apartment with other students you know very well and who share common interests. In most cases, this is still a significant savings from living on campus.
3. Choose 529 Plans and tuition guarantee programs carefully. Some states and individual colleges/universities offer a tuition guarantee program. Parents can buy into the guarantee when their children are young at a fraction of the cost of paying tuition outright when the student enrolls. While the programs are attractive, there are a number of pitfalls and issues to consider. The programs are only good at one particular school or at a few schools in the state. The funds cannot be transferred, so if your child decides to attend a different school, you will have to request a refund. If you buy into the program when your child is, say, 4 years old and then do not use the money, you can get a refund, however, you most likely could have gotten a better return on your money if you had directed the investment yourself. The real benefit to participating in a tuition guarantee program is that, if you bought enough units in the program to cover the full tuition, the school guarantees the money you deposited will pay for the entire tuition amount. However, this is where some states have run into trouble and either cut back their programs or significantly increased the initial cost. To achieve the maximum benefit, you also have to buy into the program when your child is very young. A lot of things can happen over the course of your child’s life that can make a tuition guarantee program at a particular school undesirable, including a move out of the area and the child insisting on studying a program not offered at the school.
The tuition guarantee programs work very similarly to 529 Plans, in that the money deposited grows tax free provided that the money is used for qualified tuition expenses. The 529 Plan is less restrictive in the sense that the money can be used at any school, however, there are no guarantees. The 529 Plan performs as well as its investments, which can be managed or self-directed. If your child decides not to attend college or attends a college that costs less than the balance in the account, the remaining funds can be applied toward another child in your family with no penalty. The downside is that there are taxes and penalties for withdrawing money from the 529 Plan for reasons other than qualified educational expenses. The unfavorable treatment expires when the child attains age 30, however, there are still income taxes due on the growth in the account.
One creative planning technique is to save money inside a 529 Plan and in a regular brokerage account at the same time. If you or your child obtains scholarships, spends less in tuition than anticipated or does not attend or complete college, the money in the brokerage account can help provide financial support until the 529 Plan money becomes available without penalty.
4. Start saving today. With a low savings goal of $5,000 for a child at age 18, saving approximately $15 per month beginning when the child is born and investing the money aggressively will achieve the goal. For most families, $15 a month is very doable, and $5,000 will help the child get off to a good start. The longer you wait to save, the more you must put away to reach your goal. In the financial planning process, we can go through a number of scenarios to break down the monthly amount needed to reach your financial goals and help you come up with a plan to get as close as possible to where you want to be financially given the resources available to you.
5. Choose a well-rounded field of study for your major, unless you have your mind made up about your plans or have a ready-made position waiting for you. You will be best suited for success with a well-rounded major that can be versatile across many fields. Many employers care little about what you studied in college as long as you can do the work. Very few employers build on the college education you bring to the table. In most instances, they train you for the work they want you to do. If you need a specialized education or an advanced degree, then use a masters degree to achieve the specialization. Many employers will help to pay for advanced degrees. The advanced degree will also compliment your career much more than a bachelors degree.
6. Prestige and grades are not everything. Not everyone can go to an ivy league educational institution, and not everyone will have a 4.0 GPA or achieve the highest score on the SAT. As more students than ever enroll in college, admission is increasingly becoming almost as competitive as landing your first job after college. There is a healthy balance between gaining meaningful experience toward developing your future and maintaining a reasonable grade point average. A strong grade point average is not enough to be admitted into a respectable college or land a decent job after college. College admission personnel and employer recruiters are looking for real world experience. If you are going to work during college, you should expect that your grade point average will decrease, but it is a compromise that can be worth making if your work experience will be looked on favorably by a future employer.
Experience, ability and hard work will go much farther than graduating from a prestigious university. You should certainly enroll in the best university your money can buy, however, all doctors, lawyers, engineers, counselors, financial planners, etc. must proceed to pass additional exams and achieve specialized education. A prestigious name alone will not help anyone do that.
7. Be an entrepreneur. In days gone by and sometimes today, major companies were established by entrepreneurs who did not even complete high school. The individuals knew how to work, how to serve people, and found a niche to fill. Not everyone can operate their own business. However, your college years often offer an opportunity that will not be available later in life. This is the opportunity to do something entrepreneurial. Especially if you are living at home, you can stub your toes in the world without the prospect of losing everything, and you can position yourself for a very rewarding business and career if you do it right. College years, and even high school years for that matter, are the greatest years of a student’s life to launch an entrepreneurial endeavor, and the student should be strongly encouraged to do so. If successful, you will not be standing in employment lines or waiting to hear back from the 100 resumes sent out, and you can carve out the niche in which you have a passion to work.
The key to a successful entrepreneur is to carve out a niche, develop a quality product or service, focus on the customer, and treat people the way you want to be treated. No college education is necessary to do those things.