Should Parents Pay for College?

A friend of mine (let’s call her ‘Jane’) recently brought up the cost of putting her children through college. It turned out she was paying all the bills.

This would be great if she could afford it.

But she can’t.

Jane is 51 years old and earns roughly $90,000 per year. She will likely happily work for another 15 years. Currently she has about $400,000 in retirement savings and plans to aggressively save during her remaining working years.

To help her children pay for college, she has withdrawn some of her savings and tapped into a line of credit.

As a parent, I can understand the instinct to do everything you can for your children. However, I don’t believe parents should put their retirement at risk to pay for their kids’ education.

I realize I’ve probably ticked off a few people.

What is the parental obligation?

The moral argument that parents are obligated to provide an education for their children is strong. I agree that people shouldn’t have kids if they’re not willing to set them up for the world. However, what that means has evolved over the decades. Today that might mean a masters degree. But what were parental obligations 50 years ago? And what will they be 50 years from now?

The parental obligation seems to have grown over the years. Regardless, parents with college aged children today should have known what they were getting into, but at what point does the obligation end? Maybe never. I don’t know.

Of course, the decision is more than moral. It’s pragmatic. Money doesn’t appear out of thin air, and for that reason there are many additional considerations.

Who’s paying for retirement then?

Let’s put the moral argument to the side.

There is a pressing financial issue facing parents today. The cost of post-secondary education continues to rise faster than incomes. While it is increasingly necessary to get a college education, it is also increasingly financially unattainable for many people.

This is happening while much of the world faces a retirement crisis. People simply have not saved for retirement. Jane is one of the lucky ones, yet she still faces a shortfall if she doesn’t continue to aggressively save and invest.

Jane’s ability to fund her retirement is at odds with her desire to pay for her children’s education. She probably cannot do both.

Her window of opportunity to remain self-sufficient in retirement is closing. The more she financially commits to her children’s education the less likely she will retire as planned. Of course, plans have a way of going wrong anyway. Any number of unexpected events – ill health, redundancy – can cut her timeline to retirement in half. Jane has limited time and lots of downside risk.

In contrast, her children will have 60 years ahead of them once they graduate from college. If they pay for their own education, this is plenty of time to repay debts. If they pursue the right career path, they likely have much more upside than Jane has downside. Moreover, if Jane’s retirement is adequately financed she will retain independence. If Jane sacrifices her retirement to pay for her children’s education she will invariable depend on them (perhaps even live with them) once she stops working. Whether this is good or bad is up to the family to decide, but you must recognize that each option comes with trade-offs.

The biggest trade-off for Jane’s kids if they self-fund their education is they will be saddled with debt on day 1 of their working lives. That seriously restricts their ability to take entrepreneurial risk. It also forces them to take the first job that comes their way, perhaps sending them down a path they didn’t envision. Debt is restrictive and stifling.

As you can see there are no clear cut answers (unless you’re rich), but here is what I think:

  1. The decision to go to college and pursue a stream must be carefully evaluated. College is simply too expensive to use as a place to find yourself. Students (and parents) must have a path in mind and need to fully understand the return on investment of a college degree.
  2. Education costs should be shared by both parents and children. Everyone needs a stake in the game. Not only does this reduce the burden, I believe it builds commitment. The more a student is aware of the difficulty in paying for college, the harder they’ll work to get the most out of their education.
  3. Avoid paying for college using debt. If any debt must be incurred, the child should borrow (not the parent). The downside risk for a middle-income, middle-aged parent struggling to save for retirement is simply too large.
  4. Prepare well in advance. In anticipation of college costs (even if the child is still a toddler) cut some expenses. Forgo a trip or two. Importantly, the child must participate in these sacrifices starting at an early age. And when they can get a part time job, a significant portion of their earnings should be stashed away for school.

I don’t have all the answers, but I hope I have provoked some discussion.

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How to Give Your Child a Massive Financial Head Start

Something that is often forgotten in the personal finance field is that young kids have a massively long time horizon. The finance industry tends to ignore the compounding capability between ages 0 and 20, only to think of people as savers once they start working.

Sadly, this is detrimental to children. Because young children have such a long time horizon, a fairly small amount of savings can go a long way due to the benefits of compounding. Effectively, savings and investments made during childhood can give a child a massive financial head start.

Because young children have such a long time horizon, a fairly small amount of savings can go a long way due to the benefits of compounding.

So why is this cohort ignored?

The personal finance industry – made up of advisors and asset managers – earn fees on dollars that come in the next quarter. The larger those dollars the larger the fees. So it doesn’t pay to provide advice to people with small account sizes. I’m hoping this article can help fill the void.

I’ve previously explored how high school kids can create $1,000,000 in wealth by working summer jobs.

The following idea starts even earlier than high school, is easy to implement, financially feasible and doesn’t depend on a child’s ability to find work. Frankly, anyone can do this and help give their child/grandchild a massive financial head start.

Most newborns have four grandparents. If each grandparent contributes a manageable $25 per month into an investment account earning 7%, the child would have accumulated $51,430 by age 20. Imagine what a 20 year old could (responsibly) do with this money: pay college tuition, make a down payment on a property.

But why would the grandparents fund the account alone? What if the parents also each contributed $25 per month? In this case, the child would have accumulated $77,145 by age 20. Just that additional $50 per month results in a massive increase in value. This alone gives the child a massive financial head start.

    Let’s say the child at age 20 pretends this money doesn’t exist.

    What if at age 20 the child opted to leave that money invested until retirement without making any additional contributions?

    By age 65 the child would have accumulated $1,620,227. Of course, this doesn’t account for a higher cost of living down the road, but no matter how you look at it $1.6 million is a huge sum of money. Especially considering the child never had to invest a penny.

    Of course, like most of us, the child would likely contribute to his own investment portfolio. What if – after receiving the portfolio at age 20 – the child continued to contribute $150 per month until age 65? By age 65 the child would have accumulated $2,153,876!

    Time is on a newborn child’s side. Unfortunately, that time is typically wasted. An extra 20 years of compounding early in a child’s life can add massive amounts of financial wealth for little upfront investment. So if you or someone you know is about to have a baby or already has a young child, share this with them.

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    Growing Up Gen X

    Featured Image: Oscar the Grouch (arguably the Gen X mascot) with Caroll Spinney, who played him until 2015. Spinney died on December 8th, 2019. This article is dedicated to him.

    If you were to believe mainstream media, the only two generations to ever exist are Baby Boomers and the children of Baby Boomers (Millennials). The world is so focused on these demographic bulges that other groups are completely ignored.

    One would think a neglected demographic presents an opportunity for businesses. While executives salivate over Boomers and Millennials, few are serving the unique needs and wants of Generation X.

    Who is Generation X?

    Generation X is the group of people born between 1965 and 1980. The bulk of this generation were children of the 1980s. This is a smaller cohort than the Baby Boomers, explaining why they tend to be ignored – both economically and politically. Of course, ‘small’ is a relative term. There are about 65 million Gen Xers in America as of 2018. I am one of them.

    Not once in my career – which is approaching 20 years – have I heard of a business strategy targeting Generation X. Not once! This strikes me as a massive gap in the marketplace.

    Of course, there are industries that fulfill the needs of the current Gen X age range, but that association is purely coincidental, as opposed to strategic. For example, new single family homes tend to be purchased by people in their mid-30s, regardless of what demographic to which they happen to belong. Home builders target people in their mid-30s, not a specific generational cohort.

    There are opportunities to truly service the under-serviced generation. However, to do so requires a deep understanding of the collective experiences that shape that generation’s current characteristics. Below is a summary of those experiences, some second-hand and others personal.

    I encourage you to share your experiences in the comments section.

    Children of Divorce

    As children, Generation X saw their parents divorce at a rising rate compared to previous generations. Indeed, by the time I reached high school it seemed less common for someone my age to have married parents. Intact nuclear family structures were a rarity.

    In the 1980s, divorced parents rarely had shared custody of their children. This meant that the child lived with one parent full time and saw the other on weekends, if they were lucky. Most of my friends saw their ‘other’ parent far less.

    The unbalanced parenting burden created emotional and economic stress for the parent with full custody, eroding the parent-child bond. Meanwhile, because the part-time parent hardly saw their kid, interactions were usually fun and unrestricted. In the child’s eyes, the full-time parent was a tyrant and the part-time parent could do no wrong. One parent was vegetables and the other was ice cream.

    These dynamics resulted in many non-traditional family structures and relationship issues that persist to this day.

    Latchkey Kids

    The 1980s saw women increasingly enter the workforce – particularly in the middle and upper classes. Whether divorced or not, the home tended to be empty for most of the day. While daycare existed, many kids did not attend – some for economic reasons, others because of availability. As a politically neglected generation, social programs for children were being stripped.

    Consequently, many kids in the 1980s not only went to and from school alone, they returned home to an empty house.

    Picture giving your six year old a key to the house so they could let themselves in after school. This was reality for many.

    With this being the norm, adult supervision was absent in much of the Gen X kid’s life, compared to previous and later generations which benefited from intact families, stay at home moms, daycare and nannies. Generation X, in many respects, raised itself.

    A meaningful portion of Generation X was also the children of Vietnam vets and crack heads. A combination of PTSD, inebriation and death removed the father from many families that needed them the most.

    This created a very independent generation. It also created a situation not unlike Lord of the Flies, with rampant bullying and stupidity. The law of the jungle prevailed.

    This went beyond kid-to-kid interactions. Since latchkey kids were left on their own so much, they became easy prey for adult pervs. Gen X kids were fully aware (and warned) of child abductions, but they were on their own to deal with them. The reality was that abductions were still rare, but the fear remained palpable. There are several high profile cases of kids who were my age at the time going missing. In all these cases, the kids were unsupervised.

    Some of these kids made it through the filter to become emotionally healthy and independent adults. Many did not.

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    We Were All Going to Die Part 1: Nuclear Annihilation

    While not the first generation to live under the dark clouds of the cold war, Generation X was the first to be completely helpless from birth to (eventual) death.

    During the early stages of the cold war, Baby Boomers were taught how to survive a nuclear war. Generation X was taught to hope they don’t survive. Baby Boomers also grew up believing they could stop nuclear proliferation. With time, however, Baby Boomers’ anti-war idealism morphed and they elected Republicans. Consequently, Generation X spent its childhood watching Reagan’s unstoppable massive buildup of nuclear weapons, knowing the extermination of humankind was at the press of a button.

    There were many popular songs made in the 1980s about the cold war and nuclear apocalypse: 99 Red Balloons (Nena), Guns in the Sky (INXS), Nikita (Elton John), It’s a Mistake (Men at Work), Forever Young (Alphaville), and so on. To this day, Mad Max (1979) is the reference people use to describe a post-apocalyptic world. Also released around that time (1984) was the scariest mockumentary ever made: Threads.

    This was pop culture based on impending doom. Gen X grew up in the shadow of fear.

    Since birth, Generation X has lived at the whims of others and the hope that cool heads prevail. If there’s anything that explains the generation’s cynical ‘fuck it, I don’t care’ attitude, it’s the persistent worry of nuclear annihilation. Of course, this is oversimplifying. Generation X cynicism is caused by a combination of general disappointments in humanity.

    As Generation X approached adulthood, the cold war came to a close. Russia and the former Soviet Republics suddenly became allies we needed to assist through the transition to democracy. Without an enemy hidden behind an iron curtain of secrecy, the threat of nuclear war declined and the Doomsday Clock was turned back to 17 minutes to midnight by 1991. During the peak of the cold war in 1984, it stood at 3 minutes to midnight.

    With the Doomsday Clock currently back at 2 minutes to midnight due to inaction over climate change and the (once again) threat of nuclear war, I wonder if today’s kids will grow up with the same cynicism as Generation X.

    We Were All Going to Die Part II: AIDS

    If you have sex you will die. That was what Generation X was taught as we came of age during the late 1980s. When you tell a kid something will kill them enough times, you will have a lasting impact on their behaviour and attitudes.

    The AIDS epidemic created mass panic during the 1980s because people didn’t know how it was transmitted. Until more was known, AIDS patients were ostracized, even by the medical teams treating them. The disease was a death sentence, putting a halt to the sexual revolution in which Baby Boomers actively participated.

    Because AIDS is more easily transmitted via anal sex, it was rampant in the gay community. In the early years, it was referred to as the ‘gay plague’. The disease destroyed gay communities as older gay Gen Xers (and younger Baby Boomers) saw many of their friends die. I speculate that AIDS slowed the acceptance of gay men and women in general society – either because people feared the disease or because of ultra-religious convictions that AIDS was a curse from god.

    People still had sex during the 1990s. But promiscuity and casual encounters declined considerably. Monogamy became the norm for Generation X.

    The Birth of Grunge and Hip Hop

    Out of Generation X’s chemical soup of cynicism, nihilism and angst arose new forms of self expression. The two most notable being grunge and hip hop, which overflowed with testosterone – both an outward projection of internal struggle, disenfranchisement and anger.

    In particular, the destruction of inner-city New York City during the 1970s and the crack epidemic of the 1980s combined with cultural isolation and helplessness to cause black youth to take matters to the street corners. Rapping arose from street culture but it was also the antithesis to street life, providing a non-violent outlet for rivalries and an alternative to drug dealing. Intertwined with the other elements of hip hop – graffiti, breakdancing and DJing – a cultural phenomenon was born and soon spread outward. The message of poverty and struggle resonated with a large part of Generation X, which could relate – even from the suburbs.

    Technological Transformation

    Generation X witnessed the demise of the typewriter and the birth of the personal computer. With relative ease, we transitioned from the Dewey Decimal System to, books to iPads and rotary phones to smart phones.

    While Baby Boomers also experienced these changes, most were too used to the analogue world to easily transition and were late adopters. Baby Boomers are now technologically capable, but lack the digital instincts of younger generations. In contrast, Millennials and Gen Z were born in a digital world. This is all they know and what they’re used to.

    Generation X is uniquely positioned to straddle the analogue world of Baby Boomers and the digital world of Millennials, allowing them to relate to both worlds.

    I’m sure there is tons of stuff I’m missing. There is probably enough to fill a book. I’d love to hear about your views on this. Please share your thoughts on the Gen X experience to the comments section below!