“Eighty percent of the final exam will be based on the one lecture you missed about the one book you didn’t read.”
It is an unshakable mantra of the financial planning profession that parents should do everything they can, aside from actually selling their own children, to try to put their kids through college, including selling that spare lung that you don’t really need to get by in life. Our children are precious, after all, and part and parcel of ensuring the continued preciousness of those children is to put them through college.
How many of you have kids and feel a duty or a moral obligation to pay for your kids’ college education? Raise your hands.
It’s not just financial planners who think that parents should be putting their kids through college. The U.S. government agrees! Let’s look at just a few of the ways that they incentivize parents to support the broadening of a child’s mind:
- The 529 plan. All 50 states and the District of Columbia support 529 plans. They’re so cool that they even come in two flavors!
- Pre-paid tuition. Worried that inflationary costs of putting your toddler through college will make State U. about the same price as sending someone to Mars? Pay for it now and lock in the price at today’s guaranteed low, low rates!
- College savings plans. Feel like you are smarter than Mr. Market and can turn your $1,000 contribution into enough to pay for full room and board at Harvard? Then you can invest however you see fit into a college savings plan.
- Coverdell Education Savings Account (ESA). Put $2,000 a year into one of these accounts, and you can achieve tax-free growth until you need to pay for college. It’s like a Roth IRA for college!
- Pay the school directly and avoid gift taxes. If you pay State U. directly for the kids’ tuition, then that payment is not subject to gift taxes.
- Tax credits. Yes, the government will give you dollar for dollar credits off of your tax bill for money you spend on a dependent’s education. Just as cool as 529 plans, as they come in two flavors:
- The American Opportunity Credit: 100% of qualified expenses up to $2,000, and then 25% of the next $2,000, with phaseouts occurring at $160,000 – $180,000 MAGI for married filing jointly and $80,000 – $90,000 for single and head of household filers for tax year 2013.
- The Lifetime Learning Credit: 20% of tuition expenses up to $10,000, with phaseouts occurring at $107,000 – $127,000 MAGI for married filing jointly and $53,000 – $63,000 MAGI for single or head of household for tax year 2013.
- Tax deductions. Not as desirable as tax credits, since they don’t reduce your tax bill dollar-for-dollar. You can get up to $4,000 off of your tax bill if you pay for your kids’ qualified education expenses, dependent on the expenses, your MAGI, and filing status. Additionally, if you took out a loan to pay for State U, then, again, depending on your MAGI and filing status, you can take up to $2,500 off of your taxes.
- Parent PLUS Loans. Hey, why hock things when you can just saddle yourself with a mountain of debt instead? The government will even guarantee a low interest rate to ease the pain associated with sending off a check to Sallie Mae for the next 10 or even 20 years!
You may think with my tone that I am mocking parents who put aside money for their kids’ education. I am not. I think it’s noble and well-intended. However, recent research from the University of California-Merced’s Dr. Laura Hamilton shows that those good intentions may have negative unintended consequences on their children.
While students who have parental aid have a 65.2% chance of graduating within five years compared to the 56.4% probability that unsupported students have – a positive for parental support, yet, for students whose families make more than $90,000 a year, mean GPAs are:
- No support: 3.15
- $16,000: Just below 3.0
- $40,000: 2.95
For families who make less than $90,000, the impact is not as great, but it’s still noteworthy and significant.
I’ve been an employer and a hiring manager before, and, fair or not, there’s a mental threshold of a 3.0 GPA for hiring preferences. While I apparently was in the minority, according to Careerbuilder, I’m not a lone wolf in the wilderness, as 31% of employers require a GPA of 3.0 or higher.
Furthermore, if you don’t go to an “elite” school, then your GPA will have an impact on your future salary. The University of Michigan’s Brad Hershbein shows, using five decades of data that, aside from a select few highly rated colleges (think Harvard, Yale, and the ilk), free riders do not have to sacrifice desired leisures to meet their needs. Put another way, since the kids don’t have to pay for their own spot in the college roles, they aren’t giving anything up. Mom and Dad sent them to school, and they get to spend time doing what they want as long as they meet the minimums. The result, as Dr. Hamilton points out, is noteworthy:
Students with parental support are best described as staying out of serious academic trouble, but dialing down their academic efforts.
It allows for a lot of other activities in college that aren’t academic…Participation in the social scene is expensive — money to hang out, drink…[but,] the more you have all these extras, the more you can get dragged into the party scene, and that will drag down your GPA.
The impact is twofold. First, students haven’t felt a need to work for their tuition (through earnings scholarships, grants, or veterans’ benefits), so they only feel the need to do well enough not to get kicked out of school. The second is that they don’t have to sacrifice their free time (work or co-op study programs) to earn money to pay for school, so they party a lot.
If I weren’t locked down in a military academy for my college career, I’d have probably done the same thing and partied my way through college. Yet, when I had to pay for graduate school with my own money, it was an entirely different story!
What do I recommend for well-meaning parents who want to help their kids through school?
How to Leverage The Endowment Effect to Improve GPAs
The endowment effect is where you feel an emotional attachment to an object because it’s your object. The difference between any given object and your object is the psychological feelings of possession that cause you to act differently about the object. As Nobel Prize winners Daniel Kahneman and Richard Thaler show, this emotional attachment can even occur for items as simple as pens or mugs can will cause us to place a much higher value on those items than we would otherwise place on them.
How does this affect your child’s relationship with that tuition money?
If it’s money that you’ve simply given to your child or to State U. directly, then there is no emotional attachment to that money. It came. It went. C’est la vie.
However, if your child had to work for that money, then it’s his money and he’s much less likely to part with the hard-earned money, and when he does, he better get something good out of it. That’s why students who have had to somehow work for some part of their tuition, either through earning scholarships, grants, or veterans’ benefits (a sacrifice of time) or through a work-study program or working through school (a sacrifice of money), find themselves more endowed and committed to the program of study. As a result, they end up with better grades.
What, then, are your options?
- Let your child pay for college him/herself. This is certainly the most drastic of the measures, as you’re going to make your child fend for him or herself at a tender age. Still, if it’s successful, they’ll not only graduate debt-free, but they’ll know the value of hard work, which will bode well for their likelihood of success in life.
- Do a matching program with your kids. Let your children work during high school and college and offer to match (the ratio is up to you) whatever your kids put into their college fund with funding from the parents.
- Put conditions on the money. If you’re going to pay for the kids’ college, then at least put some expectations on what outcomes are necessary in order to earn that money going forward. Set high standards and expectations. Make the child earn at least a certain GPA (“2.0 and go” doesn’t cut it) in order to continue to have tuition, room, board, books, etc. paid for in the future.
If you’re thinking to yourself “but I can’t not pay for my kids’ college,” you’re not alone. Many parents feel the same way. However, it is time that we start changing our thinking about how we approach putting our kids through school. To quote Kurt Vonnegut, “there ain’t no such thing as a free lunch.” If you pay for the kids’ college, they may find that the bill later on in life is much higher than they expected it to be.
What do you think? Pay for the kids’ college or not? Tell us what you think in the comments below!