Monday, March 7, 2016

Would You Like to Pay Cash for College

This money Monday we are goin to consider How to Pay Cash for College.

We have been taking Reed, our high school senior, on college visits over the last several months.  This spring he will be making decisions on where to attend college. We have two students in college and a senior in high school. As a family, we are committed to not borrowing for college. I'll ask you to pull up a chair to our kitchen table and listen to what we have taught our students.

Why Not Borrow

Student loans have reached a crisis level in the US and now exceed $1.2 trillion dollars. Total credit card debt is $880 billion. So student loans are now the highest level of consumer debt. Think of what I just wrote. Students now have more debt that all the credit cards out there. The average student graduating with a four year degree has a staggering $27,000 in debt with one in ten having more than $40,000.

It is very important for our students to know why borrowing for college is a bad idea, and what borrowing will do to their future.

Ask them to fast forward in their thinking 4-5 years and think of careers they may want to pursue. For our students teaching in a Christian School, a career on the mission field, being a youth pastor, being on staff at a church, or being a stay at home mom would be likely candidates. All of these are extremely important, but all have relatively low pay. All of these options become extremely difficult if not impossible with $30-40,000 in debt. With this amount of debt, you will be working at the highest paying job you can find and possibly two jobs.

But even if you have your sites set on a higher paying job you are likely stuck with 10 years of repayment.

Proverbs says the borrower is slave to the lender. The young adult years should be a time of exploring your calling and having the flexibility to change jobs frequently is part of this. Large student loans short circuits this process.

Choose a College You Can Afford

The least expensive options will typically be community colleges and in state colleges.

The sticker price is not the final price in most cases. You need to understand what scholarships and grants are available at the schools you are considering. With our students we have found that tuition has been reduced from 1/3 to ½ through scholarships. This can vary widely and some schools are not as expensive to start with. Also, consider the costs of room, board and books.

The student should then understand what the family can contribute. If mom and dad have been saving for college, pick a school that fits the budget. In our case, we had not saved much for college because we have had our children in private Christian school. We knew we would not have money for college and made that choice. We have no consumer debt so we can cash flow a certain amount for college, but it only covers about ½ of the tuition. If mom and dad can't help or can only offer a limited amount of help, then your student will have a gap they will need to make up.

Don't go to that elite or prestige college if you can't afford it. Being able to afford it means you can pay cash for all four years. Don't believe the marketing hype. There is little return on investment for an undergraduate degree from these elite colleges (return on investment means a significantly better salary that justifies the additional cost). Also, there is no benefit to pay 3X the tuition just to step over the line for an out of state college. If you can't pay cash or get a very good scholarship that neutralizes the financial hurdle to going out of state, don't do this.

Closing the Financial Gap

Minnesota has this amazing program called Post Secondary Enrollment Options (PSEO) where you can take college courses for college credit while you are in high school. Did I mention this is “free”. I know several students who have earned two year degrees by the time they graduated from high school. Don't miss this one.

Take an ACT or SAT prep course. Getting scores as high as possible will help with scholarships. Our students improve their scores several points by taking the inexpensive courses.

Scholarships and grants are a good way to reduce the cost of college. There are hundreds of scholarship opportunities. It takes work to find them and apply. A number of students have made it a summer job to apply for scholarships and some have covered nearly all of their tuition.

Student savings is another way to bridge the gap. We knew college was coming, and we started a family based business where each of our children could earn money. They have been saving for their college goals through middle and high school. My advice is start early. Create opportunities for your student to work and manage money. Have your student get a summer job or start their own business (lawn mowing, gardening, tutoring, dog walking) as soon as they are able. Playing video games half the night and sleeping until noon all summer is incompatible with going to school debt free. Don't let your student develop bad habits and waste their summers like this. If they can't find a job, start their own business.

If there is still a gap, then your student is going to need to work to make up the difference. Each of our students has several jobs during the summer and work during the school year. If you are concerned about work affecting academic performance, statistics show the students who work up to 20 hours per week during school do better academically than those who do not. They learn time management skills and other work skills that employers value highly. Even if there wasn't a financial gap I might still suggest they find some work in their field of study just for the learning opportunity. They will not suffer academically, and there will still be time to have fun.

Many students have attended a community college and worked several jobs to save for the final two years at a more expensive four year college.

Choose the Right Major

The end game of this very expensive investment is to get started on a bright future career. Ask the prospective college for the placement statistics and starting salaries for the major you are considering. Most of them will tell you right up front. If they don't, probe deeper until you get the answers you need.

We guided our students to skill building majors with marketable skills and well defined jobs. These would be things like teaching, nursing, accounting, engineering, finance, and medicine. In the past, a general liberal arts degree was viewed by employers as a good set of basic skills for a new employee, This has changed, more recently employers are looking for specific skills and the person with a liberal arts degree is often underemployed. Keep in mind that you can always add a masters degree to a bachelors degree by taking evening classes if you want to get into counseling, business, or a ministry focus. Many times these advanced course will be paid for by an employer under their tuition reimbursement program. For example, I have a masters degree from Lehigh University that was paid for by my employer.

Many students would be better prepared for an enjoyable career, with a vocational-technology or a two year associates program. There are some great jobs in these fields. I've heard some employers prefer computer science majors with a two year certificate over those with a 4 year degree because the field is changing so quickly. Don't let the status symbol of a four year degree entice you into mountains of debt if a two year program would be adequate to jump start your career.

The Role of Parenting in the College Decision

Mom and Dad if you see your student going down the wrong road in the college decision process, you need to do some parenting here. Our students need our input and our wisdom. Just because they are now 18, doesn't mean they are ready to make all of life's decisions on their own.

Andrea, our oldest child wanted to attend a school that cost $50,000 per year and would have likely ended up with $200,000 in student loans because this very elite school didn't offer scholarships. After much vigorous discussion with Lisa and I, she ended up in a very good university that cost $16,000 per year (after $16,000 in scholarships) and she is on track to graduate debt free in four years! Also, a less elite college may offer more opportunities for your student to shine. As a junior, Andrea is the student director of her colleges 76 voice senior choir (a great learning opportunity). Would she have been able to have the same opportunity at an elite music conservatory (perhaps, but we were not willing for Andrea to go $200,000 in debt to find out)?

Approximately 35% of the students who enter college will drop out the first year and the USA Today reported that only 53% of students who attend a four-year college graduate within 6 years. No that wasn't a typo, that was 6 years! Those are the students that didn't have a plan. So have a plan! We required our students to have a detailed plan for their time at college. This includes declaring a major, and having a semester by semester course schedule showing what is required to graduate in four years and monitoring their academic progress.

If they can't do that because they really don't know what they want to do I would suggest they attend community college for a year or two to get their general requirements out of the way and explore majors. I would also recommend taking a year off to work if your student isn't sure if college is right for them. Internships can also be a way of finding out what their chosen field is like. Andrea has been organizing and teaching music camps during her summers to find out what teaching music is like (this is an example of starting an entrepreneurial business to understand your field of study better.)

Sadly 8-10% of students drop out of school due to credit card debt. Many parents think getting their student a credit card is a rite of passage to adulthood and will help them establish credit, teaching them to be responsible. But statistics indicate the opposite. Providing a teen with a credit card may actually teach them to be financially irresponsible and this makes students the number one target of credit card companies. Credit cards promote the “spend now and deal with the consequences later” mindset. It is much better to start your teen out with a checking account when they are 14 with mom and dad joint on the account. Teaching them to budget their earnings and establishing a small emergency fund. Mom and dad should still monitor spending and provide input where needed. Parents should maintain this input as long as the student is still dependent on them for their college or living expenses.

Mom and dad please don't raid your retirement or take out a second mortgage to fund college. I am not saying don't help your child with college, do as much as you can without borrowing. Help your child pick a school where you can pay cash, and you won't have to borrow. You might also want to consider getting a second job to help raise money for college.

Before your student goes off to college or a career, enroll them in some financial training like Financial Peace University. We recommend you attend this class as a family with your high school junior and senior. This is one investment that will do more than anything else to help your student prosper in the adult world. As you can tell from the student loan discussion, there is much misinformation out there in our culture. When you learn the Biblical principles your chance of financial success goes up exponentially.

I didn't Know All This. Now What?

Let's say you didn't know any of the things we discussed in this article and you have $30,000 or even $100,000 in student loan debt. God loves you and there is hope, but you have dug a deep hole and you need to work extra hard to get out of it. The first thing is to not dig your hole any deeper through additional borrowing. Cut up any credit cards and if you have cars you can't afford (defined as cars with loans on them), sell them and get something inexpensive for cash until the student loans are paid off. Put all your family energy in to getting these loans paid off. Selling things and second jobs can accelerate your progress. Take a course like Financial Peace University offered by Autumn Ridge Church to learn a Biblical and time honored way to do this. Most families or singles can be debt free except for your mortgage in 3 years.


Brian and Lisa Petersen, lead the Financial Peace University course at Autumn Ridge Church. They just finished leading their 14th class, where over 500 people have been trained in the Biblical principles of money management. Each family situation is unique and they welcome your questions and dialog on this important topic.

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