College is on my mind a lot these days. Several of my friends have kids in college or just entering, and my own children are a few years away from going to college (should they choose to do so.)
In the past, it was pretty clear that going to college gave the average worker a huge advantage in the workplace. The college-educated worker earned more than the non-college-worker and, while hard to prove, I'm guessing he had better job satisfaction as well. But that was generally the case and in the past. Under this scenario, the common advice was "just get a degree no matter the cost and it will all work out." And it usually did.
This is the way it was for me. I got both undergraduate and graduate degrees in the "glory days" of the 1980's. While based on a lot of factors, I list getting a graduate degree (MBA) as the main reason for my financial success. And I have written that my college education was a $5,000 investment that made me millions.
Then the cost of a college education started to skyrocket. Years and years of 6% to 10% gains in the cost of college took their toll. The result is that college is still often a good deal, but you have to be much more careful -- attending a college at the right cost and being sure it delivers a job for you that pays a wage you can live on. And those people who try the old advice of "just getting a degree no matter the cost" are leaving schools with $50,000 or more in debt and a degree that's relatively worthless.
As I've been considering the right potential college choices for my children, I had a recent post where many of the college issues I'm considering came up in the comments. Apex made several comments that I found thought-provoking. Since I know not everyone reads the comments here at FMF, I am reprinting some of them today for all to see.
Let's begin with Apex's response to a poster's comment on sending kids to college:
This comment is not to pick on you. This comment is actually not for you, it is for everyone. You just said the magic words in quotes below that I hear so many repeat so it is the catalyst for this comment:
"I'd like them to be able to go to any school they want"
I hear this phrase repeated often. Our govt's financial aid program is based on exactly this idea that a student should be able to attend any college they want.
I would like to ask people to reconsider that statement and think about it to see if that broad statement makes sense. I think it is not often given much thought and often is just taken as a given fact that needs little thinking.
Consider the following:
- I would like my child to be able to own any car they want (Ferrari?)
- I would like my child to be able to live in any home they want (10 million dollar mansion in Beverly Hills?)
- I would like my child to be able to have any and as many friends as they want (drug dealers and gang members?)
We don't usually throw around what a child wants quite this flippantly. So why do we talk this way about college? What does "want" have to do with it and since when is our highest aspiration for our kids simply what they want, especially when you are talking about a life changing decision being made by a 17 year old based primarily on what they want.
I would encourage parents to get more directly involved in their kids post secondary education choices. Your kids are not mature enough, smart enough, wise enough, or have enough discernment and experience to make this decision. You may feel you do not either and you are probably right, but your kids certainly do not and worse yet, they often think they do. The only thing worse than ignorance is ignorance that is confident it is not ignorant. You and your kids both need to work together to educate yourself on the choices and make a wise decision that balances their desires with some real world facts. This includes both desires about which institution to attend as well as what to study while there. I am also not suggesting you should make your child become a doctor because you think that has the best prospects. What they want to do has to be a component. But it cannot be the only component or we would have 5 million professional sports athletes, or music majors who intend to start the next Beatles as it were. Or even potentially high paying careers like doctors may not be a good fit or provide good prospects for your child even if they want to do that they simply may be a poor fit for that field. Have they honestly considered what it will take to make it. 8 years of school (if they stay on task otherwise 10), 5 years of residency -- at a pitiful level of pay with 70-80 hour weeks (that's 13-15 years from now before they see any real money or quality of life from their choice). Do they know what they are signing up for? Do they have the ability and work ethic to stick with it and do what it takes? As I said, they are 17, they are not equipped to make this decision on their own.
Now I am not saying there are not very good reasons to go to Harvard or Stanford, or Columbia or whatever the college may be. But wanting to go there is not one of them. Wanting to have a prestigious name on your diploma is not a good reason. They have a cool or inviting campus is not a good reason.
So I would submit that the phrase should be changed to I want my kid to be able to afford to go to the college that has the best overall offerings that fit with their goals and future career path options after considering all the ramifications of cost/quality/connections/recruiting/reputation/etc. A top prestige school is often not the best answer to balance all those factors but the assumption is often made that it is.
If college was a no-brainer decision that you could hardly go wrong on this wouldn't be that important. 2 generations ago that used to be true. 1 generation ago it was more true than not. Today it is not true.
The link above is from a USA Today article on a study just from just last week that showed that there were currently 41 million people in the USA with a college degree but only 28 million jobs that required one. That is 13 million people with a degree for which there is no employer who even desires that you have one. That is 1/3 of all people with degrees who cannot even get a job that requires a degree. Not just can't get a job in the field of their degree. Can't even get a job that matters that you have any degree at all. Where is the promise of a higher paying job from college with those kinds of stats. In the article it pointed out that 15% of taxi drivers have a bachelor’s degree. 25% of retail sales clerks have a bachelor’s degree.
The goal of this post is simply to get parents to get heavily involved in helping their kids with this monumental decision. I have so many neighbors who I asked them about why their kid wants to go to this or that school and these are the kinds of answers I have gotten: they like the campus, or they like the east coast, or they are really smart and can get into these schools, etc. You will notice that none of those answers address a reason that involves making a choice that is best for their future or about why this college is a really good fit for the path they plan to pursue. I almost never hear an answer like that. And it's seems to be because its coming from checked out parents who think this is their kids decision or who are unwilling to get heavily involved in working through the decision with their kids beyond a subtle nudge.
1st, if you are providing money, it is not exclusively their decision.
2nd, even if you are not, do you not try to offer advice and council to your kid even if they have reached legal age now. Granted you can't force them to do anything once they leave home but I think too many parents at this stage feel it's their kid's decision and there is little say that they have.
My hope is that some parents would reconsider that kind of thinking. Most 17 year old kids in the 21st century are simply not equipped to make this decision properly. If you don't help them, they are on a tight rope with no net. It may not end well.
I too am amazed at the number of people who let their kids go to any college the kids want. I have this sort of conversation quite frequently with friends and acquaintances:
Them: My son, Bill, is going to XYZ college.
Me: What is he going to study?
Them: (Fill in the blank -- could be anything from business to education to sports marketing and on and on.)
Me: Does XYZ have a good record of placing graduates in that field?
Them: Hmmmm. I don't know.
Me: Does XYZ offer good support in helping graduates find jobs?
Them: Hmmmm. I don't know.
Me: Do you know what percent of people in Bill's major have a job offer when they graduate from XYZ?
Them: No. I guess all of these would have been good questions to ask when we were considering schools.
Uh, yeah. They would have been GREAT questions to ask.
Then as I ask why Bill liked XYZ over other schools it often comes down to "fit", location, his friends were going there, or some other reason that, while potentially making the experience a bit more fun and easy, has little to do with actually getting a job at the end of four years -- the same sorts of reactions Apex gets from his friends.
I agree with Apex that parents should help their children select a college. Parents are older and (theoretically) wiser and will be able to add perspective to a 17-year-old decision-making. But I would say that parents need to first educate themselves on the how's and why's of selecting a college. Otherwise, it's the blind leading the blind.
Apex went on in another post to discuss an issue that I've been grappling with: is college even right for my kids? I'm not sure at this point, but he makes a great argument that way too many young adults are going to college for absolutely no reason:
I do not agree with the statement that a college education is EXTREMELY important. I made two long posts on the previous profile for CA about exactly this topic so I won't rehash them here but the article above shows how there are 41 million people with degrees and only 28 million jobs that require any kind of degree at all.
College makes huge sense for many people but we are past saturation point and so we actually have too many people getting degrees right now based on the numbers from the study in the article I listed here. It is not enough to simply get a degree. Millions of people getting degrees right now are literally wasting their time and money doing so.
It is also bad analysis to use group statistics such as comparing unemployment for college grads versus non-grads like those two groups are monolithic. The 13 million more people who have degrees than there are jobs that require one are not being helped by their degree. Those statistics are not any comfort to them. Just because Doctors can get employed at 99.8% rate doesn't help the liberal arts majors who can't find work in their field at rates easily into the double digits.
The same can be said for salaries. Tell the retail sales clerks with a college degree about average salaries for college degrees and see how much better that makes them feel when they are getting paid no better than the high school dropout working next to them. The article above points out that 25% of retail sales clerks have a college degree.
For the record I have never put a single dime into a 529 college fund nor do I ever intend to. I am not saying it’s a bad choice to do so, I just don't like how it hamstrings my money and I currently prefer to have other options for that money. I suspect the odds are pretty high that my kids will go to college but I am not certain of it. I consider it at least a viable option that there may be better choices than college for my kids when the time comes.
These are the exact points I am considering/weighing as I think about college for my kids. Will they actually benefit from going to college? Will they be better off than the alternative (for example, taking the money and starting a business)? I'm not so sure.
As for 529s, I do have them for our kids, but more on that in a bit. Someone responded to Apex and asked:
I'm wondering if you could expand on your analysis of why you chose not to use 529s for your children. I understand the penalties if they choose to not go to college, but if the likelihood is very high (say 80%), why not at least drop in a portion, like $10-20K per child that would be enough to cover costs at a very inexpensive college.
The response from Apex:
I would be happy to.
1. Uncertainty. As I discussed above, the fact that this money is allocated for one very specific purpose that is not certain to happen with penalties for using it for anything else. I also find the value of college to be getting less and less all the time with the exception of very specific degrees. That is to say that 40 years ago I think any degree was a benefit. Today I think only some are. I believe a good number of them are not worth the paper they are printed on. Many more are worth something but not nearly as much as the promoters are all making them out to be. And then there is a class of degrees that are worth a ton if you are able to perform well enough to get a good job with that degree. And then if you have 20,30,40K sitting in a 529 what are you going to do with it? Well go to college of course. But wait a minute, is that the right choice? Well it’s nearly free, I mean, there sits the money. We saved for this. College has to be the right choice. I think it can circumvent the critical thinking about price and value the same way HMO health insurance does for medical care. If it feels nearly free, critical thinking about value goes right out the window. Of course it's not free, but the fact that money was pre-allocated kind of makes it feel like it’s already spent for that.
2. Minimal tax benefits. I believe the benefits of the 529 are overblown. 401k is better because the majority of taxes are federal and 529's are not deductible for federal income taxes. Some states offer state tax deductions but mine doesn't even do that (MN). So all you get is tax free growth and the last decade there hasn't been much of that and there isn't even much time left for growth now for my kids.
3. Extra expenses and limited investment choices. I can't say for sure about this one because I have not explored it in the least because I have no interest in using one but I have heard that the fees can be somewhat higher than you might like and the investment choices often are more limited. Perhaps that just requires more diligence on the user’s part to find a better plan. Which brings me to the next reason.
4. Simplicity. Given the minimal benefits I see I don't really care to have more plans that I have to deal with understanding and setting up and then figuring out what paperwork I need to file to get the money out of the plan at the right time to use for the right reasons. In addition this is dedicated money with a shorter withdrawal period. That means you have to do quicker risk re-balancing in these accounts. If you follow the same time frame of advice you get for retirement you would need to be moving to very conservative and safe investments about 5 years before entering college to protect from a large loss of principle. I prefer to do that kind of risk management over my entire portfolio but in this case you would need to do it in the microcosm of the 529 because that is where the money is all going to be drawn from in a few short years when you get to that stage. The savings here are not going to be life changing. I prefer to avoid complexity unless it comes with large benefits. I don't believe 529's do.
5. Versatility. I have enough money tied up in tax deferred retirement plans the way it is. I want access to a decent amount of my money. I do not want to put all my spare money into various dedicated vehicles that tie all the money up. As someone who invests in real estate I need a lot of cash. My real estate is my education plan and my expectation is that I will be money ahead by using that money on real estate rather than putting it in a 529.
That sums up the big reasons I avoid 529s. I want to be careful to state that I don't think 529s are dumb or that people who use them are dumb. There are clearly benefits to them. They can save you money and for many people they are probably a good option. On the whole the drawbacks and extra hassle just makes the benefits not worth it to ME PERSONALLY.
Here's my take on those issues:
1. Uncertainty. Financial planning is full of uncertainty. You have to take your best guess, make a plan, and plow ahead, adjusting as need be. I would still say that college is a better plan for the majority of kids, so the odds are in your favor that you will use 529 plan money for the intended purposes.
2. Minimal tax benefits. This depends on the state. My state does allow a tax deduction. And since I fully fund my 401k, it's not like I'm re-directing money that would have gone into it into 529s. As for tax free growth, the benefit of it is yet to be determined. Yes, you can look back and see that it wasn't a stellar option over the past couple decades. But let's say you started in 2009. How's your growth since then? Probably pretty good.
3. Extra expenses and limited investment choices. This is why you need to select a good plan. There seems to be far too many ho-hum plans out there, and picking a good one can help keep expenses to a minimum. As for minimal choices, I don't mind them -- as long as they have the right options available.
4. Simplicity. 529s do add another account to take care of, but I don't believe that the paperwork is an undue burden.
5. Versatility. This is a viable reason IMO. Does it outweigh the benefits? As Apex says, it's a personal decision. And as for being locked into spending the money on education, there are a whole host of ways you can get the money out without penalty: transfer from one child to another (or to a parent), withdraw the amount of scholarships you child receives from the 529 (yes, they make allowances for this), send the child to graduate school, transfer ownership to a grandchild (I believe this can be done), and on and on. And even if you have to take the money out and pay the penalty, it's only on the EARNINGS in the account, not the original investment. From Saving for College:
Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. The penalty is not assessed on principal. (Distributions are allocated between principal and earnings on a pro-rata basis.) An exception to the penalty can be claimed if you terminate the account because the beneficiary has died or is disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship.
As I said, I have 529s for each child. Will they turn out to be good options for us? That remains to be seen. If I had to guess at this point, I would say they will likely be a wash when weighed against the advantages of other options (mostly due to the poor performance of the investments during the life of our 529s). But time will tell whether they are better or worse than my expectations. In the end, I think they are likely good options for some and not so good for others, just like Apex said.
So, what's your take on these college issues? Please, jump in and offer your thoughts to the discussion.