Is Your ‘Dream School’ Actually A Nightmare Waiting To Happen?

December 10, 2018

Last week two things happened that really drove home the true cost of over-borrowing for college or career training. First, I read a study that said parents spend twice as much on their ADULT children as they save for retirement. That statistic shocked me. Then I did a webcast sponsored by one of our clients for some local high schools. That helped everything make a bit more sense.

How parents end up financially helping their adult kids

In going through the webcast, we talked about goals for the next 5 years, a pretty reasonable time frame for 17 year-olds. Not surprisingly, the top two goals they had were completing college/career training and buying a car. Those are both very normal and reasonable for folks their age, so no problems so far.

Rule of thumb for college borrowing: no more than first year’s earnings

Then we got into what it would take for them to accomplish those things in a financially viable way. When discussing how much student loan debt is “too much,” we reviewed the rule of thumb that you don’t want to borrow more for your education than you expect to earn in your first year. In other words, if the average starting salary for college graduates is roughly $50,000, that means that the max in student loan debt you should accrue is $50,000. Graduating with that much debt would lead to a monthly payment of about $600.

Factoring in a car payment as well

To drive the point home, we looked at what you could pay for a car on a $50,000 salary. Factoring in that banks don’t like your debt payments to be over 36% of your pay (after paying rent in an average city), that means that with the $600/month student loan payments, the MOST you could borrow for a car would be about $13,500.

First of all, that was an eye opener for the students who felt like $50,000 a year would surely afford a much sweeter ride than a used Chevy Cruze. What registered with me though, is why so many parents are over spending to help their kids – they almost have to! Even with a less expensive car, there really isn’t a heck of a lot left over for other stuff like saving for a house, standing up in weddings, entertainment and all the other things we like to do in our 20’s. It’s manageable for sure, but it means those kids are making sacrifices somewhere else.

The problem – too much student debt

More importantly, this is an example of someone who followed the “rules.” What about those families that borrowed more than the first year of income? Obviously if you have a recent graduate who is struggling to pay their student loans, then a parent who probably feels guilty about not helping more with education costs in the first place is often going to overcompensate by helping pay for other costs like cell phone bills, medical or car insurance or maybe even the student loan payments.

What can we do about it?

It might be too late for those families where the kids are already on the struggle bus in their 20’s, but it’s not too late for my peers who are just getting ready to launch our kids. The earlier we prepare, the more options we have.

Obviously, if you start saving in a 529 college savings plan while your kids are still in diapers then you can help pay for more education expenses and reduce the amount they need to borrow. But time – and cash flow – may not be on your side. There are a few ways to address this (like this one from my colleague Teresa), but one way is to re-think where your kid goes to school. Regardless of how old your kids are, you can help them weigh the pros and cons of their “dream school.”

When it makes sense to stretch for your “dream school”

There are times where paying more for college may be worth it. Maybe there are no in-state schools that offer your child’s major (my daughter’s friend who wants to be a marine biologist just isn’t going to have many options here in Kansas). We have some close friends whose daughter wants to be an animator for Disney or Dreamworks. She has that kind of talent, but there are only a couple of schools that those companies recruit animators from, so she’s going there.

When it doesn’t matter what your diploma says

That said, the vast majority of students have majors that are common. My oldest daughter is a freshman in college and she is an elementary education major. As a teacher, your salary is defined by years of service and education level – they don’t care where your degree came from. So for her, it made sense to attend a state university to keep the costs down. The return on investment just wasn’t there for the private schools that sent her information and wanted her to attend their school.

How my youngest daughter is deciding where to go

My youngest daughter wants to be a business major. She also knows that she wants to eventually get an MBA and live in a major city – at least the size of Kansas City (where she has grown up) and probably much larger. Originally, she wanted to go to a private school in New York or the Bay Area. But after realizing that her college fund will only cover an in-state cost, she has rethought the ROI of taking on a ton of debt (I’m doing my job as a Dad there!).

She has visited three out-of-state schools so far, has a visit set for her in-state option and is looking at two more out-of-state schools and one private. She eliminated most of her private school options and is focused on schools that offer in-state tuition for a certain ACT score or offer enough scholarships to make it comparable. Two schools she is looking at are closer to Texas since companies in the Dallas area recruit there heavily.

The main reason to consider them is she could pay in-state tuition and likely end up in the Dallas/Ft Worth metroplex, which just happens to be home to several top MBA programs. If she picks the right company, she can likely even get her future employer to help pay for that MBA!

Focus on “dream life” versus just dream school for the best ROI

The bottom line is that it doesn’t matter what your kid is doing after school if they feel strangled by the debt they had to take on to get there. And you won’t be doing anyone any favors if you have to compromise your own retirement to help them survive those early years of their career. The best way to help will be to keep them from taking on the burden in the first place.

So help your kid focus on their dream AFTER school instead of their “dream school.” This can help them plan and understand the downside of excess debt. Your kids – and your wallet – will thank you later!