Rethinking the College Model – Part 1

Orthodontists and College. No two words scare me more since each involves kids and significant amounts of money. But college is the scarier word. Orthodontia might or might not be required, but if the kids are going to have a leg up in the world, then some form of higher education will be required.

Editor’s Note: We are honored to welcome guest columnist Don Harrold from  This article is the first in his three-part series exploring college planning.The second article is “Selling College to the Kids.”

Orthodontists and College.  No two words scare me more since each involves kids and significant amounts of money.

But college is the scarier word.  Orthodontia might or might not be required, but if the kids are going to have a leg up in the world, then some form of higher education will be required.  The data is clear that adults with a higher education will – on average – earn a larger income than those with only a high school diploma. The Census Bureau reported in late 2006 that as of 2004, the average American with a high school diploma earned $28,645 while the average American college graduate made $51, 554.  With some form of advanced degree, the average income rose to more than $78,000.  This doesn’t mean that your toddler won’t be another Gates or Limbaugh, financially successful without the sheepskin, but the odds aren’t leaning in that direction.

So what do you need to understand?

First, college planning has to be addressed as part and parcel of overall financial planning.  I was fortunate to have parents who paid for college in entirety; but that was long enough ago that my father had a career with a single company that provided a respectable pension. But pension plans are steadily declining as a source of retirement income. The number of plans and participants fell from 112,000 plans covering 22 million people in 1988 to 30,000 plans providing for 16.2 million in 2007.  That means that the size of the typical firm offering a pension rose from 196 employees in 1988 to 540 employees in 2007.  Small businesses have been forced to move away from pensions in order to survive and unfortunately, small businesses have been the primary job driver in that same period.

We’re pretty much on our own, guys.

Likewise, the costs of college continue to rise at rates outstripping the average cost of living. Since 1958, this cost has risen at a rate almost twice that of general inflation.  Factor in that the typical investment returns are anticipated to be less in the foreseeable future and the mathematical reality is that the typical college savings plan will require larger and larger contributions to meet the projected cost of college.

Second, and this flows from the first, choosing not to pay for your kid’s education in entirety doesn’t make you a bad father. It doesn’t mean that you don’t care or that you’re negligent.  It simply means that you also have a competing demand to prepare for your own retirement.  I know of several older individuals without a pension who opted to pay for the entire college education and it has had a significant financial impact upon their elder years.  Our preference is that we be able to provide for ourselves so that the kids can later provide for their own children.  Whatever financing decisions you make should not be driven by a sense of guilt about your caring or capacity as a parent.

Third, college financing has largely become based upon the assumption of more debt, debt that is especially pernicious.  If adults encounter catastrophic financial difficulties, they can opt for bankruptcy to escape their debts and allow them an opportunity to restart.  But college debt cannot be discharged in bankruptcy and will continue to hang around them like stink on a skunk. Congress recently enacted changes which allow the education debt to be forgiven if it hasn’t been repaid within twenty-five years.  However, the amount written off is treated as income for tax purposes and must be reported as such in that final year.  While helpful, this doesn’t necessarily aid the financially struggling adult who at that point, probably has their own kids looking at higher education.

Future college financing will become increasingly difficult to obtain as much of that financing is provided by the federal and state governments.  And these government entities are simply swamped by too many competing demands and too few resources to cover those demands.  Pennsylvania and California are notable in having had recent difficulties with college financial aid programs.  Pennsylvania assessed a premium on those who’d already purchased future tuition credits via their guaranteed tuition program while California simply mugged their 175,000 U Cal System students with a mind-boggling 32% tuition increase for 2010.

Fourth, remember that teens do not have your experience base.  This is typically the first major decision of their adult lives and even if you’ve never chosen a college, you still have many more years of experience in evaluating alternatives and simply learning how to distinguish fact from nonsense.  Thousands of institutions are competing with one another for students and have to fill their seats as surely as Ford has to sell cars.  They’ve become adept at marketing and using technology to differentiate themselves and will punch all manner of emotional buttons to gain the teen’s attention and desire.  One young adult was told by prestigious University A that certainly University B was an excellent program with a strong regional reputation but University A also had a strong program and it had a national reputation.  The difference in final cost between the two was almost $20,000 in after-college debt.  Most of us would now agree that in the long-term, where you receive the sheepskin doesn’t make a great deal of difference.

Part of my job – and my wife’s  – in the process will be to help them ask and answer the questions that go beyond the marketing schtick and I fully expect some pushback as the nascent adults flex their muscles.  But they at least need to have as much information available in order to make the best possible decision.

I once had a conversation with my daughter about making decisions and how to tell which was the right decision out of the options available.  She was discouraged when I responded that sometimes there was no one single right decision from those options.  But greater involvement can help prevent the selection of a clearly wrong choice with the heartache that it brings.

Image credit: Marcelo Moura

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