March 22, 2011
It’s the time of year when high school seniors and their parents weigh their options and decide upon a college. They sort through myriad emotions, balancing long-term economic considerations against the hopes and dreams of teens with minimal experience making decisions.
Dan Getsch has been a financial advisor with Ameriprise Financial for 18 years. He has a passion for helping families plan for college. Getsch learned about behavioral finance — how emotions affect financial decisions — from Doug Lennick, a frequent speaker on the topic and author of “Financial Intelligence: How to Make Smart, Values-Based Decisions with Your Money and Your Life.”
Lennick’s premise is that by aligning financial decisions with important personal values we increase the chances of living meaningful lives. “If … we want our children to have good educations, but we don’t save money for their education, we are making financial decisions that don’t support one of our values. But if we decide to spend less on vacation travel to save more for our children’s education fund we are making a financial decision that is consistent with that value. The trick is to overcome the emotional temptation to spend in the short term rather than save money to support one of our long-term values.”
Getsch begins talking about college planning with his clients early in their relationship, for good reason. He projected a private school that costs $35,000 per year today will cost $525,000 for all four years in 18 years (assuming a 7 percent rate of inflation). If a newborn’s family started saving today, they would need to put away $1,100 per month (assuming an 8 percent rate of return).
If the student chooses a public college currently costing $15,000 per year, his family must save $475 per month to crack the nut of $225,000 (the total for all four years.) However, if they wait until he is 10 to begin saving, the number virtually triples.
When Getsch conducts seminars on saving for college, he hopes to attract parents of preschoolers. More often, however, he ends up with high school parents, for whom the issue is imminent. His goal is to help families identify their values so they make cognitive, rather than emotional, decisions.
He starts by asking parents to relate their own college experiences. Did you attend private or public school? Did your parents pay? How much did you contribute? Is your goal simply to send your children to college or is it important they attend an Ivy League university? If couples do not agree on how to finance their children’s education or if aspirations aren’t realistic, the discussions can be difficult.
Getsch shares a simple rule: don’t bankrupt your other financial goals to pay for your kids’ college education because retirement typically suffers. It’s fine to make sacrifices, he says. Parents may sell the cabin or defer retirement and continue working to pay tuition. Those choices have different consequences than borrowing against a 401K plan or assuming a home equity loan because debt must be repaid, he said. Families need to ensure they can comfortably repay it.
Parents need not shoulder the entire financial burden. Students can contribute to their education by working or applying for merit-based scholarships and need-based aid. The latter can involve work-study and favorable loans. After families complete the forms for financial aid, they learn what their expected contribution would be. Getsch helps families investigate an array of options to come up with their portion of the cost.
I am a big fanof students having skin in the game. Yet, I worry that too often they borrow money in a vacuum, with little appreciation for how much they will need to earn to repay it. I tested my theory on four high school students by asking them if they knew what it cost to live in an apartment. I shared with them how much rent, groceries, insurance, and cell phones cost and watched their eyes widen with each number. How can young people make informed decisions about paying for college with loans if they are financially illiterate?
Students who take out loans should learn the term “amortization schedule” well before they receive their diplomas. Part of the college decision-making process should involve a lesson in what it costs to live, what people earn (before and after taxes), and how much it will cost to repay loans. Otherwise, shell-shocked graduates may respond like my stepdaughter when she opened her first paycheck and asked, “Who is FICA and what’s he doing with my money?”