Are You Making This Common College Planning Mistake?

You could be setting your child up for financial failure

Like most parents of school-age children, you want your kids to go to college, and you’re willing to help pay for the degree. But what about grad school?

That’s where you probably draw the line. An amazing number of parents tell their college-bound children, “We’ll pay for your undergraduate degree, but you’re on your own for grad school.”

If that describes you, you’re making a big mistake, and that dictum could very well set your child up for financial failure.

Now, you’re probably thinking I’m nuts. After all, when you went to college, your parents made you the same offer (or at least helped as much as they could), and you turned out fine. But times have changed and your approach, while generous, is flawed and dangerous.

Think back to when you went to college. Twenty, thirty or forty years ago, college was considered optional: In 1970, just 52% of students who graduated high school enrolled in college, according to the National Center for Education Statistics. And college was relatively cheap. The annual tuition and required fees for full-time undergraduate students averaged $480 at public universities and $1,980 at private universities (and averaged $690 at all institutions), according to the Congressional Budget Office.

Today, though, a college degree is necessary for many occupations — just as a high school diploma was considered necessary in 1970. Compare 1970’s numbers with today’s figures. In 2008, 69% of 16-to-24-year-olds who graduated from high school or completed a GED went on to college in the next 12 months. And they pay a lot more for it. College prices have risen much faster than the overall rate of inflation over the past decade; the average four-year public college costs $7,020 a year in tuition and fees, according to the College Board. The average private college costs $26,273 per year.

Just as high schoolers of the ’70s debated whether to go to college, today’s college students ponder whether to go to graduate school. That’s because undergraduate degrees are no longer the leg up they once were. To stand out — as a college degree once helped you to do — many believe a graduate degree is essential for career success.

Today’s college kids aren’t crazy: In many fields advanced degrees are mandatory, not merely preferable. Small wonder that 2.3 million students enrolled in graduate school in 2007, an increase of 130% since 1970.

This is why the rules your parents played by won’t work for you or your child. Your proposed deal — that you’ll pay for the bachelor’s degree and tell the child he’s on his own for graduate school — will have disastrous consequences:

Disastrous Consequence #1
Knowing that you’re willing to write checks for any undergraduate college he wants, your child is likely to choose an expensive school (either private, out-of-state or both). To honor your commitment, you’ll find yourself forced to write six-figure checks for that baccalaureate degree.

Disastrous Consequence #2
If your child does indeed go to grad school, he or she will spend $150,000 or more. That’s the average cost of an MBA. Law, medicine and engineering degrees are similar. Tuition and fees for a masters in applied physiology and kinesiology at the University of Florida costs at least $13,645 for in-state students and $35,387 for out-of-state students. And that doesn’t include housing, books, food, health insurance and other living expenses. Your child will start his adult life in massive debt.

Disastrous Consequence #3
Both you and your child might be broke. Your retirement may be far less secure, and your child’s ability to buy a home, enjoy a stress-free life style and save for retirement could be severely curtailed for decades.

Here’s the solution. Instead of promising to pay for the undergraduate degree, tell your child you’ve set aside “x” amount for his education. Whatever you don’t spend for your undergraduate degree will remain available to you for graduate school.

It’s that simple. This approach is certain to make your child more cost-conscious when choosing a college. Perhaps he’ll choose a state school or select one that offers a partial scholarship, instead of choosing a more expensive institution.

Maybe he’ll even go a step further and realize that the freshman year of college is essentially 13th grade: It’s filled with general liberal arts classes and prerequisites that have nothing to do with his major — assuming he even has a major yet! He might also realize that he can take those classes at a community college. Why not go there for two years and then transfer to an elite in-state school? His degree will list the school from which he graduates — which is all that employers care about. When you consider that many students switch majors at least once and now take an average of six years to graduate, the cost savings of community college become alluring.

With those savings, your child can retain lots of money to help pay for that law, medical or other advanced degree. At the very least, he’ll incur less debt. And — here’s fantastic news for your financial plan — you won’t be on the hook for massively expensive college costs. Keep in mind that one-third of college freshmen drop out and only 48% graduate. If your child quits after two years, you could be out $80,000 with nothing to show for it.

My approach, by contrast, makes you and your child partners in dealing with college costs — a strategy that can help protect both of you.

Originally published in Inside Personal Finance October 2010

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