By Dr. James M. Dahle, WCI Founder
Student loans are becoming an ever-larger burden on many households. Medical school loans are ridiculous, especially when viewed in light of many concerning trends in physician reimbursement. Non-physicians are also encountering life-altering levels of student loan debt burden. I had a discussion with a friend recently whose student loan burden prevents him from qualifying to buy a house, even though his income combined with hyper-frugal living is sufficient to make the payments. Many of those who graduated about the same time I did have large burdens, but they were able to consolidate them at 1-2% interest rates, and are not in any huge rush to pay them off. More recent graduates are in an entirely different situation, and even bankruptcy promises no relief. Some consider the IBR program, but for most people, IBR payments are less than the interest, and thus it can be a very risky long-term solution (if your income goes up so do those IBR payments on a now much larger principal).
Balancing Self-Reliance and Debt
I don't want my children to be saddled with student loans into their 30s, 40s, and even 50s that will prevent their financial success. But I also don't want them to think I'm Daddy Warbucks and never really learn to work and be self-reliant. I'm constantly reminding them that when they turn 18 they're out the door and will be responsible for themselves. Who are we trying to kid though? I'm certainly willing to use my assets and income to help launch them into life on a path of personal, financial, and professional success. There is little that is more important to me than that. As Warren Buffett famously remarked, “I want them to get enough that they feel they can do anything, but not so much that they could do nothing.” I can't say my parents paid for none of my eight years of schooling, but the total amount (not counting flights home) was less than I can make in a single shift in the ED. My undergraduate tuition was paid by an academic scholarship, my room and board was paid by my summer and school-year employment (and one tiny student loan with exceptionally good terms), and I learned how to pinch a penny like you wouldn't believe. The Air Force paid for medical school and threw in a few memorable experiences to boot (note that memorable doesn't necessarily mean positive.) There's nothing like spending the Summer walking behind a lawn mower to motivate you to study hard in the Fall.
The Most Important Factor
I know another undergraduate student whose relatively well-to-do parents and other family members were willing to help him out with school. He figured out how much help he could get, and then because it was a sizable amount, opted for a smaller (although no more prestigious) private school over much cheaper options. I hope to teach my children that they should be even more frugal when spending someone else's money than they are spending their own. The most important step one can take to “pay for” college is to choose an inexpensive college. Talking your kid into going to the local state university at $5K a year (and even perhaps living at home while doing so) versus going out of state to a $50K per year private university may be the best college savings decision you ever make. Now, I'm not going to pretend the education at Yale and the one at my local state university is one and the same. It isn't. Perhaps it is worth paying 10 times as much to attend one of a dozen high-end universities in this country. But there are plenty of schools that charge 10 times as much and don't provide anywhere near 10 times the value. My alma mater and the local state universities are still a fantastic value at $5-7K per year. Some people even advocate attending the local community college for the first couple of years. That's $3K per year in my town.
How My Children Will Pay for Their College
Notice how I didn't title this post “How I Will Pay….” I want my children to take ownership of their own education and the cost of that education. There will be assistance from me, no doubt, but there won't be any blank checks. Costs will be paid out of these sources:
#1 Their Merit Scholarships
I chose my alma mater partly because it was the only one of the 7 schools I applied to and got accepted to that offered me a full-tuition scholarship. Working hard in high school and applying for scholarships can be very rewarding. Like attending a cheaper school, the best way to pay for college is to not pay at all.
#2 Their In-School Earnings
Their mother and I both worked as undergraduates. We didn't work full-time, but we have a firm belief that adults are supposed to work. Living in mom's basement playing 16 hours a day of video games isn't an option. If you're 18, you need to have a job, even if you're in school. Working for money helps you to value that money (especially when you're trading your time for money at minimum wage.)
#3 Their Summer Earnings
The lion's share of my undergraduate living expenses were paid for by my summer jobs. Aside from residency, the hardest and longest hours I've ever worked were during the summers of my undergraduate years. I knew I could work 80 hour weeks because I'd done it before.
#4 Their 529 Accounts
I put money into 529 accounts for them each year and invest it aggressively. But it isn't that much money. Utah gives me a tax break on $3680 per year, so that's what I put in there. There will probably be enough to cover tuition plus a little more at the local universities, but that's it. It certainly won't be enough for a full ride, especially at an expensive private university, and you can forget about professional school.
#5 Family Educational Trust
My children will be blessed to receive some money that was put away for them three generations previously. Like the 529s, it won't be enough to provide a full ride anywhere, but it's far better than high-interest student loans. I hope that being recipients of that money will endow them with a desire to “pay it forward.”
#6 My Current Earnings
I expect to have the house paid off about the time the kids go to college. Those mortgage payments can then be redirected toward college expenses. I also plan to have the ability to retire early and be financially free, but knowing me, I probably couldn't handle a full retirement starting in my early 50s and will probably work, at least part-time, throughout my 50s. It seems a little silly to make huge lifestyle sacrifices now to save for something that I could just “cash-flow” later. [Update: That mortgage was paid off in 2017.]
#7 Their Student Loans
I assure you that I won't be borrowing money to pay for their education. However, I can think of some situations where they might have to. If they decide not to take my advice and they attend some expensive private university, they're probably going to end up with some loans. It is also highly unlikely that I'll be able to foot the entire bill for years of professional school. Even in these circumstances, however, I hope to keep their loans down to a level where they can be paid off rapidly upon graduation rather than handicapping their financial futures.
Only the Very Wealthy (and Fools) Try to Pay Everything Up Front
I meet some parents who want to be able to pay for their children's graduate and undergraduate educations solely through 529 savings. They also often want them to go to really great schools. So they run the numbers like this:
Harvard's Undergraduate Total Cost of Attendance for 2013 is $56,407. Harvard Medical School Total Cost of Attendance for 2013 is $78,975. The total is $541,528. Educational costs have been going up at about 6% a year. Let's say the kid is 3 when I get out of residency, so that leaves me 15 years until he starts. $541,528 growing at 6% works out to about $1.3M. In order for me to get $1.3 Million in 15 years, earning 8% a year, I'd have to put away about $44K per year.
That's a ton of money, you say, and you'd be right. But wait, that's just for ONE kid. What if you have 2, or 3, or even more? On a typical physician income of $200K, saving $44K a year is not doable, much less $132K a year. You just cannot save adequately for retirement and save sufficiently to pay for an expensive education for your children on typical physician salaries of $200-400K. Something has got to give. More likely, education will have to be paid for from a variety of resources, as outlined above. The more expensive the education, the more resources you'll need to call upon.
What do you think? How will your children pay for college? Comment below!