Reality Check: Why You Need to Talk to Your Child about Paying for College - 401k Maneuver

Reality Check: Why You Need to Talk to Your Child about Paying for College

School is starting around the country, which means millions of young adults will be paying for college.

And college isn’t cheap.

According to Fidelity Investment’s 2021 College Savings and Student Debt Study:

  • For the 2020-2021 academic year, the average cost at a private, nonprofit 4-year college was $54,880.
  • The average cost per year for a public, 4-year in-state college was $26,820 in 2020-2021.¹

Given the high cost of college, it’s easy to see why kids expect (or at least hope) their parents will help when it comes to paying for college.

Some parents will help, and some will not.

The tides have changed when it comes to parents paying for college. 

Once upon a time, it was assumed that this was a parental responsibility.

However, more and more parents are recognizing that while there is financial aid available to pay for college, there is no financial aid available for retirement.

And they are opting to prioritize their retirement instead of paying for college for their children.

If you have kids, it’s wise to start thinking about paying for college (or not) sooner rather than later.

And, you need to fill them in on your decision pronto – especially if your kid is applying to college soon.

Here are some tips to help you tackle the difficult college money talk with your kids.

Get Clear on Where You Stand with Retirement

paying for college

Many parents feel guilty putting their finances toward their retirement instead of their kids’ college expenses.

You shouldn’t feel that way.

Think of it this way.

Just as flight attendants tell you to put on your oxygen mask before helping others, you need to take care of yourself financially first, or you may not be any help to your kids.

If you can’t take care of yourself in your retirement years, that burden will fall on your children’s shoulders.

Isn’t that worse for them than student debt?

As you consider paying for college, evaluate your retirement needs.

[Related Read: Should I Prioritize Retirement Savings Over Kids’ College Tuition?]

Kiplinger reports, “Pensions are gone. Social Security’s trust funds are shrinking, which puts benefits payouts in danger. Only about half of employers today even offer something like a 401(k). You’re on the hook for funding your retirement. At the same time, your costs in retirement are likely to be higher than they’ve ever been. Couples in their 60s should expect to spend over $250,000 in health care costs alone over the course of their retirements.”² 

Before you even start to think about paying for college, take a good hard look at where you stand with retirement.

If you think it may be a struggle to meet your retirement needs, it is unwise to add paying for college on top of it.

Decide What You Are and Are Not Going to Help With

paying for college

Once you know what your financial future looks like, it is time to decide what you are and are not going to help with.

Here’s the good news: It doesn’t have to be all or nothing. 

Paying for college includes much more than tuition. There are fees, textbooks, and room and board.

While you may tell your child that you don’t plan to cover tuition costs, you may choose to cover other expenses.

We recommend you use a digital College Savings Calculator to figure out what you may be able to contribute.

Teach Financial Literacy Early

paying for college

If you haven’t talked to your kids about money, they will be in for a rude awakening when they receive their first tuition bill.

A survey from Edvisors found, “64% of college students reported they had run out of money before the end of the semester at some point in their college career.”³ 

This stat alone is why you should make it a point to talk to your kids about finances. 

The more financially literate they become, the more prepared they will be to take care of themselves in the future.

[Related Read: 17 Easy Ways to Teach Kids about Money]

Be Honest about Your Experience

paying for college

In the financial talks you have with your kids, it is important to be honest about your experience.

We understand that there are some things you want to keep private from your kids, but in this case, your experience with paying for college may be beneficial.

For example, talk to your kids about the choices you made and any regrets you have, such as attending an expensive private college or racking up too much debt. 

[Related Read: 10 Financial Lessons for Young Adults Before They Leave the Nest]

Have A Straightforward Conversation with Your Kids

paying for college

You’ve looked through your retirement savings and used a college costs calculator, so you know what you can and cannot cover.

Now, it’s time to share that information with your kid.

Treat the conversation like it is a big deal – because it is.

Since you are discussing something as important as paying for college, you need to be honest and straightforward. 

You don’t want to leave any room for misinterpretation or give your child false hope. 

Provide Clear Reasons Why

paying for college

Parents get asked “why?” all the time by their kids.

And, no, you don’t always have to explain your why to your child.

However, when it comes to paying for college, it is wise to tell your kids your reasons why.

Whether it is because you want your kids to gain financial independence or you simply don’t have the money for your retirement and their college tuition, kids are more likely to accept it if they understand the facts. 

Work the Numbers with Your Kids

paying for college

One way to help your kids learn financial literacy and apply it toward paying for college is to work the numbers with them.

Break down the total costs of college for one year.

Then, multiply it by four.

But don’t stop there. Continue to run the numbers, such as figuring out interest on student loans to calculate how much they may potentially owe after they graduate.

For many young adults, this will be the first time they will be paying a bill of this size. Therefore, you need to give them some perspective, such as providing examples of how much utilities cost and car payments are. 

It is also smart to have your child compare the costs of different colleges, such as out-of-state, private, and public, to get a better grasp on the total college costs.

Help Them Find Ways to Pay for College

paying for college

The good news is that, even though college costs seem exorbitant, paying for college is still a real possibility.

Fidelity reports, “The average full-time undergraduate student received about $9,850 in grant aid, $4,090 in federal student loans, and $1,000 in other aid during the 2019-2020 school year.”⁴

paying for college

Here are some of the ways your kid may be able to pay for college:

  • Grants – A type of free aid, which means it does not have to be repaid. There are need-based grants and merit-based grants available for college.
  • Scholarships – Scholarships are another example of free aid. They tend to be solely merit-based (academic, athletic, or extracurricular).
  • Student Loans – There are student loans offered by the federal government, as well as private institutions. Keep in mind that student loans tend to have lower interest rates.
  • Summer and Part-Time Jobs – Encourage your child to work part-time or during the summer and save that money for college costs.
  • Affordable Colleges – Run the numbers and point your child toward colleges that are more affordable overall. 

If after reading this, you feel like your 401(k) should be working harder for you, and you have questions, book a complimentary 15-minute 401(k) Strategy Session with one of our advisors. 

Book a 401(k) Strategy Session

Sources

  1. https://www.fidelity.com/learning-center/personal-finance/college-planning/college-education-planning
  2. https://www.kiplinger.com/article/retirement/t042-c032-s014-parents-do-you-save-for-college-or-for-retirement.html
  3. https://www.edvisors.com/press/survey-shows-two-thirds-run-out-of-money-03-2016/
  4. https://www.fidelity.com/learning-center/personal-finance/college-planning/college-education-planning

 

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