Earlier this year, the St. Louis Federal Reserve published a study that concluded: “The promise of economic and financial advantages associated with postsecondary degrees remains only partially supported by the most recent data.” What’s more is that Goldman Sachs found that 2010 graduates will have to work 8 years to break even. If tuition continues to rise, 2050 graduates are projected to have to work 15 years (until the age of 37) to break even. The study published by the St. Louis Federal reserve doesn’t discount the importance of college, a college education continues to present several lifelong advantages that we hope everyone is able to achieve such as a higher likelihood of sustaining a long-term partnership, the ability to earn higher wages and better overall physical health. While these are all aspects of a healthy life that we hope everyone can acheive, as a financial advisor, it is concerning to me that college graduates are continually having a harder time establishing a solid financial base. The financial basics of a nest egg, retirement savings and the ability to purchase a home are the key to weathering the financial shifts we all experience throughout life. What's more, is that each generation has their fair share of national crises, such as the current crises brought on by COVID19. People who have an asset base are more likely to weather these storms without the added stress of long-term financial hardship (see chart below).
I think it's time that we reconsider the conversations that we are having with teens and young adults around the “promise of college” and their financial health. While higher education is still very important, college is no longer the simple stepping stone that it once was. Teens and young adults need to understand that when it comes to acheiving financial success, additional factors such as income to debt ratio are very important considerations. Too often, we all hear that future generations won't acheive what their parents did, when I think the dialogue should be around how to adjust to a changing financial landscape so that financial security can be acheived. When we look at it, college really is the first major financial decision that our teens make and it’s a good time to help them begin to look at how much they are paying for something while responsibly evaluating what they will get in return. We want them to see college as the investment that it can be. Helping our teens look realistically at what they want for themselves and their future, then encouraging them to move towards their dreams without creating an undue financial burden on themselves or their family, is probably one of the most important conversations we can have as they enter the college application process.
There are several steps towards starting this conversation, many of which are discussed in my TuitionWISE college planning seminar. While I recommend attending our next webinar, here are a few points to get a family conversation started:
- Review family finances so that, first and foremost, you understand where you are in terms of your own retirement and your emergency nest-egg.
- Discuss any discrepancies between contributions that the parent can safely offer and tuition levels. How will the discrepancies be handled? What portion will the student be responsible for?
- If a target college turns out to be over your budget, encourage your teen to negotiate and see if the college will meet you with a better deal. Colleges want to fill their classrooms with talented students, don’t be afraid to see if they can help with an affordable tuition option that does not include loans.
- Ask the university for specifics on employment rates and income levels of graduates for the program of interest. If your teen is undecided, assume an average income level for a liberal arts graduate.
- Write out estimated post-college living expenses so that teens can see how loans might impact budget.
- Consider career testing or even a gap year internship for students who feel unsure about their goals.
- If college is covered partially or 100% by savings, discuss withdrawal strategies with a financial planner. In some instances, withdrawal strategies could save money.
- Encourage your teen to find appropriate employment within the first two years of college graduation. Those who are underemployed in the first year after graduation, tend to stay underemployed the entirety of their careers.
- If your teen is not interested in college, encourage them to explore additional options. Many trades pay more than a student will earn after a four-year degree.
The rising cost of tuition, increased concerns around unskilled graduates and the student loan crises have all made it clear that the landscape of college is long past due for a change. The pandemic just might give that final push towards a newer, more affordable, outcomes-based system. Until that happens, I like to encourage people to be ahead of the game by evaluating to ensure that the tuition makes financial sense. Let's help teens understand the importance of choosing a college that supports their financial future.
If you’d like to learn more visit our website for upcoming dates for TuitionWISE. I’m also happy to consult individually.