Paying for college is a concern of many parents, and well it should be. College debt is a concern of many graduates, and well it should be. An issue is that the children of parents who decide to do something about paying for college by saving up money and doing without some things so that they will have at least some of the money needed for room and tuition end up with about the same amount of debt as those whose parents save nothing. This is because colleges just raise the tuition for those children whose parents have saved. OK, they actually reduce the tuition for those whose parents have not saved, but it is really the same thing. Go into college with $50,000 in a college savings account and the college will figure that you can pay $50,000 more than someone without a savings account. Now if the child with the $50,000 account came from parents who made $250,000 per year while the child without anything came from a family making $30,000 per year, the difference in tuition is understandable. But often both families may make $80,000 per year. One family just choose to maybe drive older cars or vacation locally so that they could put a few thousand dollars away each year into an Educational IRA, while the other family was trading in cars every few years and vacationing at Club Med, living for today and figuring that they would worry about college later.
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The issue with this system is that it encourages exactly the kind of behavior you don’t want. It encourages spending and penalizes savings. This means that more people show up at the financial aid office with no savings. People are not foolish — they will find ways to go to college for less or for free if they can. Why save up if there is no advantage? As a result, not only do only children from poor backgrounds show up with nothing to contribute. Many children of middle-class families who could have paid a significant portion of their own tuition and room-and-board show up as well without any savings.
Because colleges need to provide a lot of grants (as does the Federal Government) to prevent their colleges from being full of only the children of the wealthy who can float the tuition with their yearly income, they raise the base tuition so that those who can pay, pay more. This provides more money for grants and scholarships, so long as people don’t decide it isn’t worth the cost and as long as all colleges do the same thing. Because the cost is higher, however, it means fewer people are able to pay full tuition from income, which means more student debt and less people saving up since when the amount they can saved is dwarfed by the cost, they figure, “Why bother?”
So what is the easy solution to fix his issue? Simple – stop using college savings when determining eligibility for tuition reductions and other grants. Instead, base tuition rates purely on income. Children who come from families with little income would still find a lower tuition bill that they can afford, but those from a family with a higher income will need to put away more money, use more of that income to cover tuition, and/or take out student loans. Because tuition would be lower for everyone (since the colleges would be giving out less tuition aid because more people would be paying most or all of their bill), the cost would actually be lower for everyone.
Several colleges could also band together and establish a birth-to-college saving plan where parents could contribute an amount each year based on their income as their children grow with the guarantee that tuition and a certain portion of room-and-board would be covered for any of the colleges in the network. This would eliminate the uncertainty we currently see when it comes to college tuition and also means that everyone will be paying what they can. Parents whose children decide not to attend college could have their money returned with a reasonable interest rate applied.
So what do you think? Would it work? Do you have a better idea? Let’s hear it!
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
