I’ve never thought of student loans as “having skin in the game.”
When I heard this in a conversation, I immediately thought that debt doesn’t make sense unless you get a decent return on investment. It could be like a mortgage: leveraging an expensive purchase in exchange for a good place to live and a little appreciation.
Since my family is in the throes of helping our oldest daughter sort out her college offers — nearly all of which involving getting into debt — we are rethinking our approach to college financing.
But let’s say that you treat college as it it were an important business decision. If you’re going to borrow to do it, you want to see some return down the road. It shouldn’t be an investment that you write off, because you can’t really claim a loss and still have to pay back the loans in most cases.
That’s why a recent piece by financial planner Kimberly Foss caught my eye. Although it was written for financial advisers, I thought it contained a rational perspective and some new ways to see college financing.
Like any financial decision, Foss advises, you need to look at the whole picture. How will loan repayments impact your and your children’s cash flow after they graduate? Will they be able to repay the loan? Over what period of time?
She offers this anecdote to show how things can change in one’s financial life:
“In a coffee shop recently, I overheard a woman fretting about how her family was going to pay for her son to attend an elite college. Sitting with what appeared to be an unsympathetic friend, she described a lifestyle of never worrying about expenses; she’d figured they’d just write a check to pay for college.
The family had spent their son’s high school years preparing to get him accepted to college; she described sports camps, SAT tutors and flying all over the country looking at top schools. Yet it seemed they had never spent any energy on planning and saving for the college costs themselves. Like so many families of means, they just figured everything would work out.
But there was a problem. While her strategy of funding college out of cash flow might have worked a decade earlier, her husband had been laid off during the recession and their investments suffered at the same time.
They tapped money she said they had “mentally set aside for college” for a myriad other reasons.
Their solution, because they would not qualify for federal financial aid, was to have their son take out a loan — maybe just for this year.’”
Here’s why a wonky concern like cash flow management with loans can become a problem, Foss notes:
In 2013, about seven in 10 graduating seniors at public and private nonprofit colleges had student loans, according to a report from the Project on Student Debt. Nationally, the average debt for these graduates was $28,400.
Student debt weighs heavily on young college graduates. According to one recent survey, for instance:
27% of those young grads said it was difficult to buy daily necessities.
63% felt unable to make larger purchases such as a car.
73% have put off saving for retirement or other investments.
75% said debt was preventing them from purchasing a home.
These college grads aren’t living the lives they thought they would. Their financial burdens, they said, are putting a strain on their career choices, entrepreneurial ambitions and decisions to get married or start a family.
College financing, I always believed, should be an ongoing family discussion. If you take on debt, which is the least desirable way of paying for an education, how and when will you get paid back in terms of future earnings?
Foss suggests the following talking points:
- Get real about cash flow. It’s one thing to say you can just write a check to pay for college. It’s quite another to fully understand just how much those checks will amount to. Doing some math helps: If the college costs $50,000 a year now, what will it cost in 15 years when their child (or, for that matter, a grandchild) is ready to attend?
- Think of college as an investment. I ask all families to consider this question: What is it that stops us from evaluating the cost of a college education the same way we would a home or a new car? On college tours, I’ve seen parents hesitate when they ask about the cost, as if the question implies they can’t afford it, or that their son or daughter is not worthy of acceptance. Is it that education is such a noble endeavor that we should be ready to pay no matter what it costs? Either way, that’s not a healthy attitude that supports a wise investment.
- Save smarter. Why wouldn’t you advise clients to save in a tax-advantaged account like the 529 college savings plan, where assets grow tax-deferred and qualified distributions are tax-free? For practical reasons, it can also be beneficial to keep the college money in the college bucket — not in an account that clients can easily tap for other expenses or extravagances with the promise that they will pay it back.
- Decide whether children should have skin in the game. I’m stunned that many parents wait until their child’s senior year in high school to tell them they are going to be responsible for a portion of their college costs. If the students knew sooner, they might have made different choices — worked during the school year, looked for a better-paying summer job or saved some of those birthday checks from grandma. As a result, teens learn at the last minute, and when they don’t have the money, they take out a loan.
So we’re back to the “skin in the game” theme. When I hear that phrase, it implies that students should be working and saving to invest in their future — along with their parents. It doesn’t mean that anyone should assume that borrowing is the complete answer to the affordability question. It’s not a solution and I don’t consider loans financial “aid.”
Another part of the investment piece is knowing whether the expenditure is worthwhile. Which colleges and majors are likely to yield decent-paying jobs upon graduation? What’s the return-on-investment for various schools. Here’s a list of high ROI colleges here.