Paying for college
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| Fri, 08-03-2007 - 11:14am |
Next year at this time we will be sending DD off to college. We are making campus visits, she has taken her ACT test, and has college and scholarship applications on her mind.
My question...how is your student's college bill being paid? H and I have been discussing this for years and now the time is here to make a decision and make it known to DD. We would like to help her, but we don't want college given to her and we don't want her to be overwhelmed with debt when she is finished. We believe she should put tremedous effort into scholarship applications (and have strongly encouraged her to do things that look good on her applications), however, we don't what her hopes dashed if she does not receive a lot of gift money.
DD will not be eligible for federal grants. Any government assistance will come in the form of a $3500 Stafford Loan. We thought we would give her $5000 per year which is about 1/3 of the budget for the school she plans to attend. She would be responsible for the rest through scholarships, working, and her savings. (We are hoping she will not opt for alternative loans or ask us to take out the parent loans).
I'm interested in other thoughts or philosophies on this subject.
Thanks....Julie

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Your son's career choice??
I think it's admirable that he wants to be a pastor at 12 years old. Your moral standards have no doubt influenced him.
Most 12 year olds want to be a pilot, professional ball player, race car driver, and chief of surgery at Johns Hopkins....depending on what day of the week it is.
As he sails through adolescence, there is a good chance he may find other interests. Personally, I would be encouraging but wouldn't take this too seriously.
I must disagree with extending college to prevent a student loan. The math tends to suggest college level earnings as quickly as possible coupled with an interest favorable loan is better than extended post high school earnings with no loan.
Timely post for me!
We are struggling with this and DS2. I believe we should have had him have some financial input in college from the beginning but Dh sees this as his full responsibility
Maybe fiscal responsibility would not have helped-there's no way of knowing what WOULD HAVE worked but instead only what ISNT working
But I think you are on the right track; you might need to tweak some expectations and numbers as you get closer but you have the right idea IMO
"As he sails through adolescence, there is a good chance he may find other interests. Personally, I would be encouraging but wouldn't take this too seriously."
I agree with this statement daddioe :)
My DS said from the time he was 11 that he wanted to be a doctor. He never wavered on that. This yr, his soph year he announced that he no longer wanted to be a doctor, but really wants to follow his dream and passion of being an actor, mostly musical theater. DH and I gulped at the thought of all of the starving actors, but we really want him to follow his passion. Now only 6 months later, he is saying he really wants to go to a big university where he maybe could major in broadcast journalism and minor in theater. I have learned now....it could change at any moment :) DS is also a very good student, so I hope in a way he does go to a big University and let the chips fall where they may :)
Sorry this got so long, but I really believed for about three years that DS would really go to pre-med and med. Your point hits home with me :)
Julie
<As he sails through adolescence, there is a good chance he may find other interests. Personally, I would be encouraging but wouldn't take this too seriously.>>
His choice of service was not what we anticipated him doing with his life. We were encouraging him to use his writing tallents, perhaps going into journalism, but he had other ideas. He has his own agenda, and is supported not only by us but also a series of mentors within our community and out, whom he looks up to and admires.
I know he's young for a high school freshman but he's not that young. He'll be 14 in a few of months. Most of the kids in his graduating class are 15 years old right now.
As to your thought that most kids "his age" change intersts from one week to the next. Of his group of friends, Most of them have a fairly solid idea of at least what field they would like to go into and at 15 years old. They may not know exaclty what type of job within the field, but they have a good idea of what they want. Just as my son doesn't know exactly what type of service he wants? youth pastor, adult pastor, missionary work, worship minister, community life pastor, theology professor, Full time/part time etc.. There are countless choices left or him to make, so it's just easier to say Pastor for right now.
Actually he's never experienced a changing of interests from one week to the next like you do with most kids. An interest would follow him for a few years and he'd slowly move onto something else (though related in nature so he more or less progressed onto something else, than actually shifting gears).
As to the student loans. I'd love to see your "numbers". Taking on unneccessary debt is just poor math period. Here are some numbers from DH, who is an investments professional with a large retirement firm.
Let's say Child A took a Stafford loan for a total of $40,000 with the current interest rate of 6.8%. With four years of college and ten years of loan payments at $460 a month, that's 14 years total until the loan is gone resulting in $15,000 total interest going into the bank's pocket.
In comparison, Child B works his way through college, taking seven years to emerge with a college degree debt-free. After college, he invest that $460 a month into an investment account for seven years. (ending the same time Child A's student loans are paid in full). With the industry average of 9% gains for long-term investing, this would grow into $91,000 savings after seven years for Child B.
Stacy
<<<Let's say Child A took a Stafford loan for a total of $40,000 with the current interest rate of 6.8%. With four years of college and ten years of loan payments at $460 a month, that's 14 years total until the loan is gone resulting in $15,000 total interest going into the bank's pocket.
In comparison, Child B works his way through college, taking seven years to emerge with a college degree debt-free. After college, he invest that $460 a month into an investment account for seven years. (ending the same time Child A's student loans are paid in full). With the industry average of 9% gains for long-term investing, this would grow into $91,000 savings after seven years for Child B.>>>>
Stacy, the key word there is “unnecessary” debt; which I categorize as fancy cars one can’t afford or irresponsible use of credit cards.
I really don’t put the investment of ones future earning power in that category.
While your example is sound, it doesn’t take into consideration the utility of money, the earnings time line, or the disparity between degreed and non-degreed earnings.
So Child A has a loan payment roughly equivalent to a new car. Meanwhile, he/she has enjoyed three years earnings of more than double that of Child B (if you believe the IRS).
The earnings disparity alone absorbs the $15,000 interest.
The interest on the loan is tax deductible. He also has three years head start on employer sponsored tax favorable investments. If investing a modest sum of $200 per month (assuming your rate of 9%), at retirement, would amount to a fund value of over one million dollars, which is $274,000 more than child B doing the same thing but starting three years later.
Granted there are some career paths that don’t fit this scenario. But for the majority of college students aspiring to the work force, a debt free education is neither plausible nor economically advantageous.
"I know he's young for a high school freshman but he's not that young. He'll be 14 in a few of months. Most of the kids in his graduating class are 15 years old right now."
I do not pretend to know your child and maybe he truely will be different from the majority of adolesents, but....
You have yet to even *meet* your adult son and neither have I, he's 16 going into his Junior yr.
You will be truely lucky if your child doesn't change leaps and bounds during even the next two yrs. Their bodies, and minds (and it is true their minds) are continually growing and changing during these years.
I only mention this, because if you are not prepared for "change" in your child....it could really be a tough ride. I say this with experience :)
Julie
You make a good point Julie.
<I really don’t put the investment of ones future earning power in that category.>>
Unneccessary debt is a solid statment not a point of view here. "Unneccessary as is any debt taken on when payment without debt was possible with some patience, planning and hard work. If you know the expense is coming, then there should be no reason to take on debt to pay that expense. I also see credit card use as unneccessary debt. Doesn't matter if you pay it off at the end of the month or not. A study done by Dunn and Bradstreet showed that a cc consumer will spend 12-18 % more on purchases than a consumer who uses cash. You are still loosing money even if the cc balance is paid in full each month. Debt isn't a tool.
Borrowing against potential earnings is a bad idea no matter how you slice it. Potential earnings is not guarented.
Let's look at how these numbers work out. We are making the assumption that Child A takes a student loan and starts paying $460 per month for ten years after graduation. Child A also starts saving $200 a month into a retirement plan after graduation.
Child B does not take a loan, but pays his way through college, taking seven years to do so.
Both Child A and Child B attended the same school, graduated with the same honors and are working the same job for the same income. So equal ground once they graduate. The only differing factor is that Child A starts 3 years earlier. Both will be investing at 9%.
So Child A, starting at age 22 starts to invest $200 per month into a retirement fund. and continues to do so for the next ten years. At which point the investment increases to $660 per month, as he is now able to roll the money he was putting towards loan repayment into his investments.
Child B, invests nothing until he's 25 years old, as he is working his way through school. Because he has no loans, he starts off investing $660 per month right away.
By the time they are 31 years old. Child A has an investment of $39,745. Child B has an investment of $79,425. After this point their investments remain identical for the remainder of their working lives. At retirement age Child A has $2,922,793 and Child B has $3,805,721.
It would not matter what the initial investment per month Child A made was. If Child A can afford to make $500 per month investment, plus pay $460 per month towards a loan; Child B can make that same $500 per month investment, plus an additional $460 per month investment because he has no loan. No matter how you do the numbers Child B still comes out ahead. You have to remember that Child B has that $460 free to invest for an extra seven years. Compounding interest is a beautiful thing!
This is assuming they are on equal footing, same income, same job, same everything. This does not take into account the increased earning potential Child B may have as the result of having a potential 7 year track record with a company. Many companies like to hire from within and even at an unskilled job, this can give Child B a leg up that Child A wouldn't have. Additionally, you can't put a price on the work ethic that Child B will develop working his way through school.
stacy
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Actually I'd be highly disappointed if my son doesn't change by leaps and boudns over the next four years or more. I'm looking forward to watching him grow, mature and develop into young man that he is ment to be.
If the past changes overy the past few years have been any indication of the direction the next four will lead, then we are in for an awesome ride.
Change is to be expected, welcomed, rejoiced in. Negative change is to be challenged, and learned from. All will be a part of who he is as an adult. I don't view the world through rose colored glasses.. they give me a headache.
stacy
"Not only do kids change a LOT in their 4 years of hs, but also in the 3 or 4 years right after hs too."
Yep, I believe that too Rose :) Also, my statement takes all "changes" into account. Like with your DS the changes went from troubled to maturing into a fine young man/adult man. (Thank him again for his service to our country) Some kids change from the straight A student with great morals and goals into average students whos goals go flying out the windows and morals....well, they change too :( Some kids hang in there with their same Grades, morals etc...but their attitudes about life change. Alot of these kids seem to *morph* into something else, and then seem to come back to some sort of the person we always thought they would be.....and sadly some never come back.
I'm not saying that my DS is a troubled teen and his grades haven't fallen soooo badly, but I was under the impression that HS wouldn't change him at all, he seemed so "set" in his ways. I was kidding myself when he was 14. Will he grow into a fine young man/man. Yes, I believe so....but the journey getting there is different than what I expected :) Younger DS will have an easier time of it with DH and I because now we know what to expect and it won't freak us out so badly when he starts *morphing* LOL
Julie
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