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3 Rules For Paying For College

Here in the month of May 2021, or May of pretty much any year, there are graduation ceremonies taking place for those graduating from high school. Is the traditional next step of college the correct next step? If that’s the plan, there are several major things to take into consideration. In this episode of The Wiser Financial Advisor, host Josh Nelson talks about 3 of those things.  He actually calls them ‘Rules” because they are so important to consider.

Rule#1:  Parents put on your own oxygen mask first.
Rule #2: Don’t go into debt, please.
Rule #3:  Know the rules and use them to your advantage.

There are wise ways to approach paying for college, and with these three rules, and by being resourceful ( which Josh also covers in this episode) you could do quite well.

We hope you enjoy this episode and that you will write a review for us. Also contact Josh with your questions about this topic or any financial matter, and give us your show topic suggestions.

Transcript

Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.

This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly at josh@keystonefinancial.com . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Google, Spotify, or your favorite podcast service. Let the financial fun begin!

Today we’re going to talk about three rules of paying for college wisely. These are my rules, of course, because it’s my show, but after 20 plus years now being a financial advisor, I can see a lot of things that have worked and a lot of things that have not worked out so well for people. I’ve been able to recognize patterns of success and failure regarding money, and paying for higher education is no exception to that.

At this time of year, we’re all going to graduation parties and getting announcements from people. Graduation and that next step afterward is very much on people’s minds. Not everybody goes on to higher education, but many people do, and I think it’s important to recognize what path you are on now. I do have a bias, and my bias is that education of some type is always a good investment. If it’s the right education, it’s a great investment because you’re reinvesting back into yourself or into the life of another person—either your kids, your grandkids, or somebody else that you’re supporting. Ultimately, education is a good investment but it needs to be targeted, because we have lots of examples of people who have gotten degrees that end up being worthless because the degree was in something that had nothing to do with what profession or career track the student was going toward. Therefore, getting an education is no guarantee and needs to be thought out.

However, statistics do show that we will make more money on average if we have a higher amount of education beyond high school. In fact, the evidence from the Bureau of Labor Statistics in 2020 shows that the average person who went no further than a high school diploma had an average salary per year of $38,792.00. But for somebody with a bachelor’s degree, average earnings go up to $64,896. For those who hold advanced degrees like a doctorate, the average is almost $100,000 per year. Those figures are from 2020, but I don’t think they’re that far off from where we are today. Bottom line is that statistically it’s a good thing to get education as long as it’s targeted to what you want to do.

Let’s use an example. Let’s say that somebody wants to start their own business, and they’re never going to be working for anybody else. That doesn’t usually happen, because most people that have businesses started out working for somebody else. But let’s say that’s the track you were on. Many people who have a business degree say what they learned in college didn’t prepare them very well for being a business owner. It may not be a terrible thing because there may be some things you’re learning and connections you’re making; it may be a chance to grow up for a few years because you’ve got that baby face just coming out of high school. But ultimately, it’s important to think about what does education look like for you. Maybe you’re planning to be going into a business that’s more of a trade, like being an electrician or a plumber or going into construction work. Is there education you can get in those areas? Absolutely, just be thinking about what it is that you’re planning on doing and make sure that whatever education you’re going toward will end up being a good investment.

So my three rules for paying for college wisely are as follows.

Rule Number One: Parents put on your own oxygen mask first. Get your own financial house in order. Be honest about this. If your own financial house is not in order, then you shouldn’t be paying for college or taking on any additional debt to pay for it. Folks who already have a boatload of debt and no cash in the bank and no savings for retirement should not be taking on debt to pay for college. Foundational financial things need to be happening before we pay for college.

Now, I know that people will argue with me on that. Over the years, some people have argued, and that’s perfectly fine. But I think it is important to make sure you’ve got your own financial house in order and your own financial security set before you go on to paying for kids’ college. There are lots of ways that they can cover that on their own and there’s no obligation. I don’t think you signed anything in blood at any point saying you were going to pay for all their college no matter where they went. You might not be able to cover all of it, or any of it in some circumstances. It’s important to think about that.

Kids, if you know your parents can’t afford it or you suspect that maybe they aren’t in the best financial shape, don’t expect them to hurt their own financial security to pay your way. I know that’s a harsh reality because in our society it’s almost been set up as an expectation—that once you’re an adult, you’re really not an adult. In other words, because you turn 18 or 19 or whatever age you want to say you’re an adult, society now has ways that your parents can cover you—under their health insurance and car insurance, and it’s almost become a perception of an obligation your parents have to just keep covering you. But you’re an adult now and need to be thinking adult thoughts. One of those is thinking about your parents and making sure they’re okay. I know you wouldn’t want to do anything to harm their finances. Be cognizant of the fact that they may want to do something because they care about you and love you, something that might be hurting themselves financially.

So again, parents put your own oxygen mask on first, and make sure you’ve got your own stuff in order. And if you’re not sure if you do or not, there are a lot of resources out there, including us. Take the time to assess.

Rule Number Two for paying for college: Don’t go into debt, please. If you do, pay it off as soon as possible, but really, don’t go into debt, period. Yeah, I know, that’s counter-cultural in a lot of ways because these days it almost seems like everybody has to have a student loan, nobody can cover their own college. I don’t agree with that. I didn’t have student loans. Well, actually I did have a very small student loan at the end, just because I believed the student loan people when they said, “Hey, you should borrow this money because you don’t have to pay interest.” But I really didn’t need to borrow the money because my parents agreed to cover half my college. I went to a state school, nothing crazy as far as expense, but they agreed to cover half of it for myself and my sister and brother.

The reality is I worked my butt off in college, worked 30 plus hours a week at a grocery store and made enough money to cover a lot of my own expenses. One of the years I also was a resident assistant, which meant that my room and board was paid for. That defrayed my expenses quite a bit. Bottom line, I didn’t need to take out any student loan debt. When I went into that student loan office, I should have run the other way. I just didn’t know any better at the time. (I did end up paying it off as soon as possible myself.)

When you talk to people who have student loans, it is just like they have a monkey on their back. It’s like an anchor going into their life. We’ve heard stories about people who have tens of thousands, sometimes hundreds of thousands of dollars of debt for higher education. So I think it’s important to have the mindset of, “I’m not going to go into debt over this, either for my kids, or myself. I’m not going to go into debt and put myself in a financial hole I will have to climb out of some day.”

Now, if you already have student loans, I’m not going to beat up on you anymore than I already have. I recommend getting them paid off as soon as possible. Here on this podcast, you can go back to the episodes on the debt snowball and get on that like crazy to get all your debt paid off as soon as possible. The mortgage we treat a little differently because it’s an appreciating asset, meaning something that almost always goes up in value over time. It’s a bit of a different bird. Also, most people can’t just go out and write a check for a house, especially when it’s their first one.

All your other debt, whether student loans, credit cards, car loans, or any other kind of consumer debt, needs to get paid off as soon as possible using the debt snowball approach. (Dave Ramsey’s approach by the way, not mine, but it works really, really well.)

Rule Number Three of paying for college: Know the rules and use them to your advantage. Ideally, you’ve saved up the money in advance. Ideally, you’ve got a nice little college account and you’ve been setting money aside in a 529 college savings plan, which is typically what we would recommend, though not always. Sometimes there are other accounts that work better based on certain situations, but almost always the 529 education plan is the best for saving for college. As far as how you invest the money, there are all kinds of different details there. We’re not going to get into that today just because we don’t have time, but more or less understand the rules and tools, and use them to your advantage. Understand the tax implications of any of these accounts or investments that you could be pulling from or accumulating money in for college. It’s so important to understand the rules of the game so you’re not surprised when you have to pay taxes or a penalty because you didn’t follow the rules or didn’t understand them. It’s important to think about those things. Either know the rules yourself or hire somebody. Hire a financial planner who really knows the rules well and can help you plan.

There are all kinds of resources out there. Back to Rule Number Two, I said don’t go into debt. Well, there are lots of different ways that you can keep from going into debt. One of those would be to save the money up in advance and start a college account. For example, we’ve got a one-year-old. We’ve already set up her college account and we are funding it pretty aggressively right now to make sure the money is set aside well before she actually gets to college. Also, there are grants. There are scholarships. They actually say that most scholarships go unclaimed because people don’t apply for them. Even people that would qualify don’t end up applying because it’s a lot of effort. Oftentimes it involves filling out applications and writing papers, things like that. But ultimately, that could be a way that you’re not going into debt. Be a resident assistant as I mentioned before. At the college I went to, all my room and board was paid for during the year I was there and so the only costs that needed to be covered were tuition and books.

Another option is the military, and that’s very valid. In fact, my sister did that. They paid for her medical school, which was quite a good investment. Of course, she had to give them some years after that. It was a sacrifice of time and they dictate your life for a while, but it was great from a training standpoint and also the fact that she got to leave medical school with no debt and go into her career without having any debt on the books.

So, I advise being willing to adapt, be creative, work your butt off while you’re in college. A lot of people do. Many people have college jobs.

Sometimes I hear people say, “I don’t want my kids to have to suffer or struggle like I did.” Is that a terrible thing? Because really, when you look back on your years when you were poor or working your butt off, do you look at those years as being bad years or a bad experience? Probably not. In most cases people look at even their bad jobs as a badge of honor. I look back to some of my worst jobs and feel good about them from the standpoint that I really had a lot of pride in getting the job to begin with, in working hard and making money, then getting a better job. And the best way to get out of a bad job is just to work your butt off and move into a better job over time.

Another option is to get less expensive credits. Of course there are lots of ways in high school these days to get college credits by taking AP courses or Community College courses while you’re still in high school. In many cases, there are ways to get your basic general education credits before you even graduate from high school. You could also choose a less expensive school. Again, I know there are people who would debate with me on this, but the bottom line is, when you talk to your doctor, do you know or care what college or medical school they went to? Well, it depends, right—if they’re going to do brain surgery on you, you might care. You might ask some of those questions, but my guess is probably not in most cases. Once you get into your career, most employers don’t care and might not even ask. They might just want to know you have a degree. There are probably a few professions out there where they would. If you wanted to be the CEO of a Fortune 500 company or work in a prestigious law firm, you probably could make the case that you would need to have the connections you would form in certain universities to be able to get those types of jobs. In most cases it doesn’t matter.

What are some less expensive ways to get through school and get the degree? Going to Community College for the first two years. Lots of people do that. Go to Community College for the first two and then transfer to the school of your choice. Just make sure those credits can be transferred. Another option is getting a job at a company that does education reimbursement. For example, let’s say you want to be a registered nurse. It could be that you start working for a medical system at a lower level position and they might allow you to work and go to school, and they would pay for your education or at least a portion of it.

We could spend a lot of time exploring creative ways, but I think you can get creative and get resourceful if you agree with me.

To review-

Rule Number One: Parents, put on your oxygen mask first. We’re not going to sacrifice our financial safety or the security of our future to pay for higher education. It doesn’t make sense on an aircraft and doesn’t make sense in your financial life either.

Rule Number Two: Don’t go into debt. That’s for both parents and kids. Figure out ways to get through. There are a lot of great resources out there. I’m a big fan of Dave Ramsey and if you go to Dave Ramsey’s website, they have books on this. One I like a lot is called Debt Free Degree. It talks about getting creative to pay for higher education without having to leave college with a bunch of debt. So, don’t even go down that path if you agree with me on these things. Believe me, I’ve worked with so many people over the years and nobody likes their student loans! And of course I know it’s a controversial topic right now because it’s being debated whether to forgive student loans, a portion or all? I wouldn’t even go down that path. I would not expect that somebody is going to be covering your college to begin with, and I would not expect that somebody is going to pay off your student loans. If it happens and you’re a beneficiary of that, well, great, now you’ve got extra money.

And Rule Number Three: Know the rules and use them to your advantage. Learn the game and play the game wisely. Bottom line: Paying for college is really expensive. Oftentimes it is a good investment. Just do it wisely.

There are wise ways to approach this, and again with the three rules I think you will do quite well if you keep those in mind and be resourceful. Use resources out there. There’s all kinds of accumulated wisdom on this topic, but keep in mind those three rules.

I hope that’s helpful for today. And for any of you graduates, congratulations. I’ve got James, my 18-year-old graduating from high school. So congratulations to James and congratulations to all the folks out there graduating from high school and college. A great investment that you just made and I hope that you are financially successful in the future.

Thanks everybody, for supporting this podcast. We are very grateful for anybody who’s out there promoting the podcast. If there’s an episode that resonates with you, please pass it on to a friend. Or maybe it doesn’t apply to you as much, but it could apply to a friend, a coworker or a family member that really needs to hear what we’re talking about. It also helps when you let us know topics you’d like to hear more about. We want to make sure this is valuable for you, for your family, for your coworkers and friends. This is really about acquiring financial wisdom.

So I hope you have a great week, and God bless.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.