More education usually equals more earnings, right? People who don’t finish high school earn less on average that people who do. And people who go on to get a college degree earn more on average than those people who don’t. But neither one is a guarantee of wealth. There are plenty of people who are wealthy but don’t have a college degree. And there are plenty of people with degrees who are broke and in debt.
I’m a big fan of the college experience, not just because of the great time I had there, but because it will increase your chances of financial stability. I want my kids to experience the same things: moving away for college, living on campus, learning to love learning, building relationships and memories, and leaving with a degree that almost guarantees them a job. College is great. And I give partial credit to my college degree for helping me to become financially stable, and on the way to financial freedom.
I would bet that most people with kids, or with plans for kids, want them to go to college. And you want them to get that degree so they can get that job and go live their financially secure life. This is great. But I think two things are likely going to get in the way of financial security and true wealth for your kids, even if they go to college: student loans and credit cards. Here’s how it happens and how to avoid it.
The Student Loan Debt Cycle
Most of my friends are in their 30s now. When I take a rough poll, many of them either still have a small bit of student loan debt, or they just paid it off (like me). 10 years later! The average student loan debt is somewhere around $25,000 right now.
Our parents didn’t have to deal with this debt. College was an expense that could be tackled with current earnings. When they got their first job right out of college they could pocket the $100 to $500 a month that we now pay in student loan payments for their own retirement or short-term savings needs. Our parents didn’t pay for college after college. They could focus on savings and building wealth.
The truth is, college isn’t getting any cheaper, and parents and kids aren’t getting any more prepared with college savings ahead of time. So, I don’t see this cycle of debt ending. Kids will continue to take on debt and pay it off over the course of their careers. This debt will continue to grow into a burden that limits their ability to grow wealth. Of course all is not lost. Because of this new system, some kids and parents are learning that there are some ways to escape the debt cycle:
- 529 College Savings Plans – If you have a small amount you can contribute each month automatically, you can start a college savings plan and really give your kids a head start. Not to mention, help you avoid some taxes.
- In-State Tuition – There’s no question that in-state is the way to go if you want to keep costs reasonable. You have, in effect, pre-paid college for your kids through state and property taxes. Why not take advantage of this?
- Community College – Spend a year or two at a community college, where tuition is still reasonable. Then move to a four year school to finish the degree.
- Military Service – Serve your Country and earn your G.I. Bill.
- Work Study Programs – Both Federal and Non-Federal work study programs are available on your campus. Take advantage of this part-time work to help you defray some of the costs of college.
The bottom line is that parents and kids both need to be a bit more prepared and flexible when it comes to a college education. You can no longer show up day one at the college of your choice and try to figure out how to pay for it then. If you do, you’ll likely need to take on a massive amount of debt, which will inhibit your kid’s ability to build financial security and wealth.
I have been known to say that the student loan is the best kind of debt you can get into. It’s low interest, usually subsidized, and pays itself back in the form of future earnings. But as tuition rates rise, and as kid’s start leaving college with $80,000 in loans (unlike the $20,000 I had), this supposed good debt just gets really ugly, turning it into a burden that’s hard to overcome.
The Credit Card Knowledge Gap
Being in school means your child isn’t earning enough to pay for most of the things they want. But the wants still get paid for. How? By credit cards. Just like I did when I was in school, college kids today are opening up their first credit card and despite some good intentions, they will use it to pay for things they want, in addition to the things they need. When the balances rise and income is inconsistent at best, the card becomes a burden to the kid’s future. And like student loans, kids are leaving college with this debt and not able to properly achieve their other financial goals: car down-payments, retirement contributions, saving for a house, etc because they are making credit card payments. According to a 2009 study by Sallie Mae on undergraduate credit card use,
“Seniors graduated with an average credit card debt of more than $4,100, up from $2,900 almost four years ago. Close to one-fifth of seniors carried balances greater than $7,000.”
Unlike college tuition rates and student loans though, with credit cards, much is being done on the institution side of things to help curb this problem. The government, via the CARD ACT has started forcing more disclosure on schools and credit card companies with regard to their on-campus solicitation practices. And credit card companies are now prohibited from taking on college-aged kids as customers unless the parents co-sign, or they can show an income.
But government intervention shouldn’t stop you from taking steps to help your kids control their credit card spending. Education is key. Teach them how to use debt properly. Teach them about interest charges, late fees, their credit score (and how proper balance-to-limit thresholds and on-time payments affect them). Create a system where they can only use the card for emergencies if needed. Instead of a credit card, push them towards one of the many free prepaid credit cards. Just like with student loans and tuition, you need to be proactive with your efforts here.
What’s your take? Were these two things a burden on your ability to create financial stability and wealth? Do you think they will be an issue for your kids?
This post is part of the group writing project at Go Banking Rates. Visit their site to read more stories on education and wealth.