There is an article floating around on Marketwatch titled Parents You’re Paying for College Wrong. This kind of article is one of the reasons I write Finance Gourmet.
After being a Financial Planner in Denver for several years (and, yes, I was a Certified Financial Planner), I saw a lot of different financial situations from a lot of different people. I realized two things:
- Too often useful information gets bogged down and confusing because it spends so much time covering small, infrequent, exceptions to the rule.
- On the other hand, useful information is often harmful because it glosses over all of the possibilities in favor of hard and fast statements that aren’t necessarily accurate for everyone.
If those to reasons seem a bit contradictory, then you understand why writing personal financial advice can be tricky.
How To Pay for College The Wrong Way
According to the article on Marketwatch, a lot of parents are “paying for college in ways that experts say aren’t smart.” Fair enough, that’s probably true. However, the way the article goes on to explain what is “smart,” makes it sound like you are a fool for doing certain things that are not foolish whatsoever. The important thing is to fully understand each method’s pros and cons. The other thing that is given no attention in the article is the fact that not all options are available to all people. Thus, what might be a “wrong way” to pay for a child’s college education according to experts, might be only way for some parents.
What triggered this particular article is the annual report titled How America Pays for College. (Fun typo in the original article where the title is written as “How American Pays for College” – I find typos in articles about education to be particularly funny. Having said this, there will now be several embarrassing typos in this article. Just point them out in the comments when you find them and I can laugh with you.) This report shows the many different ways that parents help pay for higher education. Ironically, the attached infographic is subtitled, “There is no single way to pay for college.”
You Should Have Saved Money for College
This article starts off by saying that many parents borrow money to pay for college. Then, it says that is wrong because, it’s cheaper to save money than to borrow money. In fact, it says, if you save $200 for 10 years, you’ll save more than $34,400.
Of course, that is true, however, if you are paying for college wrong, as the article says, that means, with no ambiguity that you are currently paying money for your children to attend college in an incorrect manner. Saying that you are wrong to be paying NOW with a loan versus saving sometime in the PAST is just dumb, unless you have a time machine, in which case, this article is 100 percent correct. You are doing it wrong. Get in your time machine and go back and save some money.
Of course, it’s equally true to say that it would have been much better to win the lottery a few years ago, or to have married someone rich, or have your parents leave you lots of money. While everyone one of those ways would be “better,” none of them is a legitimate means of paying better today.
Pay For College With Credit Cards
Next up are the people who pay for college with credit cards. Nevermind that survey referenced here says that a mere 3 percent of parents pay for college with credit cards. I guess the author still felt that it was worth including in an article about how “you’re paying for college wrong.”
No, not you, or you. But, there’s somebody here using a credit card. Anyone? Whatever, let’s include them anyway.
I had many friends whose parents eagerly paid for college using their credit cards because the mileage rewards from paying tuition with a credit card was enough to get their son or daughter a plane ticket home for free. This article makes the assumption that this already small percentage of credit card payers is also carrying the balance and paying the interest. How many of those three percent of people do you think turn around and pay off that balance right away?
If you get credit card reward points, or free miles, or whatever and then you pay off the balance before paying any interest, then, my friend, you are paying for college RIGHT. You may as well reap the rewards of this big outlay.
Next up, the article bashes using a home equity loan to pay for school. The only downside to this is that you are technically risking your home if you can’t repay the loan. However, that’s true any time you use a home equity loan or line of credit. Unless the people writing this article are against home equity loans in general, one wonders what makes it okay to use one to remodel your kitchen, or take a vacation, or whatever else, but makes it far too dangerous to use on education.
You should most definitely understand how a home equity loan works, and have the means to pay it back, but that is always true. As an added bonus, the interest rate on a home loan may be much lower than the 7.21% interest rate for Federal PLUS Loans that the author recommends. In addition, unlike those Federal PLUS Loans, a home equity loan (or other loan) can be discharged in bankruptcy if things get really bad. Plus, you can deduct the interest on a home equity loan, even if your income is too high to qualify for deducting student loan interest.
Near the end of the article, is where they talk about the ways of paying for college that are actually wrong. Raiding your 401k plan or IRA account is a bad idea, especially if you are getting hit with the 10 percent penalty for taking an early withdrawal. That’s like paying 10 percent extra for tuition. Find another way.
Assuming you aren’t raiding your retirement accounts, or carrying tuition payments as a balance on a credit card, you aren’t paying for college “wrong.” This article just adds a lot of judgement upon parents for no reason, especially when several of the wrong ways, are potentially the right way for many people.
If you are NOT currently paying for college, then you probably wouldn’t even read that article, but if you did, and you will be paying for college someday, then the right move now is to open a 529 savings plan for your kids and start socking away money. Even if it isn’t enough to cover a full ride, it’s still going to help, and as an added bonus, you’ll get to pay for college the “right way” in the future.