We want the best for our children, and we seek to lead them towards lives that are better than our
own. Culturally, we accept the pursuit of the “American Dream.” We measure success in terms of a house and white picket fence, a steady nine-to-five job, and a sizeable bank account. As parents, how do we put our children in a position to achieve this dream? What if our children want something other than this dream?
These questions lead me back to the current reality. To help our kids prepare for this next exciting phase of their lives, what should we as parents be doing now? For most families, “college” is the answer. However, the reality of achieving it remains a challenge. It’s like watching a crowd pay to stand in line for a box of goods and the promise of a great future, but not knowing how long the line is or what the box contains.
The American Dream
We hear about the goods in the box being the American dream – buying a home with a white picket fence, having two children, working at a nine-to-five job, and having a sizeable bank account. These traits are measures of success. The American Dream tells us that a pension awaits us when we reach the age of 65, and that our children will get college degrees, putting them on track to have better lives than ours. Yet somehow, in some way, the dream feels out of reach.
Consider Generation X. They bear the once-shared responsibility of creating a retirement pension while caring for elderly parents and helping pay the inflated cost of college – all on stagnant wages. The financial planning community tells this generation, “Save more, work more, save for your retirement first. Kids can borrow money for college; you cannot borrow for retirement.”
What is the result? A lack of retirement savings, student loan debt that both parents and children will be working to pay off for decades, and high levels of stress and anxiety. Where can we start building momentum that helps parents and acts as a springboard for our children and communities? College planning. Here, we can start with one of Gen X’s biggest concerns. First, we must gain perspective on the current landscape.
Student Loan Bubble
One of the most disturbing clocks is the student loan clock (found at collegedebt.com). Take a moment to venture over there and wait for a few seconds. It likely feels similar to watching the national debt clock. Consider the growth in student loan debt over time with just federal student loans outstanding (3.)
Or how about the increase in parent plus loans versus federal loans to undergraduates(4.)
Several studies have shown that parents tap into their retirement accounts to help pay for college. Even as parents sacrifice their own retirement over time, we sit with $1.4 trillion of student loan debt, on which one generally cannot file for bankruptcy. Experts state that the student loan bubble is coming.
Is it coming or is it already here? In a recent article, Forbes noted that the percentage of borrowers not paying on their federal student loans within three years of graduating college has increased to 11.5% (1.). Compare this to the mortgage delinquencies from the great recession, which topped out at 11.53% in the first quarter of 2010 (2.). How can the bubble be on the way? It is already here.
For several reasons, we should not be surprised by the lack of conversation on this topic:
– The Department of Education does not penalize universities until their student loan default rates exceed 40% in one year or 30% over three years. Remember how terrible things were during the Great Recession? Universities would need to become three to four times worse in terms of their default rates before the school has skin in the game.
– Think about the fact that you cannot easily declare bankruptcy to eliminate student loans. Why would the student loan industry care much about defaults? The interest will continue accruing; it only becomes a question of when they will collect. The longer it goes, the more compensation they will receive. The interest does not stop piling up.
– Let us not forget the standard advice of the financial planning industry: Prioritize saving for your retirement. “Kids can borrow money for college, but you cannot borrow money for retirement.” Think about how we pay for advice. Most advisors or financial salespeople receive compensation from commissions and/or the assets they manage. The larger this pool of assets, the more money they make. Why wouldn’t they prefer that you and your child take out student loans instead of paying for college from accumulated assets? While this does not apply to all financial professionals, based on my experience it is most often the case. This is not always a prudent financial move. In 2015, Mark Kantrowitz wrote an article that discusses situations in which putting your retirement first does not work best.
Does the world seem bleak, as though all is lost? There are new and developing trends. We must
understand both sides of the student loan issue.
The first is students who have already graduated and are working to pay off their loans. These individuals must look and plan for their student loans using the same mindset Boomers have toward Social Security planning. As you look back on retirement income planning, not much thought was given to maximizing Social Security to increase lifetime income. However, as Boomers aged, they explored the rules and started developing strategies like file and suspend, or restricted claim to help increase lifetime income. These strategies were innovating. They became so popular that Congress had to change the rules on Social Security. In a comparative way, new planning tactics must be developed for current holders of student loans. People like Heather Jarvis and younger financial planners are leading the way.
The flip side involves preventing student loans from being an issue. This means that as college education consumers, we must change the way we save for, shop for, and save on higher education. Most of the time, financial services will tell you to save for college (provided you have taken care of your retirement first), but it will not tell you how to save on the cost of college. Those individuals who talk about how to save on the cost focus on getting scholarships. However, there are other ways, like smart shopping, making the schools compete for your student’s attendance, and using the tax code to create “tax scholarships.”
Next Step with College Funding
– If you face the first scenario, study the innovators who specialize in student loans. If you are a do-it-yourselfer, check out Heather Jarvis’ site: http://askheatherjarvis.com/. For those who are delegates or validators, check out the screening tool on the XY Planning Network and look for advisors who specialize in student loans.
– If you are a parent of a high school student seeking some level of education beyond high school, look for advisors who specialize in the financing of college funding, not just the filing of the FAFSA or CSS and finding scholarships. I’m talking about using the tax code to create “scholarships,” having universities compete for your attendance, coordinating contributions from family members to avoid negative impacts on aid, helping coordinate distributions from accounts, developing a smart borrowing plan, and helping families explore ways to cover any college funding shortfall. To see what this process can look like, follow this blog over the next few months.
– Check out my other college funding articles.
- Friedman, Zack. “Student Loan Defaults Rise – What To Do Now.” Forbes, Forbes Magazine, 6 Oct. 2017, www.forbes.com/sites/zackfriedman/2017/10/06/student-loan-default/#1f1cc56928de.
- “Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks.” FRED, St. Louis Federal Reserve, 27 Nov. 2017, fred.stlouisfed.org/series/DRSFRMACBS.
- Eisenhart, Maddie. “Student Debt Is Going to Be A Huge Problem for Millennial Marriages | A Practical Wedding.” A Practical Wedding: We’re Your Wedding Planner. Wedding Ideas for Brides, Bridesmaids, Grooms, and More, 17 May 2016, apracticalwedding.com/student-loan-debt-relationships/.
- Mitchell, Josh. “The U.S. Makes It Easy for Parents to Get College Loans-Repaying Them Is Another Story.” The Wall Street Journal, Dow Jones & Company, 24 Apr. 2017, www.wsj.com/articles/the-u-s-makes-it-easy-for-parents-to-get-college-loansrepaying-them-is-another-story-1493047388.