Journal of Financial Planning, December 2003

The College Dilemma: Who Pays?

by Eileen Gallo, Ph.D.

Earlier this year, my husband, Jon, and I conducted a break-out session on “Raising Responsible Children In An Affluent Environment” for the AICPA Conference on Tax Strategies for the High Income Individual. During the Q&A session at the end of the presentation, one of the attendees raised the issue of kids graduating from college or graduate school owing many thousands of dollars in student loans. Should parents pay for their children’s college educations or tell them to get student loans? What did we think?

In a vacuum, the issues surrounding how parents choose to finance their children’s college education would seem to be entirely financial in nature. In reality, the choices are modeling values and sending important messages to college age children. As Sue Shellenbarger pointed out in the May 12, 2006 issue of the Wall Street Journal: “Do student loans teach responsibility – or foster a lifelong overreliance on debt? Are parents who pay their kids’ way through college modeling self-sufficiency – or martyrdom? Does requiring a student to get a job during the academic year instill a work ethic – or workaholism?”

My husband and I have strong feelings in this area that have been informed not only by our writing and speaking but also by our experiences as parents of three adult children. And those feelings have changed over time. We originally believed that parents should pay 100% of their kid’s undergraduate college expenses. Over time we have reached the conclusion that the problem isn’t giving kids money for college; it’s failing to involve them in the money process. College age children who are involved in the economics of their education and pay part – even a small percentage – of their college expenses are less likely to develop a sense of entitlement and learn valuable life lessons that help them cope with adult life.

Let’s start with the question whether graduating from college with crushing student debt is the exception or the rule. According to the College Board, an association of more than 5,000 educational institutions and the provider of the well-known (and feared) SAT, about 60 percent of students attending four-year colleges pay less than $6,000 a year for tuition and fees. (While this column focuses on paying for a four year college education, two-year public colleges are a bargain that should not be dismissed. Forty-four percent of all college students are currently attending two-year colleges. The College Board estimates tuition and fees at the typical two year institution at $2,191. The average two-year public college student receives grant aid that reduces the average tuition to a net price of about $400.) Nationwide, average yearly tuition and fees at a four-year public college or university amounted to $5,491 in 2005. For example, the California State University website estimates the cost of tuition, fees and books for a full time student at the CSU campus in Los Angeles at $4,277 a year, while tuition and fees for the four-year program at City University of New York is $4,353 a year. A full time student at UCLA (part of the more prestigious University of California system) can expect average annual tuition and fees of $6,769 for 2006.

On the other hand, the College Board reports that the average yearly cost of tuition and fees for the 40% of students attending a four-year private college or university was $21,235 in 2005. About 2 percent of all students currently attend private colleges and universities where annual tuition and fees total $33,000 or more.

Parents of college age students attending private colleges or universities clearly face a dilemma. Is it a good idea to pay for their children’s college educations or should they insist that the children take out student loans? Should their children work part time to contribute to the cost of tuition or is being a college student their full time job? Does paying for college produce entitled kids ill prepared for the real world? Or is the senior generation abdicating the responsibility for educating the young by passing on the costs in the form of student debt?

We find it convenient to divide sources of educational funding into four categories:

  • Parental savings, including 529 plans and Uniform Gifts To Minors Accounts.
  • Student aid that does not have to repaid, such as Pell Grants, Federal Supplemental Educational Opportunity Grants, work-study programs and scholarships.
  • Loans to students that must be repaid, such as Perkins loans and both subsidized and unsubsidized Stafford loans. (The difference between the two types of Stafford loans is that the government pays the interest on subsidized Stafford loans while the student is in college, and in unsubsidized Stafford loans, interest is accrued and added to principal, creating a substantially higher loan balance to repay.)
  • Student earnings while in college. Educators generally recommend that college students work no more than 15-20 hour a week. Employment in excess of 20 hours has been shown to impair scholastic performance and to play a significant role in extending the number of years to graduation. Yet, Jacqueline King, Director of the Center for Policy Analysis of the American Council on Education, reports that 40% of unmarried students under age 25 are currently working more than 20 hours a week.

For some families, there is no alternative but to rely on a combination of all four funding categories, often with significant emphasis on student loans and part time employment. But what about your clients who can afford to pay for college but wonder if they should? What advice would we give them?

  • Involve your college-bound child in the decision making process. Let him or her participate – or even take the lead — in determining the availability of scholarships, work-study programs and grants. An important first step is to visit the Department of Education’s Federal Student Aid website – – which distributes and processes the Free Application for Federal Student Aid (FAFSA), the fundamental qualifying form used for all federal and government-guaranteed commercial lenders’ programs, as well as for many state, regional and private student aid programs. In addition to the FAFSA form, most private colleges and universities also require a second financial aid form, usually the College Board’s PROFILE application available by clicking on the “Pay For College” tab at Individual colleges and universities also offer information about work-study programs and private scholarships on their websites.
  • Discussion of scholarships can be used to foster financial literacy. A 19 year old told us that a discussion with his father helped him understand the true economic effect of a $2,500 yearly scholarship. His father explained that it was actually worth almost twice that amount. He showed how, after taking into account both state and federal income taxes, he would have had to earn $4,500 to net $2,500 to apply against college costs. His son felt a sense of pride that he was effectively contributing $4,500 a year to the cost of his education. He not only felt good about qualifying for the scholarship but he got an important financial lesson at the same time.
  • Have periodic meetings with your adult child that result in a clear understanding – preferably in writing—of the economic arrangement. Such an understanding will help your clients avoid what Monterey, California CPAs DeAnn Thompson and Michael Jones call “financial embroilments” that can outlast college days. Some of the issues that should be covered include:
    1. Are there grade point or unit requirements, such as “not less than 12 units a semester with a GPA in all classes not less than 2.5?”
    2. What is the student’s financial contribution to his or her education and how will he or she earn the money? Since many college students work at minimum wage part time jobs, it is important to select a reasonable figure that does not require the student to work more than 20 hours a week. In fact, we would recommend that part time work be limited to no more than 15 hours a week. In lieu of part time work during the school year, the agreement might be based on no work during the school year and full time employment during Christmas and summer vacations. Determine how much or what percentage of the student’s earnings are to be applied against educational costs and how much are to be kept for personal expenses.
    3. Create a realistic budget for the child’s personal expenses and review actual expenditures at least once a semester. Help the child tweak the budget as necessary. As one parent colorfully observed, the net effect of expecting his son to contribute a fixed amount towards tuition, together with a reasonable personal budget accompanied by a periodic review, was that he “screwed around less and applied his skills and talents more.” (Clearly, a result hoped for by many parents!)
    4. If the parents agree to help their child repay some student loans after graduation, the agreement might be limited to loans that were used for mutually agreed upon expenses, such as tuition, books and other educational expenses. I’ve heard many stories from parents that suggest that some “student loans” were really “life-style loans” that allowed their college student to maintain a desired life style, such as living off campus in a more expensive apartment or taking expensive vacations during semester break and generally maintaining the life style they enjoyed at home.

My two bottom line recommendations: Be aware of the messages and values that the parental decision sends the college age child and make sure the agreement is clear and unambiguous in order to avoid future embroilments.

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