One of the things many responsible parents are doing today is saving for college via a 529 plan. Not saving for college and expecting a student loan bailout in the future is bad planning. The same goes for not saving for retirement and hoping the government will take care of you once you can no longer work.
Do you really want to take that chance? I don’t think so.
Given college tuition is rising by roughly 6% annually a year, by the year 2033, the cost for one year’s worth of public or private school tuition may approach $54,070 and $121,078, respectively.
Add on expenses for room, board, travel and miscellaneous stuff and the annual cost of college could easily be 50% – 100% higher.
Meanwhile, according to the National Center for Education Statistics, just 41% of first-time full-time college students earn a bachelor’s degree in four years, and only 59% earn a bachelor’s in six years.
Therefore, it is only logical that all of today’s new and future parents should try to save about $1 million for each child’s college education. If a family has a “trophy kid,” then the family should save $4 million and so forth if college is the desired path. Going into debt to buy a depreciating asset like a car or a college degree is fiscally unsound.
No parent should expect their child to be brilliant and get scholarships. Nor should any parent expect their child to be sensible and attend a public institution to save on costs. High expectations lead to disappointment.
No matter how many articles I write about the depreciation of a college degree, not enough people will listen because the desire for status is too strong. We also all believe that we are more talented and smarter than we really are.
Parents can hope for sensibility, but should still plan to spend the big bucks.
However, to save for our children’s college education often means that we are unable to save as much for our own retirements. This, in turn, may cause financial anxiety and unhappiness within the household.
Perhaps the Cancel Student Debt movement is a solution. Probably not.
Cancel Student Debt To The Rescue
Senator Bernie Sanders has proposed canceling all $1.6 trillion of student loan debt currently held by roughly 45 million Americans.
Bernie’s proposal is a one-up of Senator Elizabeth Warren’s proposal to cancel $640 billion of student loan debt by forgiving up to $50,000 in student debt for those earning under $100,000. Warren’s plan would directly benefit about 42 million people.
During a presidential election, it is understandable that candidates need to come up with enticing proposals to gain votes. The more freebies you can promise at a minority’s expense, the more votes you will get. Power is a mesmerizing elixir all politicians crave.
I’m personally waiting for the Cancel All Mortgage Debt proposal to one-up Senator Sanders. Not only would homeowners save a ton, demand for real estate would surge, thereby creating even more equity for millions. As a property owner, I’ve got my fingers crossed.
What’s interesting about canceling all student loan debt is that the benefits will go mostly to more well-off Americans. After all, only about 30% of Americans have a Bachelor’s degree. Even fewer have a Master’s or Doctorate degree.
Senator Sander’s plan would help eliminate student loan debt for some of America’s highest-earning professionals e.g. doctors, lawyers, bankers, consultants, etc. But at least his plan does not discriminate between student loan holders.
People against canceling student debt also make the point that nobody forced parents or students to take on so much debt. After all, there are plenty of more affordable education options.
Just because AOC could afford to pay $55,000 a year in tuition in today’s dollars to attend Boston University doesn’t mean we all can. Most of us don’t have the financial means and will probably have to attend a state school or community college for two years instead.
When I was looking at attending college, I chose William & Mary, a public school, because the tuition was only $2,800 a year. Only the rich kids who couldn’t get into a top 20 private school went to a school like The University of Richmond in Virginia, where tuition was about $25,000 at the time and $54,690 today.
I was fine with the rich kids who went to the University of Richmond instead of going to a state school like most of us. That’s just life. We’ve got the same scenario playing out in practically every state, e.g., Portland University ($47,500) vs. Portland State ($8,500), University of San Francisco ($49,740) vs. SF State ($7,264), etc.
We just need to make the most of our situation. Hating on the rich is not productive because their privilege does not preclude you from creating your own wealth.
I knew my parents weren’t rich given they drove an 8-year old Toyota Camry, I went to a public high school, and we lived in a cozy townhouse. Therefore, it was only logical I should attend a more affordable college. Even if I didn’t get a decent paying job after graduation, I knew that with a minimum wage job I could still pay my parents back.
We can’t always get what we want.
In high school I really wanted to rumble to class in a 1990 Mustang 5.0 GT. The sound of a 5.0 engine was one of the sweetest ever. My rich classmate was getting a Supra and was willing to sell me his Mustang for $13,000. But I only made $4/hour working at McDonald’s. So instead, I had to impress the girls with my bike and sparkling personality.
I firmly believe that other parents or college graduates who are my age (42) or younger understood the cost/benefit analysis of attending college as well. By 16, the concept of only buying what I could afford was very clear because I had to work craptastic jobs for things that I wanted. Further, the internet and all its free information about the dangers of overpaying for college have been readily available for decades now.
Everything is rational. I do not believe the vast majority of Americans who are bright enough to attend college do not understand the risks of spending hundreds of thousands of dollars for an education.
To cancel all student debt would only be rewarding irrational behavior. By rewarding irrational behavior, we may be dooming such folks to a lifetime of hardship.
The Importance Of Personal Responsibility
As honorable citizens, we know that everything is earned and nothing is given.
There’s something incredibly satisfying about taking out a loan and paying it back in full. Fulfilling your obligation is the best way to cancel your debt.
My wife, a fellow William & Mary alum, graduated with $10,800 in undergraduate debt. She came from a poor family where neither parent went to college. Therefore, she logically attended a state school to save on costs.
Her first job paid her $24,000 a year in expensive San Francisco. Nevertheless, she stayed super frugal and diligently paid off her student loans in five years. When she sent in her last payment we went out to dinner to celebrate. Then it was back to saving and investing aggressively in order to one day get out of the rat race, which she did at 34.
I graduated business school with about $25,000 in student debt because my employer decided to only pay for 70% of the tuition instead of 100% once the global financial crisis hit. I wasn’t about to complain after seeing colleagues get blown out left and right. But boy did it feel great to get that monkey off my back through some lockdown savings.
There is no way we would have achieved financial freedom when we did if everything had been handed to us. Instead, we’d probably still be working and complaining about why everybody else has it better than we do while also being unwilling to do any extra work.
Getting into the mindset of earning what you deserve is incredibly powerful to building greater wealth and happiness. The satisfaction of achieving a goal through years of struggle is one of the best things ever. The struggle makes you appreciate more of everything you have.
We shouldn’t let politicians pandering for votes legislate away a person’s ability to feel satisfaction through their own initiatives. Instead, let’s use the $640 billion – $1.6 trillion in new taxes to be raised by these proposals on helping the homeless, underemployed veterans, foster children, and kids with disabilities instead of the top 30%.
Honor Your Debt Obligations
The average person who worked for their success will feel much better than the average person who gets everything handed to them. If you don’t believe me, just ask any adult child over 30 still living at home with their parents. Chances are high these folks were given a little too much and lacked the motivation to succeed on their own.
Once the expectations for a handout are ingrained, there’s no turning back. We’ll end up raising a new generation of entitled Americans who will not fully appreciate the value money. Our economy will unravel because trust will be broken and productivity will decline.
There is always a silver lining. If the #CancelStudentDebt movement succeeds, then it is rational for all parents to stop contributing to their children’s 529 college savings plan and live it up. Perhaps the extra amount of spending will help boost the economy.
We can only hope that society wises up to the fact that paying record amounts of tuition for an antiquated degree will no longer be necessary in the future. But I wouldn’t bet on it.
Save aggressively. Work hard. And be responsible. If a bailout comes, you’d be irrational not to accept. But if a bailout never comes, you won’t care because you never expected one in the first place.