Smart Savings For Education

Open any newspaper or visit any financial website and you only need about 10 seconds to find a story about students with massive education debt. Do you wonder how this happens? I think I can answer that, and also offer a smart technique I just learned from a client. First, let’s look at some of the ways you (or your child) can rack up a huge bill, with an eye to AVOIDING these “techniques”.

  1. Choose a dumb major. I’m all for a liberal arts education. I do not think undergraduate work should be trade school. So if you want to major in English, or history, or Near Eastern archaeology, go for it. There are a few things that I would strongly discourage—film studies, speech, hospitality industry—but mainly because these aren’t even recognized by most employers as solid academics. Nothing wrong with a few courses, but pick something that seems to indicate you might actually be able to write and analyze something. The problem with a dumb major is that there’s almost no possibility of getting a job in the field. If you’re going to choose a dumb major (film studies, again), it better be at the absolutely best school in the field, or you have NO HOPE. It’s also not a career plan to be a professional athlete, novelist, or opera star unless you have 1) significant professional recognition in college 2)independent inheritance, indulgent parents, or a wealthy and willing spouse, 3)a way to make a living while you’re trying. Music majors especially can cost a fortune in coaching, instruments, and all the little extras.
  2. Change majors several times and spend more than four years in school. This is a good way to add another $40-50K to your bill. If you don’t know what you want to major in, maybe you need to take a year or two off and WORK until you figure it out. Unfortunately you will then need to begin repaying any loans you’ve taken out. Best to buckle down and finish something. In college and in life, sometimes things aren’t perfect but you still need to stick with them.
  3. Borrow everything. I wish someone would tell me how they tote up $160,000 in loans for undergraduate work. If you really had no money and filled out the aid forms, you should have had some portion in grant money. If you were determined but not sought after (i.e. nobody offered you money but you went anyway) you need to keep your eye on the finances. If you’re also borrowing all your living expenses, you need a JOB. Really.
  4. You borrowed money without ever considering what you might earn. Don’t borrow more than your potential profession earns the first year. Major in English and figure out what a teacher, editor, meeting planner, etc. makes the first year out—and know what jobs people from your school got with that major. Talk to your professors—they’ll be stunned that anyone showed up for office hours. Get know to the careers office—you’re paying for that service whether you use it or not.
  5. You paid the full freight for graduate school. This is where I think people really hit the big time on loans. If you’re getting a grad degree in the liberal arts or humanities, you’d also better be getting significant aid. If you’re not, THEY DON’T WANT YOU and neither will an employer when you get out. To make a living in academia, you need to be shining pretty brightly by graduate school.

It’s a different story for the professional schools: biz, law, medicine, etc. Virtually the only “aid” available is loans. This is because (at one time) anyone who landed a degree walked out with a huge new salary and often (in biz & law) with a signing bonus big enough to take a huge bite out of the debt. No more. And the real poor idiots are ones that drop out before completing the degree—they have nothing BUT the debt.

And now the really smart thing I learned from my client:

Start saving into a Roth as early as you can—yes, this means high school or college if at all possible, but certainly as soon as you graduate from college. Also, put the max into your employer’s retirement plan and get that match. Maybe you’re not going to save it for the next 40 years (although I hope you will). But guess what—under normal circumstances you can take this money out for education. Voila! A very good chunk of change to get your MBA, or social work degree, or whatever. Look at the stats—plenty (most, in MBA programs) of people are in their late twenties or early thirties in professional programs. Maybe it helps to know the landscape of the profession by working in it before you incur two or three years of lost income and $150K in loans. You’ll be far less likely to drop out before finishing, be an unfocused slacker, and you’ll have done your “market research” on whether the degree is worth the cost. With any luck, you’ll have found an employer that will either pay for part of the degree or give you some time off to get it.

As in all other life situations, some savings give you far more options.

About the author

Danielle L. Schultz, CFP®, CDFA
Danielle L. Schultz, CFP®, CDFA

Danielle L. Schultz, the principal financial planner of Haven Financial Solutions, is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a NAPFA-registered Financial Advisor, and a Registered Investment Advisor in the State of Illinois. She studied financial planning at Northwestern University’s Certified Financial Planner™ certification program. She also holds a Series 65 license (Registered Investment Advisor Representative) and a CCPS (Certified College Planning Specialist).

She writes a regular column for Better Investing magazine and is currently working on a revision of their mutual funds handbook. In addition to academic training and professional experience, Ms. Schultz has personally managed Social Security, Medicare, retirement and long-term care issues; college funding concerns; and cash flow and transition planning in self-employment and divorce situations. Her social work background gives her an innovative perspective on financial planning issues; for her, financial planning is not only about money, but also a key component in a satisfying and well-lived life.

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