The High Cost of the College Investment

Second to purchasing the family residence, the financial support parents provide to children attending college is the largest financial expenditure made by most families.  It is no secret that education costs have risen faster than the general rate of inflation for almost two decades.  This is true for both private and state supported institutions of higher education.   Costs for state-supported 4-year institutions average $17,500 per year while private universities run approximately $35,000 per year, according to the latest data from the U.S. Department of Education.  Elite institutions are much higher.

Motivated parents and grandparents understandably devote significant attention to accumulating these needed funds, and often start many years in advance.  In addition, they may continue to bear the burden of repaying educational loans long after the graduation date.   They make this commitment because they recognize the linkage between a successful educational outcome and lifetime earnings.

Surprisingly, however, almost all of the financial planning effort around this important family financial goal relates to the accumulation of the necessary sums.  Our experience as Wealth Advisors is that comparatively little effort is expended on planning specifically for the disbursement of these monies.

Important Questions, Some with Surprising Answers

Most people assume that a college student undistracted by the need to earn money and contribute to higher education costs will likely attain better academic results.  Most people also assume the likelihood of successful graduation with a degree is higher in such circumstances.  Are these assumptions correct?  In short and in order: NO, and YES.  College students with a fully-paid ride do indeed enjoy higher graduation rates, on average.  However, the best grade point averages (GPAs) are attained by those students who are working to help contribute the needed funds.

The Research

Laura Hamilton, Sociology Professor at University of California – Merced, authored an in-depth study related to these questions several years ago.   The goal of her study was to understand the effects of parental financial contribution to student GPAs and bachelor’s degree graduation rates, independent of other factors such as socio-economic class, family background, previous academic performance, etc.

This study was extensive, relying upon data that covered more than 20 years and 12,000 students at institutions of all types – public and private.  The study itself is a tough read, not exactly a page-turner unless you are really into the art and science of mining datasets.  Nonetheless, the conclusions of her 26-page report in some respects are surprising, challenging conventional wisdom.  We can summarize a few key conclusions as follows:

  1. Eliminating the effects of family income level and other unrelated factors, average GPA for students was highest for those students receiving no direct family support to the cost of higher education. This was compared to those students who were receiving financial support from parents.
  2. Average GPA ranged from 3.05 to 3.15 (on a scale of 4.0) for students from all family income levels who had no parental or family financial support. With the first $16,000 per year in family financial support (2013 dollars), average GPA dropped below 3.0 for students from all family income levels.
  3. Higher levels of financial support from family decreases average GPA further, but at a diminishing rate. The lowest average GPA rates were associated with those students who had a “full ride” from the family.
  4. Students working part-time to contribute to the costs and those earning merit-based scholarships which included GPA performance standards averaged better GPA results than students not working or those relying solely upon need-based assistance.
  5. Overall graduation rates, however, increased with greater levels of family financial support. This seems to make sense since many students with little or no family financial support may be forced to drop out of school for economic reasons.

Dr. Hamilton’s motivation to conduct this study began a number of years previous, after she worked on a project that including spending a year living in a college dormitory, observing the students, then following them through graduation and, eventually, interviewing their parents.

Dr. Hamilton summarized it in the concluding comments to her study this way:  “Students with parental support are best described as staying out of serious academic trouble but dialing down their academic efforts.”   This finding suggests that parental financial support can act as a form of “moral hazard,” in that students make decisions about how seriously to take their studies if they have not personally made an investment of their own cash in their educations.  A more down-to-earth explanation:  the students who are not required to contribute may be spending their freed up time partying, rather than studying.

This research does not suggest that parents who can afford to pay for college should refrain from doing so.  However, even for parents who are well positioned to pick up the entire tab, it might be advisable to pull back modestly and require the student to get some of their own skin in the game.  Regardless of where a family might end up on this decision, Dr. Hamilton suggests it would be wise for parents to link their financial contribution to specific goals.  By way of example, she suggested a parent is wise to offer support so a child can take a meaningful, but unpaid internship.  By contrast, the parent isn’t going to see any return on an investment of cash to pay for a spring break vacation.

All of this suggests a meeting of the minds between parents and students regarding the cost of higher education and what is expected in exchange for that investment.

What is a Parent to Do?

There is much in the way of advice and help for parents and family who desire to develop a strategy for collaboration with their student that leads to the optimum college outcome.  Here are three simple ideas that can prime the pump of your thinking on this issue.

  1. Avoid waiting to the summer after high school graduation to begin the discussion with your student about the large investment required to secure a college education. Ideally, these discussions should begin as early as the eighth grade and progress in terms of detail.  A gradual process will build a base of commitment on the part of the student that can work to overcome attitudes of entitlement.  If you’ve determined the research is right and that your student should have some financial skin in the game, make that clear at the earliest possible point.  With all of this said, if you’ve nonetheless waited too long, the old adage about “better late than never” still applies.
  2. Accountability is always a worthwhile requirement. Parents and family members do not have access to students’ grade records unless the student authorizes it.  It will generally be best to have an understanding in advance that continuing financial support is linked to reasonable and appropriate performance goals.  Monitoring the progress toward the goals is a good example of “trust, but verify.”
  3. When your child leaves to go off to school, establish a framework for staying in communication. Diane Barth, LCSW, describes this as creating the proper balance between being a “helicopter” parent and just letting go with the wish that they will be able to figure everything out for themselves.  Students will successfully develop an identity of their own if they do not lose connection to family and loved ones.  Agree on a regular time for communication by phone.  It probably should be more at first and can be dialed back as time elapses and the student and parents are feeling confidence that the trajectory is proper.

To learn more about Harold Williams, view his Paladin Registry research report.

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