When faced with the decision to invest money in your retirement or put a portion of your hard-earned paycheck in an education fund for your child, which do you choose? Well, if you're like a lot of parents who aspire to see their kids head off to college, you're probably asking yourself, "What, if any, portion of my child's education should I pay for?"
And while there are several factors that go into determining the answer to that question, most financial experts do agree on one thing: There is a lot of value in having your child help fund at least part of their own college education.
What money lessons can teens learn if they help pay for their education?
It's no secret that we appreciate something more when we have to work hard for it; that's why kids tend to take a different approach to their education when their own money is at stake. Not only does writing a personal check for things like tuition, fees, and living expenses keep them vested in college, it also helps set a good foundation for a lifetime of healthy financial habits.
For many teens, budgeting and helping pay for college is their first realization that the "bank of mom and dad" is no longer handing out unlimited resources. And while some kids naturally take on the responsibility of managing their own money, others need a little nudge in the right direction, in order to understand how paying for some of their college will help set them up financially for their future.
The financial lessons teens learn during these early stages of adulthood are critical, as they form the foundation of their views on money. "Being responsible for your own day-to-day expenses affects your spending behavior," says Justin Sinnott, CFP®, a senior financial consultant in Schwab's Seattle branch. "If you are faced with a limited resource, you will learn how to best manage that resource."
Sinnott recommends students create a budget focused on cash flow to understand how much income or allowance they are receiving, then answering one question: "What does it cost to be you?"
This is easily tracked by looking at one month's bank statement of money in vs. money out and determining if there was a surplus. Or, did they have to ask parents for more money? Working though this process helps lay the groundwork for fiscal responsibility and makes teens more conscientious of how they spend their resources.
What can your child help pay for?
Leon LaBrecque, CFP® with LJPR Financial Advisors, believes kids are partners in the education decision. "As a parent of three college kids, we always required our kids to pay 25 percent. We could afford it all, but we didn't want education to be a gift, but an investment," says LaBrecque. He says the 25 percent his kids were responsible for went towards tuition, which "gave them some potent skin in the game."
Sinnott offers up a different, yet equally beneficial, option: He says you should consider having your child pay for their own living expenses. He believes this gives kids a safe and real-world way to take control of their own financial lives. "Understanding the amount of money they have available for rent, food, entertainment, and then focusing in on the cost of each of these items, prepares them for what they will face once they have finished school," he explains.
How much should parents contribute?
The first step in figuring out which path — pay all expenses, a portion, or nothing at all — makes the most sense for your family, is to look at your own financial profile and determine how much you can contribute. Sinnott says he always reminds his clients that they can't rely on anyone for retirement except themselves, and that's why you should fund your retirement account first.
Mychal Eagleson, CFP® with An Exceptional Life Financial, says "worst case scenario: Your kids can use student loans for their education, but there are no loans that will finance your retirement." In order to keep parents financially healthy, he feels strongly that kids need to pay for part of their college education. "I believe most advisers have heard the stories of parents who have leveraged their futures in order to pay for the kids' college by withdrawing from retirement accounts or taking from 401(k) loans," he explains.
Eagleson says because so many people get caught in that cycle, it's his job to help parents determine what they realistically can commit to paying for college and make sure they understand how important it is to stick to this.
Whatever the final decision ends up being, it's important that you share with your teen what your expectation is, so they know how much of their own education they need to cover.