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Skin In The Game

The conversation is rarely easy. If they haven’t already brought it up, I know the probability of some awkwardness increases. Body language becomes closed. Arms are folded and limbs retracted. Lastly, eye contact is taken away.

The nature of the conversation is probably not as bad as you’re imagining. I am talking about parents not fully funding a child’s college education. During the financial planning, or employee financial well-being, process education funding has to be addresses and many parents simply can’t afford to participate very much in their child’s education and/or they want the child to have “skin in the game”.

Anything to do with kids always has some degree of societal expectation and possible shame associated with it, and college funding is no exception. It has long been expected that we as parents should give our kids “every” advantage to succeed. Of course, we often don’t spend much time defining success.

On the other side of the fence from the parents-will-fully-fund crowd are those who just can’t afford to provide much support and those who feel that their kids will not develop character if they are just “given” the education.

So while the recent article in the Star Tribune has a lot of really good points regarding kids being more involved in the college-funding process and putting retirement first, parents and students should also be made aware that things have changed since Gen Xer’s like me graduated from college in the 90s.

Back in the old days (the 90s and before), ignoring college funding usually did not have severe consequences. As an example, the median annual earnings in 1998 for those with a Bachelor’s degree only was $39,156 and the annual tuition and fee cost for the University of Minnesota Twin Cities to get those earnings was $4,458, 11% of earnings*. That percentage increased to 24% in 2017 (tuition of $14,417 and median earnings of $60,996)*. A common theme over the last 20+ years is that wages have not kept pace with normal, everyday inflation, much less education inflation. And in many cases, student loans are filling the gap (total of $1.6 Trillion as of 2019). Bottom line….parents and students are not being rewarded for the education investment like in years past.

I am not suggesting that students should have no skin in the game, nor that parents should be shamed into contributing more, I am suggesting that parents make sure their kids are aware of what post-college looks like and the return on investment potential from their time and money. The consequences are just too severe for students now, compared to those coming out of college 20+ years ago. In most cases, a haphazard approach to college finances rarely led to life-changing adversity. Now, the size of student loan debt can be so large that it can be too much for most to bear. A financial yok holding back their personal and professional lives.

Because the consequences are so much greater than in the past, if students are to bear the financial burden, parents need to make sure students know what they are getting into. Questions the family should answer:

  1. How much debt will the student come out of school with?
  2. What kind of debt will the student have (federal, private, PLUS)?
  3. How much will the debt cost? (interest rate)
  4. How much will the student make post-college? (realistically)
  5. What will it cost to live? (how much will you have left over to service the debt)
  6. What other goals do you have? (kids, marriage, etc.)
  7. What does the worst-case scenario look like?

Answering these questions sooner rather than later will help the child and parents prepare. It may encourage them to take college classes in high school, live at home for the first two years, attend a community college, or get creative with other cost-saving measures.

All it takes is bad timing, a bad economy (2009), or a few bad choices (we are all human), and the student could be looking back at a lost decade at the age of 32. A decade full of compromises, lost opportunities, and unfulfilled potential. And what can student loan balances look like after all these artificial struggles? Sometimes loan balances can be the same or even higher. And you might guess, these decades often come with struggles with depression and anxiety.

It is difficult for an 18 or 19 year old to have the perspective to make a decision this impactful. Kids are brought up thinking that education is always good, good at any price. This kind of indoctrination is not easily undone.

Skin in the game sounds good and can also teach character and responsibility. Just make sure these lessons don’t come at too high a price.

Stay financially classy Minnesota!

*Tuition & Wage Data:

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