It was all over the news last week that the college Class of 2016 will graduate with an average — an average — of $37,000 in debt, the most ever. This is a 6 percent increase over the Class of 2015 (those lucky dogs graduated with an average loan debt of $35K). Experts say that if these kids' starting salaries are more than their total debt, they should be able to pay them off in 10 years. That's a big ‘if.'
My family has been going through the college application thing for the last 6 months. Our daughter is a high school senior and in the late summer she will be heading off to college in New York City to start the next chapter of her life. By my husband's calculations, when she graduates in 2020, she will be about $24,000 in the hole. Yay us! Let me tell you how we did that.
First, my story of financing our child's education begins with two things you don't have: My Grandma and My Husband. So already you know that you cannot follow my blueprint exactly. First, My Grandma. She was the quintessential Frugal New England Farm Wife (although she had a college degree in nutrition). When My Grandpa died, she discovered she had a lot of money. A LOT. So she began doling it out to her kids and her grandkids, and when the grandkids had kids, they all got money for college. So My Grandma gave us a very nice chunk of seed money when our daughter was born 18 years ago.
My Husband (whom I interviewed for this article, thereby officially making this A Piece of Journalism) readily admitted he knew nothing about investing. So he bought Mutual Funds for Dummies and a subscription to Smart Money magazine. “We never had money to invest before, so I wanted to learn before I did anything,” he said in our interview, which took place at our kitchen table, while we were both wearing pajamas and drinking tea because everyone in our house has been sick as a dog for a week.
(My Husband also wanted to say up front that he is sure that he made some mistakes along the way, in case people want to criticize what he did. I told him this is for the Internet, so there will be criticism. He is OK with that.)
He decided his course of action with My Grandma's Seed Money would be to:
- Set up a Vanguard education IRA
- Invest in various mutual funds of different shapes and sizes in order to make sure we had a diverse portfolio
- Set up a Connecticut Higher Education Trust account (that's the Connecticut version of the 529 College Savings Plan.
“Wow,” I said. “When did you do all that?” “You were watching NYPD Blue at the time,” he noted.
Different asset classes
Among the mutual funds he chose were the Vanguard Health Care (because he saw the writing on the wall and knew that health care would be big, big business), the Vanguard 500 Index, T. Rowe Price Mid-Cap Growth and Baron Small Cap. He set them all up as custodial accounts, in her name and his name. “I wanted to spread the money across different asset classes,” he explained (“Asset classes,” I thought. “Who is this man and what has he done with My Husband?”) “Then I just let them grow.”
At this point Another Grandma comes into the picture. My mother set up 529 accounts for all her grandchildren as well, and she faithfully deposited into them at least twice a year. (As for our CHET account, not so much — we put dribs and drabs into it, but not religiously. This, My Husband now says, was a mistake — one that we have continued making with our younger child, or as we like to call him, Hope He Gets A Soccer Scholarship.)
My Husband's advice to all those who are currently birthing babies is this: Open a 529 and put a minimum of $500 a year in it — if all you do is $500, that's a half-year of college when the kid hits 18. And as we are discovering, every half year counts.
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So he started all this investing in 1998, when the country was fat and sassy. When the crash hit in 2008, My Husband didn't panic. He didn't touch those funds. “I knew it would come back,” he said. He had a dollar figure in mind for when he would convert them to CDs, and he was content to sit and let the funds revive themselves. “When did you figure all this out?” I asked. “You were watching Lost at the time,” he said.
He had this plan to convert to CDs because he was more cautious than greedy, he notes (I know, he's so cute, isn't he?). “I didn't care to make more money,” he said. “I didn't want to be greedy and endanger it. So when the Dow hit 16,000, I started selling.” He sold one or two funds a year to reduce the tax impact on us, and he continued until they were fully liquidated, just before the market hit 18,000. All that money is in CDs now, in his name, nice and safe.
He put one chunk into an IRA because he read somewhere that IRAs aren't counted in college aid forms, but that turns out not to be true. He pulled out this huge fat folder labelled Daughter's College Fund (“When did you do all that?” I asked. “You were watching American Idol‘s final season at the time,” he said) and noted that while the FAFSA doesn't require retirement account information, the CSS/Financial Aid Profile form did, and half the schools she applied to required that form as well.
The breakdown (which might lead to your breakdown)
So, it breaks down this way: 33 percent of our daughter's annual college cost is being covered by a beautiful merit package she received from the college. 10 percent of the cost is being covered by the Federal Direct Unsubsidized Loan, which begins accruing interest immediately. We are left with about 57 percent of the cost, which my husband says we can cover for three years of her college without also taking on additional debt. (“Really?” I said. “That's impressive.” “Thank you,” he said.) He is also slightly optimistic about her fourth year, because that's when Hope He Gets A Soccer Scholarship starts college, and so our financial aid picture will shift.
She will pay an interest rate of 4.29 percent on her $24,000, which starts ticking the minute the money is in her hands. The government will pay the interest while she in school, which offers a bit of a break. And hopefully when she graduates her starting salary will be higher than her debt, meaning she can erase the debt in 10 years. But a study in 2014 found that one-third of graduates with student loans were paying over $300 per month and 5 percent were paying more than $1,000 per month. Does this mean she can't think about home ownership until she's in her early 30s?
The dream of every generation of parents is to do better than their parents did for them. My parents did that for me – I graduated from college in 1985 debt-free, and we were solidly middle class. But it looks like My Husband and I – for all his efforts – won't do that for our kids. We aren't rich. We aren't poor. We're … OK. We live a nice life. We work really hard. We tried really hard (with her, anyway). But for all that, we are sending our kid off to adulthood with a pretty heavy load on her before the starting gun even fires. There must be a better way.
We asked our followers on the Get Rich Slowly Facebook community about their college debt, and they had some pretty interesting answers — please join the conversation.
An earlier version of this article contained misinformation about the timing of interest on the Federal Direct Unsubsidized Loan. It has been corrected.