Our Journey to College…and Debt

This kid will graduate college in 2020 at least $24K in debt

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.

Study up

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.

Not panicking

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.

 

Related: Maximizing Your Investment Returns

 

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.

More about...Debt, Investing

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Amy B
Amy B
4 years ago

I think it is important to plan. I think it is best to consider the worst case. I think it is important to have a plan B. My daughter just completed her junior year and will graduate next May completing her Bachelors degree within four years. Of course, I hoped she would earn scholarship dollars – free money. But I planned and saved consistently since she was young just in case she didn’t. I graduated with debt and it burdened me until my early 30’s. My priority was no matter what my child would not owe one red cent when… Read more »

Pat Daddona
Pat Daddona
4 years ago

The 529 accounts are great vehicles for college saving. Unfortunately for my niece, I stopped contributing when the recession hit, then a layoff followed by work that paid less than my previous job. The fund is languishing while my niece is growing up fast.
Thanks for a thorough accounting of what it takes to build up these accounts. I had every intention of dollar cost averaging contributions but still can’t make that happen. A timely topic entertainingly delivered with serious underpinnings.

Ken
Ken
4 years ago

Thanks for the personal story. I have a freshman in high school and a 4th grader and I enjoyed seeing what action you took. Great post!

Eric B.
Eric B.
4 years ago

Interesting plan. Thanks for sharing. Could you please clarify? 24k loan to pay back representing 10% of college cost. Am I missing something or is the expected cost for degree 240k? Was there consideration of cheaper options?

Mom of 3
Mom of 3
4 years ago
Reply to  Elissa Bass

To put that number in perspective, I have a friend who is paying that ($240,000 for a 4-year degree) for a child attending MIT.

cc
cc
4 years ago

Actually, it is better in my humble opinion to have your child participate in paying a portion of their college expenses.

When they have to pay for some of it, they recognize how invested they are in it and it is a huge incentive to do well. The total free ride is not a motivator for many young people. Obviously there are exceptions, but I still think when they know they have to drop their own coin in the pot, somehow that makes them more aware of success vs failure.

lmoot
lmoot
4 years ago
Reply to  cc

That’s a popular, but false assumption IMO. They won’t drop their coin in, they will borrow coins instead. If that were the case, then why are there so many young adults who are serial students, spending cash and racking up loan debt to keep going back to school until they run out of money and max out loans….quit to go back to work, then try again. Rinse, and repeat. Our family paid for mine and my cousins’ education (I am very lucky, I realize this)and we all gradated loan-free, within 5 years. Meanwhile, co-workers and friends who’s family didn’t help,… Read more »

Elissa
Elissa
4 years ago
Reply to  cc

CC- thank yo for reading! I do agree that participating in the financial end of the experience is important. When I was in college, my parents paid for the education, and I paid for the associated expenses, like books etc. (Also, the part like beer). Our daughter has done an excellent job of ferreting out and applying for as many local scholarships as she can find, because every $500-$1,000 will help! Also, she is expected to pay for her books and materials, and her fun. And of course, she will be paying off those loans, so that counts too!

Mom of Five
Mom of Five
4 years ago
Reply to  cc

Depends on the kid. I know lots of people who make their kids pay some portion directly or by taking on some loans. And some of those kids are partying their undergrad away. I like to think our daughter is contributing to her education by earning and keeping her merit scholarships. She also earns all her own spending money. We pay all direct college costs, including her books. Although she hasn’t technically contributed a dime to her college costs, she has a 4.0 and has actually received two departmental scholarships beyond what she earned upon entrance to the school, so… Read more »

Elissa
Elissa
4 years ago
Reply to  Mom of Five

It is important to note too, that she has received a $20K annual merit package from the college. That is a major contribution that is due entirely to her hard work and great grades in high school.

Betsy
Betsy
4 years ago

I just wanted to clarify one detail in your post – you said the unsubsidized student loan’s interest would be paid by the government while your daughter is in school, which isn’t accurate. Subsidized student loans don’t accrue interest while the student is in school, but unsubsidized ones do.

Mauricio Gatgens
Mauricio Gatgens
4 years ago

That sounds genius, yet so simple when you really get to read it…
Planning is definetly one of the most important habits you can develop and if reducing your kid’s college debt by half isn’t proof enough, I don’t know what is.
Love this post, keep up the awesome work!

abl soft
abl soft
4 years ago

I agree that giving your children the idea of putting some of their money to pay their debt is not a bad idea.The more they knew that life is not an easy journey to go,they will be striving to be on the top to chase more chances of success rather than counting their failures.

Latoya @ Femme Frugality
Latoya @ Femme Frugality
4 years ago

Knowing what I know now, if I were her I would get a part-time job during the summer if I didn’t want to work through school. Anything that I earned during the summer, I would use it to pay towards the loans. That should ease the burden a lot since it’s only 24k and it will give her a much better vantage point when she graduates. Nice job with what you have achieved because it’s more than most!

Mom of Five
Mom of Five
4 years ago

I think there’s a misprint in the article. Unsubsidized loans WILL accrue interest while a student is in school. Subsidized loans will not.

p.s. I have to admit I’m always a little jealous when there are grandparents who can help with college. I would love to be able to do that for my grandkids one day.

Jen2
Jen2
4 years ago

Thanks for the interesting story. We are currently saving and investing in a 529 for both our children (3 and 5). I wish there were more target calculators for 529 savings. A lot of articles about saving seem to be mainly focused on retirement. At almost 37 years old my husband and I are still paying off his student loans, while mine were paid off 5 years ago (I made a lump sum payment to finally put them out of their misery). When I was in college I had no idea how much debt I had in student loans or… Read more »

Mrs. Picky Pincher
Mrs. Picky Pincher
4 years ago

Another alternative is to reconsider college altogether. This isn’t a path for everyone, but college isn’t a guarantee for a good job, especially with a market saturated with so many Bachelor’s degrees. It’s hard to decide what you want to do with your life when you’re 17 years old. I would advocate for taking a gap year before college to work or gain other types of experience–that don’t come with $37,000 price tags.

Ping
Ping
4 years ago

As a child of the 80s, I went to undergrad and grad school. I had a 4.0 the whole way, and the biggest scholarship I ever got was $500! I think it’s great there is so much ore financial support for college these days. I also know that’s not the prevailing opinion! I also think there should be more support for superior scholars, and trade programs for those who are less dedicated. Not everyone needs a biology degree. (For full disclosure, at my university, tuition in todays dollars would be about $17K/yr.)

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