Paying Your Children for College Credits
Mike Earl, CFP®, CPWA®
If you’re planning to contribute to your children’s future earning potential (i.e. by paying for college), you are committing to a big expense. But you already know that.
Here’s a good gut-check question to kick off this discussion: how much research time did you put into your last purchase of an iPhone, a computer, or vehicle purchase? Now, compare those answers to how much time you put into researching the college decision for your children.
Most families do a great job of traveling with their students for on-site college visits. And that’s great. But it’s a bit like going to the car dealership without first doing online research for affordability, reliability, and performance data for various makes and models.
My parents took me to visit half a dozen colleges in person. And like many students, I made a final decision that was largely based on how the school “felt” on my visit. My decision had nothing to do with cost. Sure, I considered the academics of the school, but the on-site visit sealed the deal. Not exactly a robust decision-making process.
One of the best steps to take early on in the college decision process is to utilize net price calculators.
Colleges have a sticker price and a net price. The net price is what a family actually pays. The net price is driven by a number of factors, including:
Academic prowess of the student.
Parent’s income and assets.
Whether the family has multiple children in college.
While sticker prices of college have risen at a sickening pace over the past twenty years, the net price has risen at a more modest clip. Net prices have still outpaced overall inflation in the US, but not by a huge factor:
But here’s the rub: these figures are averages, and our clients are not average. Our clients tend to earn more and save [much] more than the general US population. There are perverse incentives when it comes to saving for and paying for college: the greater your income, assets, and college savings accounts, the more colleges expect you to pay.
Using a local example, I ran some number for St. John’s University, a liberal arts university northwest of the Twin Cities.
The sticker price (published price) at St. John’s is a staggering $55,872. Of course, the average student at St. John’s pays considerably less than that figure. Helpfully, St. John’s offers an intuitive net price calculator at their website here.
After entering some basic financial information, the calculator spits out your estimated expected family contribution. Let’s say the number it kicks out is $35,000 per year for your family. Assuming a student takes 16 credit hours per semester, that equates to about $1,100 per credit hour. Thus, a 4-credit hour class is costing the family $4,375.
If you’re prepared to pay $4,375 for each class your child takes in college, why not pay your child for earning college credits while in high school?
How about paying your child $1,000 or $2,000 for every four college credits they earn while in high school?
This way, the parents save money, and they also keep the money in the family by paying their own children – rather than a college. Further, it brings students into the financial side of the college decision. You are bringing them money skills that are so vital in “the real world.”
If a student spends 30 hours preparing for an AP test or a CLEP exam (to earn the college credit), their hourly wage is looking really good on that prep time. If you’re paying the student $1,500 for earning 4 credit hours toward a college degree, that’s an hourly wage of $50 for the student ($1,500/30 hours). That figure is exponentially higher than any income he/she would earn from a part-time job in high school.
We at The Wealth Group are here to help you create a thoughtful plan for paying for college.
Sources:
1) https://awealthofcommonsense.com/2018/12/good-news-bad-news-about-saving-for-college/
2) https://csbsju.edu/admission/finaid/netpricecalculator/sjucalculator
3) https://professionals.collegeboard.org/higher-ed/financial-aid/netprice/participating-schools
Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The scenario above is a hypothetical example for illustration purposes only. Actual results will vary.
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