Given that a college degree can easily cost a cool hundred thousand (or two), there are plenty of good reasons to fear having to save up that much money. But a fear of harming your kid's odds of success probably didn't make your list.
However, that's the very conclusion that Laura Hamilton, assistant professor of sociology at the University of California, Merced, came to after writing her thesis, "More Is More or More Is Less? Parental Financial Investments During College," which was recently published in the American Sociological Review.
After living in a dorm at a large, Midwestern university for a year to conduct research, and tracking the undergrads she was interviewing for a total of five years, Hamilton knows of what she speaks. In fact, she and her coauthor, Elizabeth A. Armstrong, recently published "Paying for the Party: How College Maintains Inequality," a book about how class issues impact students.
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But before you drain your 529 account and head to Tahiti, read on because it turns out that there is a right and a wrong way to pay for college—and what you do today could impact your child's future in a big way.
LearnVest: What was the biggest takeaway from your experience?
Laura Hamilton: The literature in education suggests that every dollar that a parent invests in their child’s education will give them a good return. It’s this notion that it's the best investment, period. But I was seeing that a lot of parents weren’t getting what they thought they were getting with this investment.
In what sense? How did parents paying for college not work in a child's favor?
To a lot of people's great dismay, the kids’ GPAs actually dropped when parents were footing the bill for college. I call it "satisficing"—in other words, kids were doing just enough to stay in school. They dialed down the academic effort, and did less than other students who were paying part or all of their own way.
"When parents fund your education, it’s a no-strings-attached situation. Kids are completely in the dark about how expensive it is."
When parents fund your education, it’s a no-strings-attached situation. Kids are completely in the dark about what they’re receiving, and how expensive it is. Parents also don’t tell kids what they have to do to keep receiving it, and since paying for college makes it possible for students to spend a lot more time on the social scene, there’s no motivating factor to make them focus on academics.
With grants or scholarships, however, students have earned them in some way. They feel responsible. And there’s a minimum GPA they have to meet, so there’s an involvement in the process of maintaining that funding. What this suggests is that it’s not the money, but the meaning of the money or who’s giving it.
How does the social scene at college further play into this problem?
What "Paying for the Party" suggests is that these four-year colleges provide social playgrounds that pull students into socializing a lot more than they can afford. As the states have withdrawn funding from schools like the one we studied—big, middle-tier universities—they’ve raised tuition and heavily recruited international and out-of-state students. But since these schools typically can only get the less studious of the rich, their effort is on creating a great party place. Someone called it "the country club-ization of higher education."
You found that student loans had a similar effect, right?
Loans are bad for pretty much the same reasons. The students have no clue [about the money being spent], and they just don’t think about it. It’s not real until they graduate—and start paying those bills.
A lot of times parents also take out loans in their kids’ names, and the kids don't know they exist. That happened more than a few times [with the kids we were observing.] Parents were taking out the loans to pay for sorority fees, and when students found out later that Mom and Dad were doing it to pay for their social lives, they’d say, "Wow, I might not have decided that," or "Maybe I should have gone in-state instead."
Is this how we have over a trillion dollars in collective student loan debt today?
There's a lot of talk about the student loan bubble, and how it's going to burst. The student loan and credit card industries are to blame for a lot of this because many of the loans are not subsidized. Student loans are important for kids who don’t have financial means, but there’s a level at which it becomes really predatory.
So what's a parent to do?
That's a good question. I’ve identified two approaches: If you’re going to give money, set a clear minimum GPA and hold to your guns on that expectation. For example: "You must maintain a 3.0 or we won't pay your way next semester." If students don’t live up to that, you have to do what you said you’re going to do. If they see that you’re bluffing, you’re cooked.
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It’s also useful to have students put in something themselves. That might be a part-time job that’s not too onerous—25 to 30 hours a week is actually good for students. Or it might be five to 15 hours a week, and the money goes to pay for clothes and extras.
And, above all, you shouldn't infinitely give funds. Say to your kid: "This money is going for rent. This money is going for books. If you want to go on that spring break trip, you’re going to fund that." Among parents who did that, their kids did well. They were more focused on academics because they knew why they were there.
So it is possible to do this successfully.
The parents who do this successfully have raised their kids from a much younger age to be super independent and financially aware.
One set of parents in my study had a daughter whom they put on a clothing budget. She forgot to buy herself a winter coat one year, and they kind of let her go without one for a while, like “Ha ha.” They taught her that money is finite.