How to Attend College Debt-Free

I was recently interviewed on WOLB Talk Radio in Baltimore on the topic of college planning. The interview lasted one hour. Toward the end of the interview, the interviewer asked me about college financing. I told her that my wife and I sent our two sons to college and both graduated with not one penny of college loan debt.

The interviewer reacted in astonished disbelief, asking how we managed to do that. She then said that she might ask me to come back on a future program to discuss that very topic.

After the interview, I realized that I had better have a solid response to this seemingly outrageous statement, just in case I really am invited back for another show! After giving it some thought, I concluded the following. It is a simple, common sense approach, in my view.

First, plan early. Hire a professional financial advisor before your first child is born. Perhaps you did not plan that long ago. Now is the time to face the facts. Of course, your time horizon is shorter and the level of intensity with which you must now save is greater. However, it is never too late!

Second, open a Virginia 529 Plan (or any similar college savings plan in the state in which you reside). Also, consider investing in a diversified, professionally managed portfolio that allocates your funds in equities, bonds, and cash holdings. This should be done by a professional who works on a fee basis (not a commission basis), and who has your interests in mind at all times. Being a “do-it-yourselfer” is not an effective long-term strategy.

Third, save regularly and live modestly (even frugally) for a very long time. Learn to defer gratification. Avoid trying to keep up with the proverbial “Joneses” – friends, neighbors, family members, and others who always seem to have a new, expensive vehicle, live in a home that consumes more than 30% of their income, or take expensive vacations on borrowed credit such as home equity lines of credit or credit cards. My wife and I each worked two, and sometimes three jobs for more than a decade and literally wrote checks each month from our extra earnings to cover college costs. We were determined to keep ourselves and our sons out of debt.

Fourth, stay out of debt in general – particularly credit card debt. Recognize that there is “good debt” and “bad debt.” Good debt is debt that allows you to benefit from tax advantages, such as interest on a home mortgage at historically low interest rates. Bad debt is debt such as high interest credit card debt that imposes stringent penalties for late payments and for carrying large balances from month to month.

Fifth, live in a home that you can comfortably afford to live in, including maintenance and upkeep. Carry a mortgage that works to your advantage. In fact, carry as large a mortgage as you can and extend it to a 30-year loan, not a 15-year loan. Why pay the bank more when you can save and invest the difference in that diversified portfolio I mentioned earlier? Why not take as big a mortgage interest deduction as possible? When you reduce your taxable income, guess what? The money you save can and should be invested for the long-term. You have borrowed money at all-time low interest rates, and you will be able to take advantage of a stock market that has a historic average rate of return of 10% since 1926.

Sixth, do not get caught up in what I often term “zip code envy.” Must every high school graduate attend an expensive, private, Ivy League college? There are more than 4,700 four-year and two-year institutions of higher education in the United States. The options are varied and wide. They range from universities such as George Washington University at a cost of $60,000+ per year to Northern Virginia Community College at less than $6,000 per year. Also, consider the fact that not all students must earn a college degree. The reality is that seeking certification in a trade is a very real option for many students. We need qualified people to repair our vehicles, appliances, roofs, plumbing, and other essential elements of home ownership. This can be a viable professional (and financial) option for many students.

Further, if your child plans to major in elementary education (a very admirable and satisfying profession, by the way), and the anticipated salary for a starting teacher in Northern Virginia is $45,000, why would you (or your child) then incur more than a quarter of a million dollars of debt to attend an expensive private university? Community college or one of the many state universities in Virginia is an excellent option.

So, you might ask, how did our sons graduate with no debt? They took this advice and selected in-state schools where they excelled and flourished. We gave them a simple option. Go to school in-state? We pay it in total. Go to school out-of-state? We pay the cost of in-state, they borrow the rest. They both chose wisely and attended excellent in-state universities (one attended community college for his first two years). The apple(s) did not fall far from the tree.

Last, do not rely on scholarships and student loans as a source of college funding. A relatively small percentage of students actually receive free financial aid. In fact, according to Washington Post business columnist Michelle Singletary, less than 1 percent of students are fortunate enough to win a scholarship that pays for four years of college. The average scholarship amount is only $4,000, according to Singletary (Sunday, May 28, 2017 Washington Post). So, if your child is a good student, but not an outstanding student, or is not an extraordinary athlete, a budding concert pianist, or an emerging Picasso, the likelihood of free money is not good.

And remember, student loans are exactly that – loans. They must be paid back and at interest rates that have reached high levels in recent years. Besides, if you can do this without the assistance of the federal government or a local commercial bank, why would you not do it yourself? At the heart of this is financial independence. It is a goal we should all embrace when planning for our children’s college education – and our own retirement.

Now that is a topic for yet another future blog post…

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