Giving Students Skin in the Game when Parents Pay for College

Are you planning to help your children pay for college? Have you considered what that may look like? 

Helping your children incur less debt as they attend school is one of the best graduation gifts you can give them. Student loan debt is debilitating for many college graduates; many will still be paying for loans into their 30s and 40s. This debt makes it difficult to start saving for retirement, to support a family, and to begin building wealth. Graduating college with as little debt as possible is ideal; however, college is a great opportunity to learn basic financial principles that are essential in the real world with a little less risk. For this reason, I recommend making sure your children have some skin in the game if you pay for some or all of college. Here are some ideas:

1. Pay only for the classes they get an agreed upon grade in
2. Match their contributions to a college savings account
3. When selecting a school, give your children a budget. If they spend more than this, they must cover the rest of the expense, but if they spend less than this, they get the remainder when they graduate

Let’s dive into each of these:

1. Pay only for the classes they get an agreed upon grade in
   
   This makes college similar to a job and rewards your children for their hard work and success. It prepares them for life after college. In the workplace, we are rewarded for doing our job and doing it well, but we might lose our job if we do it poorly. You could set up a system like this: 
   
   For every “A” you get, I will pay for the complete course and 25% of your living expenses (this way they need 4 “A’s” per semester for you to pay for everything). For every “B” you get, I will pay for just the course. For every “C” you get I will pay for 50% of the course. Anything lower than a “C”, you are required to pay for. 
   
   This allows your children to focus on school as their “job” instead of trying to balance school and a job. It also teaches them the value of hard work and accomplishment.
   
2. Match their contributions to a college savings account
   
   This one you should start as soon as you can (even younger children can learn from this). It teaches the value of saving, investing, and compounding interest, especially when set up as a 529 college savings plan or UTMA/UGMA investment account. The idea is for every dollar they save or invest, you match it, similar to a company 401(k) match. It could be dollar for dollar, $0.50 per dollar, or something else. This encourages saving and delayed gratification, and it teaches your children how matching retirement plans work (free money is always good!). If your children are starting college or are already there, you could pay a dollar for every dollar they pay. Be careful you do not gift money beyond the annual exclusion number ($16,000 for 2022) by directly giving your students the money and having them pay tuition. If you pay the university directly, that money does not count toward the annual exclusion amount.
   
3. When selecting a school, give your children a budget. If they spend more, they must cover the rest of the expense, but if they spend less, they get the remainder when they graduate
   
   This helps them understand the value of their education versus the value of the dollar. Is the private school worth paying for with some of their own money or would they rather go to the less expensive state school and have some money when they graduate? This is a good question for all of us to consider. The right answer is different for each situation.

Being creative when funding your children’s education is a great opportunity to teach them about the value of money. It is one of many opportunities to teach basic financial principles to your children. This list is not exhaustive. You could combine two or even all three options. Simply involving your children in the financial aspects of going to college gives them skin in the game and even more incentive to work hard and succeed.   

Written by Erica Mathews: Erica is a financial planner and investment advisor. She currently works for Financial Counseling Associates. She completed her course work for the CERTIFIED FINANCIAL PLANNER™ certification at the College for Financial Planning and is one year of experience away from completing her certification. She is passionate about helping families build their wealth so they can live out the calls God has places on their hearts. She lives in Colorado with her husband and four kids. They love everything outdoors including gardening, hiking, biking and simply exploring nature. If you would like to reach out to Erica her email is erica@fca-inc.com