Got kids and an above-average income? That’s great! But if you haven’t done much planning about paying for college, you may unnecessarily inflate your tuition bills, and not even realize it. What’s more, if your children are going to pay their own way, you’ll be inadvertently digging a big, giant, massive financial hole that is custom-designed to fit your own child. Here’s how to seriously screw your kid, financially (without even trying):
Paying For College
There’s a lot of parents out there that don’t intend to pay for their kids’ college. Some of them paid their own way through school decades ago, and so they expect their kids to do the same. They say it builds character, and they’re probably right. Other parents don’t have the funds, and so they pass off the burden of paying for college to their kids, who can take out student loans. Still other parents simply don’t plan for college at all.
If you do think you’ll make your kid pay for school and you’ve got an above-average income, you may want to think twice. You may be setting your child up for some real unnecessary financial burdens.
One thing parents often don’t understand is that if they continue to earn an above-average income while their child is in school, they will inflate their child’s tuition bills, causing a much heavier financial burden than is necessary. Unwitting parents create a big giant massive financial hole that their child has to climb out of, and they don’t even know it.
Now, I’m not one to judge parenting skills (OK, I am). But, inadvertently shackling your child with decades of student loans is not the best way to help her spread her wings.
You Cannot Disown Your Child
Try as we all might, we cannot disown our children when it comes to paying for college. What I mean is that parents cannot simply declare that their children are independent. If a student is under 24 years old, universities will look at her parents’ income to determine how much she should pay. This is how it works.
Whether the parents or the student is paying for college, any income the parents make will directly increase the net cost of tuition. As a rule of thumb, the more income the parents earn, the higher the cost of college, regardless of who is paying. Universities assume parents will chip in.
The Shackles of Your Income
How much are we talking about? Every school is different, and it depends on your personal financial situation. But, as a rule of thumb, I’ve found that universities generally increase their net cost of college by around 20% – 50% of each additional dollar of income the parents earn over a very basic “parent income allowance”. If you’re making much more than the median household income, this can easily add up to tens of thousands of dollars of increased tuition bills over a four-year degree.
I call this the University Tax. Who exactly pays this “University Tax” depends on who is paying for college. If Mom & Dad pay, they pay the tax. If your children are paying for school, then your children pay the tax.
So that means that if you continue earning a high income while your child is paying for college, then you’re basically making your own child pay 20-50% of your salary! It sounds messed up when you think of it that way, doesn’t it?
Now, careers are totally awesome and all, but…. seriously?? If you think making your child pay for school builds character, that had better be some pretty damn good character!
Your children have better things to do with their future earnings than to pay YOUR damn salary
Do Your Child A Favor – Reduce Your Income
So, if you still insist that your children will pay their own way through school, at least do them the favor of reducing your income! Take a couple of years off. Move to part-time. Take a pay cut, or just defer more of your income into things like retirement accounts and HSAs. Do something!
I know you love your career, but your children have much better things to do with their future earnings than to pay a huge chunk of YOUR salary!
Related: How to Get Massive Discounts For College With Stealth Wealth
Or, alternatively, if you insist on keeping on with an above-average income during the college years, then don’t make your child pay for school. You can pay for your own University Tax, rather than asking your child to pay it. That’s just a little parenting advice – free of charge.
A Good Hole Needs Planning
So, just how big of a financial hole are we talking about? That depends on the school and it depends on your personal financial situation. But, you really don’t need to make much money at all in order to generate a massive University Tax that digs an unnecessary financial hole for your children. Your income doesn’t even need to be high! Even a median income can jack up your tuition by more than 20%!
Fortunately, nearly every university out there has a “Net Price Calculator” on their website that helps estimate the true cost of college, given your own personal financial situation. Pick a school and find their Net Price Calculator. By running different scenarios, you can figure out how much of a hole you may dig for your own child.
Like most parents, I don’t know what schools my kids will attend, so I like to do my college financial planning with a variety of different schools, just so I can have an idea of the range of possible outcomes.
I calculated how much four years of university will cost per child for a family of four with two kids in school, under various income scenarios. I ran scenarios in the Net Price Calculators of three different schools: University of California, San Diego (UCSD), University of Southern California (USC), and Stanford, using hypothetical data.
For each school, I ran three scenarios – one where parents have no income, one with average income ($60,000, which is about equal to the U.S. median household income), and one with above-average income ($150,000). In all three scenarios I assumed the parents have no assets, and the student also has no income or assets.
Obviously, having no assets is not realistic, but it allows me to see exactly how much these universities would charge if a student has no parental handicap at all, and also to isolate the impact of parental income. The base case is thus how much the student would pay if there is no parental income at all, and the “University Tax” is how much the net cost of tuition increases as parents’ income goes up. It is the difference in the four-year cost of college as parental income increases from $0 to $60,000 or $150,000.
I like running scenarios at UCSD because it is the closest public school to our house. It’s a good public school option for our kids, and it’s similar in cost to the other UC schools in California. Here’s UC San Diego’s Net Price Calculator.
Net Cost of 4 Years At UCSD, By Parental Income
|Parental Income||4-year net cost of college||University Tax|
|$60,000 / yr||$60,616||$10,616|
|$150,000 / yr||$116,644||$66,644|
Note: “University Tax” here is the difference between the 4-year net cost with $60,000 or $150,000 parental income and the 4-year net cost with no parental income – how much the parental income increases the cost of college.
At UCSD, a student without any parental handicap will pay $50,000 for four years – with room and board. But a student whose parents make the median household income ($60,000) will pay an additional $10,616. That’s a 21% premium hike in the cost of college, thanks to Mom and Dad.
How about a student whose parents have above-average income? Parents who make $150,000 and make their kids pay for college create a big, beautiful financial hole for their kids – $66,644 deep, to be exact. I hope those parents really love their careers!
Let’s take a look at USC. Here’s USC’s Net Price Calculator.
Net Cost of 4 Years At USC, By Parental Income
|Parental Income||4-year net cost of college||University Tax|
|$60,000 / yr||$46,272||$4,272|
|$150,000 / yr||$115,924||$73,924|
The student whose parents have no income pays $42,000 – that’s the base case at USC. A student whose parents make the median household income ($60,000) only pays a bit more – $46,272, generating a small 10% premium on the net cost of college. I’m sure no student minds paying a few thousand dollars extra, right?
But here’s where higher income parents can really screw their kids. At USC, a student with parents earning $150,000 per year will pay $73,924 more. Nice!
Finally Stanford. I like looking at Stanford because it has a big, beautiful endowment, and it showers lots of students with free money. Here’s Stanford’s Net Price Calculator.
Net Cost of 4 Years At Stanford, By Parental Income
|Parents' Income||4-year net cost of college||University Tax|
|$60,000 / yr||$20,000||$0|
|$150,000 / yr||$108,000||$88,000|
At Stanford, the median household earning $60,000 actually pays no University Tax. There is no difference in the cost of college from the base case ($20,000 for four years). That’s nice. But, a student with parents earning an above-average income gets royally screwed, to the tune of $88,000 of extra costs.
Ouch! How’d you like to pay that off while you’re trying to get your career started? Maybe you can still buy a house before you’re forty.
How To Seriously Screw Your Kid, Financially
And this, my friends, is how to seriously screw your kid, financially. Earn a good income. Don’t save much for college, or better yet, don’t even plan. Get yourself a new boat instead, you deserve it! Then, when it comes to paying for college, make your child pay her own way. You can tell her it’s going to build character. And then, for the coup-de-grace, keep working at your career while your child racks up tens of thousands of dollars in unnecessary tuition bills. After all, your work is important and you just might get another promotion!
Good luck paying those loans off, kid! Oh, and don’t forget that I love you!
p.s. What other options are available to above-average income parents? See here.