Unbelievably, some 46% of Millennials plan on paying the full cost of college for their children. This is the same generation with millions of members who do not have the financial means to move out of their parents homes, who are paying for a Social Security tax which will never benefit them, and crippling student loan debt. These young Americans who are all too aware of the cost of paying back college tuition somehow have faith that they will be able to pay off their children’s college education in full.
Let’s start with some good news: The percent of parents saving for college is rising. In a new survey Fidelity Investmentsfound that 69% of people with children under 18 were saving; that’s up from 64% last year. Another smart move? More than half of the savers are using tax-advantaged 529 accounts.
Millennial parents, which Fidelity is defining as those born between 1981 and 1997, turn out to be the most aggressive with 74% reporting that they are saving for their kids’ college. Plus, 46% of them say they plan to cover the full cost of college for their children, compared to 35% of the broader group surveyed.
It makes sense that this generation has an above-average desire to shield their offspring from the cost of college. Many of them have student debt themselves, including 56% of the 642 surveyed by Fidelity. This generation has been a part of, and even leaders of, a nationwide conversation about the downsides of indebtedness. In fact, a debate continues about whether student debt is causing delayed marriage, delayed home buying and delayed parenthood among young Americans.
Let’s put that debate to rest. I’ve covered delayed home buying on this blog yesterday. Delayed marriage and family formation among Millennials are well documented. While changes in attitude and expectations may explain some of the shift, the bottom line is that Generation Y is financially strapped. It is tough to get a job when wages are slumping. It is more difficult when you owe tens of thousands in student loans to the federal government. All of these financial hurdles, along with changes in social trends, causing Millennials to delay marriage, family formation and the purchase of a home.
Currently many elite colleges cost over $60,000 per year, or about $240,000 for four years. Earlier this year FORBES’ contributor Troy Onink wrote a headline declaring: In 18 Years A FORBES Top College Will Cost You Over $500,000, referring to our annual ranking of America’s Top Colleges. He got there by adding 4% to the cost of college each year, which is the roughly the speed with which college costs have been increasing. Onink quipped, “With a headline like that, who needs birth control.”
With a 4% average annual rate of investment return, Onink figures, you would need to save $1,584 a month in a tax-advantaged account for 18 years to cover the projected cost of college. That’s a lot. The median household income for a married-couple is $81,000 in this country (let’s assume our sample Millennial parents are married since couples earn the most and it makes the math slightly less sad). So $1,584 would eat up more than 20% of pre-tax income.
That’s 20% of pre-tax income before the cost of a home, cars, insurance, and child services.
You might be thinking that if college costs are going up so fast, wages must be growing too. Not so fast. They are increasing a little, but not enough. Average hourly earnings have grown by about 2% since 2014, that’s well below the norm for periods of economic expansion (which technically we’ve been in for awhile). Some economists argue wages will eventually go up since jobs are being created. The idea is that with a smaller pool of candidates job seekers gain negotiating power compared to when the unemployment rate was 10%, nearly double the current rate. Others warn slow wage growth may be the new normal.
Slow wage growth has been the “new normal” for decades. Few realize that this is the case.
Chart from http://www.epi.org/publication/charting-wage-stagnation/
Regardless of what happens with wages over the next few decades one things is clear — Millennials will need to save more toward retirement than their parents and grandparents did. (Advisors suggest saving 10% to 15%.) There are three key reasons for the increased need for savings: more and more retirement savings responsibility is being pushed from employer to employee, Social Security may or may not be around when this generation retires and Americans are living longer. (For more on the importance of saving for retirement young see, Why Saving Too Little For Retirement In Your 20s Is A Bet You’ll Die Young And Broke)
Millennials will need to save more. Because they are going to receive watered-down pennies when they retire for every dollar that they contribute to Social Security today; if Social Security still exists when its their turn to retire. Because of this, Millennials are going to have to work much longer in life than their parents did. For decades the burden of retirement has been shifted from the employer to the employee. The workplace pensions of decades past have virtually disappeared and they aren’t coming back. Millennials are noted for their unbridled optimism, but believing that they can support themselves, save for retirement and pay for their kids college is pushing the bounds of reality.
The article continues and is worth the read. There is some cause for optimism as we may have reached the peak of what colleges can legitimately charge for tuition. It is no longer heresy to question if a college education is worth the exorbitant price of admission. Slumping wages and skyrocketing tuition prices have greatly reduced the return on investment of a college education. Luckily for future students, they may not have to pay that much at all. Stanford University offers free courses as do other major universities. In my classroom, I tell my students about Khan Academy, an excellent resource that is free to anyone with an internet connection. While this isn’t the prevailing trend yet, over time, this could force universities to price their tuition rates accordingly. Until then, Millennials should demand reform, including the right to opt-out from Social Security, and focus on paying their own student loan bills before they entertain the thought of paying for those of their children.
-R.J. Renza, Jr.
Please take a moment and sign the National Petition to Opt-Out of Social Security. The more signatures we gather, the more pressure we place on Congress and our political leaders.
August marked the release of my first e-book “How Are You Not Angry Yet: How Social Security is Destroying the Futures, Finances and Hopes of Generations X,Y and Z and How We Can Put and End to it,” which takes on Social Security from the perspective of young America in a visceral and humorous way. “Angry Yet” breaks down the complex topic of Social Security into a way that most Americans can easily understand and find entertaining and is available here.