The Alternative to Saddling Your College Kid With Student Loans (as Taught by Real Estate)
At what point does a child separate from his or her parents? Is it when the doctor cuts the umbilical cord? Is it when the child looks at their parent and hears the parent say “come here”—and then runs the other direction? Is it when the child goes through those self-discovery teen years and believes that their parent really doesn’t know anything?
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The reason I ask the question is because, as a therapist, I have had parents bring their adult children into my office because of conflicts arising from unmet expectations of their children in college. The parents will share how frustrating it is that they are spending all of this money for their child’s education, and their child is not studying hard enough or getting good enough grades.
Maybe their child is in a relationship that the parents don’t like. The parents then want me to fix the situation.
While the therapy session can be insightful for the parents, the answer usually doesn’t make them very happy. The problem is that these parents have a hard time seeing their children as individuals, who will make their own decisions—whether it is in line with the parent’s wishes or not. Usually this type of situation happens with families that are enmeshed and struggle with individuation. In other words, parents see their kids as extensions of themselves and believe that the child will do and follow the parent’s wishes even into adulthood.
When that doesn’t happen, and the parent’s expectations don’t get met, the parent becomes frustrated. (In truth, the situation is usually frustrating to the adult child, as well.)
So, for parents who want to help their children get a higher education and are willing to financially support their children by paying for it, how can parents set things up in a way that causes less frustration and greater accountability for the college kids? In keeping with the general theme of a real estate investing website, we can take lessons that many investors have learned while investing in real estate—specifically when working with contractors and hard money lenders.
Sad Lessons Learned from Paying Contractors in Advance
You have probably heard saying, "Never pay a contractor in full up front."
Why, you may ask? Because of human nature. When someone is paid up front, they have received their reward. It then is up to their integrity to follow through with their end of the bargain. However, the urgency to finish the job is not there anymore because they have already gotten paid. And while there are many good and honest contractors out there, when it comes to choosing between finishing the first job or starting a new job and getting paid in advance again, finishing the odds and ends of the first job can take a backseat to getting paid and starting a new job.
While honest contractors usually finish the first job eventually, the urgency is often not there. Finishing the job usually gets done at the convenience of the contractor.
Now, I just shared about a good and honest contractor. What about those contractors who are not so good or so honest? You know, the kind that, in their mind, have finished the job and have moved on but have not met expectations or even completed things written in the contract. Predictably, it becomes a struggle to get the contractor to finish his work.
Sometimes, in order to avoid the battle, the homeowner just hires someone else to come in and finish what the first contractor didn't. How frustrating! Wouldn't it be nice if people just followed through with what they said they were going to do, regardless of when they got paid? Unfortunately, because of human nature, when the reward is given up front, often the motivation to finish goes down.
The lesson is obvious: Never pay a contractor in full up front. The same goes with our kids. When college kids receive their reward up front (getting their college paid for by their parents), going out with friends and living up the college life becomes more tempting as opposed to staying in to study on a Friday or Saturday night for a big test scheduled for Monday morning. It’s naturally more of a struggle when the reward has already been received.
How Can Parents Set Themselves Up for a Better Result with Their College Kids?
In order to answer this question, we have to explore a few fears first. Why don’t parents just have their kids pay for their own higher education?
Well, that can be very expensive and very difficult for a college kid to do nowadays. And expecting a child to be able to save up for college isn’t very realistic with today’s tuition prices (unless they plan on going to college in their later years). But that idea brings with it its own set of problems, namely that the young adult may enter into a serious relationship and start a family. This then makes it even harder, if not impossible, to save up for college.
The other option becomes getting student loans. But those loans are not cheap, and they can strap families down financially for decades after school is over. These are the major concerns that prompt parents to want to help pay for their children’s college in the first place, and they are understandable. Parents want their kids to start out their adult life equipped to take on the world—rather than fettered by the chain of school debt.
So then, how do parents motivate their kids to take college seriously when all the tuition has to be paid in advance (reward up front) and they don’t want student debt to follow their kids around like a little black cloud of misery? Here is where we take lessons from our hard money lenders.
What Hard Money Lenders Teach Us About Helping Others Succeed without Getting Frustrated
Hard money lenders are in the business of making money through gaining interest and fees on the money they lend. They lend professionally, and when it’s done right, they fill a very helpful role in the system of a real estate investor.
How do hard money lenders set themselves up to be successful? They don’t lend money where they have a low chance of getting it back. Instead, they lend on assets that they could sell and recoup their money on if they had to.
What about hard money lenders that lend on rehab costs? The ones that I have worked with have the investors pay for the first portion of the rehab themselves. Then, the hard money lender reimburses the investor the amount that they have put into the rehab of the property on a draw schedule when they see evidence that a portion of the work has been completed.
This makes it so the investor has not received the reward (the money draw) until after the work has been performed. It also makes it so that the hard money lender remains in a better solvent position.
Setting Parents and Kids Up for Success with College Tuition
How do we apply this to our kids going to college? Simple, we follow the example of the hard money lender, and we create a draw schedule for our kids. Instead of paying for everything up front, we help them learn how to get a loan to pay for the first semester of college. Then, we reimburse them depending on the work finished (or the quality of work finished). In other words, parents can reimburse their kids 100 percent for every class that their kid gets an A in, and 80 or 90 percent for every class that their child gets a B in, and 60 or 70 percent for a class with a C gradeÃ¢ÂÂand nothing for anything lower than a C.
The child can then take that reimbursement money and can use it toward the next semester's tuition. This way, if the child does not perform very well during the semester, the child gets to pay for their own mistakes rather than the parent getting frustrated at the child for not living up to the parent's expectations. And if the child does well throughout college, the parent can just pay off the original loan that was taken out at the beginning of that first semester as a gift.
Parents who follow a system such as this find that it’s easier to respect the decision process of their adult children, and they can maintain a healthier and happier relationship with their adult kids.
What systems do you use to help your kids with higher education?