Tuesday, January 22, 2013

Good Money, Bad Grades?

"I want to pay for my children to go to college."

It's a common goal clients tell financial planners. And planners generally run some calculations and, based on a variety of assumptions, determine an amount needed to be saved in order to meet that goal. But recent research suggests doing so may not actually be helping clients' children out. In fact, parents fully paying for a child's education could actually be harmful to the child's progress in college!

We Seem To Know This Somehow

There's been plenty of anecdotal evidence to suggest that children who have to fund part of their college educations perform better. I've discussed this with other planners in that past. Heck, I can speak from personal experience. My GPA rose dramatically (much more than indicated in the study below) once my parents limited the amount they paid toward my college education and I began working 20+ hours per week to make up the difference! But using anecdotal evidence to guide clients is a poor practice.

Research Confirms It

Now we have a strong, research-based indication that parents should allow space for their children to put some of their own money and effort "at risk" while attending college. A report in the Associated Press, Study: Parental support sends down college GPA, reviews a study that indicates greater amounts of parental funding are correlated with a lower average GPA for students. The results:
"...parents not giving their children any aid predicts a GPA of 3.15. At $16,000 in aid, GPA drops under 3.0. At $40,000, it hits 2.95..."
As noted in the article, it's important to remember that parents funding children's college education has been illustrated to greatly increase the likelihood a child actually attends and completes college. Financial planners encouraging clients not to save for college education at all certainly would not be helping clients desiring to see their children attend college.

Just Raise The Issue

However, financial planners may want to raise the topic of how much to fund with clients and what impact on academic outcome that funding may have on the client's children. While it's not the role of a financial planner to try to shape a clients' goals unless specifically asked to do so, a planner can (and likely should) help a client understand the impact of their financial decisions. This potential impact on college performance is just such an opportunity to educate our clients.

As financial planners, we have a duty to help our clients understand the numbers and help them make financial decisions to reach their goals. However, I strongly believe that we also have a duty to help our clients see beyond the numbers, to help them understand the impact their financial decisions have on a variety of factors in their lives beyond simple mathematical ones. Financial decisions can impact emotional and physical health. They can increase the likelihood of depression, or lead to more risk-taking.

Maybe a financial decision will lead to a child doing more poorly in college than expected.


  1. Great post, Nathan. I am in the process of writing something along these lines as well. One thing I would like to see researched is the impact of working (whether a literal job, research in a lab, etc.) and/or volunteering while attending school. My personal observations (and personal experience) indicate a stronger connection there than finances.

    Clearly, the student paying their own way HAS to work, while it becomes optional for a student who has their education paid for. In my own experience (my tuition and housing was paid for), I did poorly(sub 3.0) my first 2 years in school while I was not working, but made the Dean's list when putting in 30-40 hours per week at internships and volunteer activities during my last 2 years. The more free time I had, the less productive I was.

    My father once told me that if you have to be certain that something gets taken care of by a specific deadline, give it to the busiest person you know. That statement has proven to be true in college and the past decade since. People that fill their plate / life with meaningful work just seem to get more things done, be more productive, and generate better results / grades.

    Joe Pitzl, CFP®

    1. Joe,

      I think you raise a great point. This impact may be less about "skin in the game" and more about time.

      My own experience was similar to yours. Before I needed to work to make ends meet, I had tons of free time and space to choose whether to socialize (yes, a euphamism for "party" at the University of Wisconsin!) or study. But once I began working my second year, I had to be at work every Saturday and Sunday morning by 5AM to drive a hotel shuttle and get a flight crew to the airport on time. Guess what I was not doing until 2AM or 3AM on Fridays and Saturdays anymore.

      Having to work entirely changed the shape of my schedule. I no longer had big open blocks to study nor to socialize. I had to be much more selective, and this made me better at choosing to do the most important things first. I also became much better about actually waking up to go to early morning classes, since my weekends required early rising anyway.

      To your point, I wonder if the GPA impact in this study might go away if those parents fully funding children's education required their children to volunteer regularly. Would this have the same impact as a student having to work?

      Thanks for the thoughts, Joe!