You’ve helped your clients plan for their children’s education for years. You helped them set up 529 plans, you explained the available tax credits and deductions, and your clients have sent their children on their merry way. What happens to all that careful planning when after a few years those children decide to switch course?
The percentage of students who make a change is hard to pin down. A study conducted at Brigham Young University and published in 1994 put the average at 85% of students. The University of La Verne in California found between 50% and 70% of students will change their major at least once, and most will change as many as three times before they graduate. Research from Penn State found 80% of students aren’t sure about their major, even if they’ve already declared one, and half will change at least once.
Eleanor Blayney, consumer advocate for the Certified Financial Planner Board of Standards, noted that those big percentages shouldn’t really be a surprise.
“Let’s face it: I think we know from psychology and neurology that the decision making part of the brain isn’t even fully formed until someone is 26 or 27,” she told ThinkAdvisor on Friday. “There’s going to be a shift in focus, and part of the whole college experience is to go one direction and then decide in another. Be alert to the extra cost and see if there’s a creative way to work around it.”
Blayney argued, though, that a change in aspirations doesn’t have to lead to extra time in school. Say one of your clients has a child who begins working toward a psychology degree then decides he’d rather do something else. “Does having that degree in psychology eliminate them from pursuing what they want at the graduate school level or in the workplace? It doesn’t always.”
Blayney described her own experience. “I was an English major,” she said. “This was a long time ago, and I’ll admit the job market looks a little different now. Most kids will assume that an English major is a complete dead end. Maybe it has a little more currency than a philosophy major, but not much when you consider what the workplace is looking for.”
Blayney suggested supplementing a major with courses from outside that educational track. “It seems to me that it is possible to add other courses, maybe not enough for a major, but come up with a very attractive package to employers. If you have a major that teaches you how to think and write, use that and bring in other courses from economics or computer science or whatever to create a package that can be very compelling.”
Erik Carter, a financial advisor at Financial Finesse, agreed that for at least some careers, students’ declared major when they graduate doesn’t matter as much as the education they pick up on the way.
“For the most part, unless you’re studying something very specific like computer science or accounting, a major has a lot less of an impact on career and income than people realize,” Carter told ThinkAdvisor on Wednesday. “It just doesn’t make sense to extend the amount of time in college to change majors unless it’s something very specific like that. Probably the most important thing is that the student is doing something that they enjoy and can excel at because what’s going to really matter is that they do well, as opposed to something that they think will look better on a resume and they don’t do as well.”
Considering how likely a change is anyway, Carter suggested urging children to start school at a community college and finishing their degree at a more prestigious school. “It’s a really good idea if the kids are not sure what they want to major in and are thinking about doing some exploring, something like starting out at a community college or a lower cost school, maybe a state school and then transferring to a private school. Why pay the big bucks when you’re still trying to figure out what you want to do when you still get to graduate and have that private, four-year degree?”
Blayney agreed that community college and online and evening courses can help a student who feels the urge to switch majors but can’t afford it. “What you may want to do to save the money is just have those four years of campus life and if you realize more education is needed, turn to professional education programs, which are often at night and don’t involve living there, or getting a job and picking up that extra expertise.”
If their children start talking about switching their major, parents can also impress upon them how much more debt will impact them later in life. “One way is for the parent to help out with just the years that the kid was going to originally be there and have the child pay for the extra time that it would take to do that major,” Carter said.
If extra time in school can’t be avoided, though, there are some ways to fund a few extra semesters that won’t send parents scrambling.
“One thing people don’t know is that they can take money out of an IRA and there’s no penalty if they use it for education,” Carter explained. “That also means that if they have an old retirement plan from a previous job, they can roll that into an IRA and use that money for education expenses. The one caveat to that, though, is they want to make sure their retirement’s on track first.
“Going along with that, there’s also the option to take a loan against their 401(k). The advantage of that is there’s no credit check, and the interest they pay just goes back into their own account. The downside is that their money is not growing for them. There’s also a home equity loan and pros and cons there: lower interest rate, tax deductible, but they’re putting their home on the line.”
Carter also suggested peer-to-peer loans as a way to finance an extra year or two in school. Websites like Lending Club and Prosper allow people “to borrow money from other people over the Internet. You can usually get lower interest rates, and specifically if you have a sympathetic story, you can usually get a better deal. You can borrow up to $35,000.”
If your clients decide to try more traditional loans, Blayney suggested having the child apply for them as long as they’re able to. “What really may work is to have the child apply for loans if they’re old enough and no longer can be thought of as dependents,” she said. “In some cases it’ll be easier for them to get more generous financial aid, but it does mean the child truly has to be no longer dependent.”
Blayney said that regardless of whether a student changes majors halfway through school or stays on the same path all four years, paying for education will always be an issue.
“Even a kid who knows exactly what they want to do is going to spend four years doing it,” she said. “The question of affordability exists even when the child doesn’t make a change, so you want to be looking at all those avenues.”
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