Some people argue that college students must have primary responsibility for paying for college so that they have “skin in the game.“ This often requires the student to work a half-time or full-time job during the school year or to borrow significant amounts of student loan debt or both.
There is no evidence that having skin in the game makes students work harder or appreciate their education more. It is no longer possible for most students to work their way through school. Students who work a full-time job while in college are half as likely to graduate. A modest amount of work can be beneficial. Working 12 or fewer hours a week can improve academic performance by forcing the student to learn time management skills. But, graduation rates decrease proportionately with every additional hour of student employment during the academic year.
Skin in the game is often used as an excuse for forcing the student to take on more debt than they can afford to repay. Having the student borrow excessively will either force the student to drop out of college or graduate with too much debt. That is more likely to cause resentment than appreciation.
Paying for college is a partnership between the student and the parents. Each has a different role to play. The student can help by doing well academically in school, applying for scholarships, working a part-time job and borrowing a reasonable level of student loans. The parents can help the student make smarter decisions, keep them on track for various deadlines, teach them financial literacy skills and cover the shortfall between college costs, financial aid and the student’s resources.
As part of the college planning process, the family should work backward from their available resources to determine how much college (based on the net price, the difference between the college’s full cost of attendance and only the institutional and government gift aid a student receives) the family can afford:
Reasonable debt. Start by calculating an estimate of the family’s total borrowing capacity, assuming a reasonable amount of debt based on current and future ability to repay the debt.
Total student debt at graduation should be less than the student’s expected annual starting salary, and, ideally, a lot less. If the loans will be mostly unsubsidized, assume that about 20 percent of the total will come from capitalized interest. Divide the remaining 80 percent by the length of the education program to arrive at a reasonable annual borrowing limit.
Parents should borrow no more for all their children than they can afford to repay in ten years or by the time they retire, whichever comes first. A ten-year repayment term means that total parent loan debt is less than the parents’ annual income. If retirement is less than ten years away, they should borrow proportionately less. For example, if retirement is only five years away, they should borrow half as much.
Other family resources. Calculate the sum of the family’s total resources available to pay for college, such as college savings plans, student savings, student earnings from summer employment, private scholarships (after subtracting any displacement of the need-based financial aid package), the American Opportunity Tax Credit and other education tax benefits and how much the parents are able to contribute from income for the duration of the education program.
Add reasonable debt to the other family resources to calculate total family resources. The total family resources represents the maximum amount of money the family has available to pay for the student’s entire college education.
Determine net price. Use a net price calculator to calculate an estimate of the annual net price of each college. Adjust the figure upward after asking each college whether it practices front-loading of grants. Front-loading of grants provides a more favorable mix of gift aid vs. self-help aid (student loans and part-time employment) in the first year, leading to a higher net price in subsequent years. Multiply it by the length of the education program to estimate the total net price of the college degree.
Compare total family resources to the net price. If the net price of the college degree is less than the sum of the family’s resources and borrowing capacity, the college is affordable. Otherwise, the family will need to stretch to cover the college costs. This may involve borrowing more than is reasonable, which can force the student and parents to adopt an austere lifestyle and the parents to delay retirement.
Some parents tell their children that they will cover the cost of an in-state public college, but if the student wants to enroll at a more expensive college, the student will have to cover the excess cost. This is just another variation on the skin in the game argument. If this approach causes the student to take on too much debt, it is not a smart strategy. Sometimes, the parents just have to say, “No.” Making tough decisions is part of good parenting.