It’s not uncommon to find ourselves in a situation where two or more needs are at odds with one another. In the case of funding for college, balancing the desire to finance children’s higher education and the need to invest for a secure retirement can be particularly overwhelming. The danger is that the conflict may lead to decisions based on fear.
When navigating this situation, says Newcomb, advisors can begin by recognizing the psychological hurdles their clients are facing. “A degree of guilt can accompany parents’ decisions in terms of college funding. Am I a good parent if I don't pay for it all? Is it fair to require that my children take on loans? Should I foot the bill, even if it means taking out a loan myself?” In addition, she says, many parents approach the issue with certain preconceptions that can cloud their thought process. For example:
- Students shouldn't have to work during college. Many believe this to be the case because, in their minds, it allows the student to focus solely on their education. According to Newcomb, however, “Research actually shows that kids who work up to 20 hours a week on campus are more engaged, get better grades, and are happier after college. They have a higher level of life satisfaction after college than their peers who didn't have to work."
- College debt will consume your life. “We see it in the news all the time,” says Newcomb. “That students are just overwhelmed with school debt and many people borrowed far more than their careers afford then to pay back after graduation. There is a calculus that can help student determine how much they can borrow and still have that student loan payment be very manageable, given their career.”
The bottom line, she says, is “there are ways to help children get through college that don't require parents just forking out money.”
“With a well-thought question or two, you have the chance to change a life.” - Sarah Newcomb
“We have narratives in our mind about what certain financial decisions and behaviors mean about us as people.,” says Newcomb. For example: “I was talking with a friend about how much money is needed in order to retire. She said, ‘I'm never going to be able to retire. I've got three boys to put through school.’ What I heard was, first, she feels an obligation to pay for her children's education through college. Second, she has prioritized that obligation over her responsibility to fund her own retirement. She believed that if she didn't pay for her three boys to go through college, she would fail them as a parent. I wanted to help her to understand that a good parent that can't pay for college is still a good parent.”
Newcomb explains why ‘a good parent pays for college’ may not be the healthiest narrative. “A good parent also sets an example of financial responsibility to their children. A good parent prepares their children for the realities of the economic world. A good parent is honest about their own strengths and weaknesses and is able to face challenges head-on. By modeling the courage to look at your own financial limits and then find solutions, the parent can model great financial behavior by sitting down to problem solve with the child to figure out what combination of scholarships, loans, savings and financial aid they’re going to use to get them through college.”
How can advisors initiate these tough discussions? Newcomb suggests: “Drop nuggets in the conversation about college. If it becomes clear that there's a conflict between retirement readiness and paying for education,” she says, there is great value in “an advisor’s ability to say, ‘what I see on your balance sheet is that you will sacrifice your own financial stability if you choose to make it easy on your kids right now. That may not be the best example to set for them financially.’ Help them recognize that their children are watching their actions. Children are better served when we show them how we overcome our own challenges through creative problem solving. That prepares them to face their reality. Just making everything easy for them, paying their way, does not prepare them to solve their own problems in the future.”
In her practice, Newcomb sees an increasing appreciation for the benefits of recognizing the personal biases that drive clients’ decisions. This type of coaching, she says, is emerging as a core competency in the advisory industry. “Train your ear to listen for clients’ underlying assumptions. It's a deeper type of discovery. Instead of just focusing on the financial goals, you're digging deeper to understand the deeper motivations behind financial behavior. With a well-thought question or two, you have the chance to change a life.”
The College of Financial Planning has introduced a new curriculum in financial psychology. It is required training now for any new CFP. According to Newcomb, “The module on financial psychology provides an overview of some of the frameworks from psychology, along with typical conversations that illustrate working within those frameworks.”
You can access the full discussion on The Flexible Advisor, wherever you get your podcasts.