Skin in the Game: Funding College Education

The vast majority of parents want their children to pursue higher education.  Often, a parent may reinforce this desire by offering up great personal sacrifices to ensure their children have every opportunity to go to the best college money or talent can buy. The question to be answered by all parents – separated or divorced parents, married or unmarried- is: How will the child’s college education be funded?  In short, who will pay and how much?

The most well-known formula, referenced in the Child Support Guidelines, is for the parents to assume equal liability for funding each child’s college education at Massachusetts’ flagship university, UMass at Amherst. Yet there is another rather popular formula, known as the one-third one-third, one-third division of cost. This formula, based not eh concept of children having a stake in their education is informally known as the “skin in the game” approach. In this arrangement, each parent is responsible for one-third of the child’s education and remaining one-third is the child’s liability.

This formula raises many questions.

Let us consider a few.

• Does the “One-Third “ Formula apply to funding only public school education? Or does the formula apply equally to the cost of a private school education? In short, should the same formula be used for any college, at any cost?
• If we assume the formula is generic to any college or university, then the following would be worth considering:  With college costs of $100,000/year, at the end of a four-year degree, the child (alone) will be responsible for payment of $133,333 of college loans and/or contributions.  But what if the child pursues a degree in a field that does not produce high entry-level salaries?  Is starting life with this kind of debt manageable?
• What about each parent’s ability to pay $133,333 in after-tax dollars?  Does each parent have to have an equivalent earning capacity or have similar financing sources after support is paid by one and received by the other? Does each parent have to have an equivalent ability to repay debt after termination of support payments?
• Would the division of assets need to be altered to accommodate the use of the “One-Third” Formula? Does each parent’s future prospects for income and assets have to be equivalent?  Is there any consideration of present and future differences in ability to save now and pay later, or is the field simply leveled with each and every parent having the same financial responsibility for their child’s schooling?

Upon closer consideration, we see that the simplistic division of liability inherent in the “One-Third” for all formula negates differences in each individual—parents’ and child’s—ability to finance the debt.

It also overlooks differences in the long-term earning power of the child’s chosen field of study. Not all college degrees will produce the same monetary return.  While this is not an argument for career choices to be based solely on projected earnings, it is a serious question for parents to consider when assessing each party’s ability to repay a debt obligation that may be unmanageable or become so in the future.

Parents of younger children have more years in which to accumulate funding for the children’s education.   With luck, parents may have the luxury of being able to designate gifts, squirrel away savings, and add children’s earnings to the pool of funding for future schooling.  The key remains: time and clever planning may well change an untenable commitment into a workable plan. Even families with very young children are wise to, at minimum, agree on a realistic target date to start saving for each child’s post-secondary education.

Some options to consider:

• Establish a savings pledge to be initiated after each child begins school; timing should be when parents are no longer responsible for the expense of daycare and preschool education
• An agreement to limit parents’ legal liability to funding a public school college education, thereby giving each parent the option to contribute a higher amount towards a higher cost institution if they (or their child) choose, without the pressure of being legally bound to do so.
• Set aside joint assets to be allocated to all or part of the anticipated college educational costs.
• Devise a formula that will account for each parent’s ability to pay, without it being a blanket commitment to make equal contributions regardless of each one’s resources and liabilities.

There are, of course, more questions to be asked than answers given, and, in each family, the circumstances vary. Each family’s unique circumstances speak to the need for an individualized solution and appropriate strategies.  A simplistic formula may well work for one family and be detrimental to others.  Mediation offers the opportunity to explore the differences inherent in each family’s objectives and while facilitating achievement of their shared goals. Parental collaboration in the present can help avoid future disappointment, confusion, and even litigation in the future.