How To Be Smarter Saving For College

The 2019 College Bribery Scandal

By now, we have all heard about the scandal in which at least 50 sets of wealthy parents have “donated” at least $25 million and counting in bribes to a number of colleges in exchange for admitting their children. We are all appalled, but not shocked, at the way that wealthy, influential people are using their money to bypass the rules of admission that apply to the rest of us. What appalls me even more is how none of these children have failed out of any of these schools to which they seemed unable to qualify for admission on their own. This fact is emblematic of the reality that we must confront: that while college tuition is higher than ever, the academic value of a college degree is lower than ever.

 
This fact should surprise no one with a degree in basic economics. My wife and I are expecting a new baby. This has prompted us to make many changes in our lives. We decided where we wanted our baby to attend school, then sold our condo and moved to an area closer to this school. We spent a great deal of funds to furnish and outfit our new apartment. We shopped conservatively with an eye towards both frugality and taste. Our experience demonstrates the behavior of a first-party buyer. We are using our own funds to purchase items we plan to use ourselves. We are conscious of both price and quality.


Our best friend is having a birthday party for his 3-year-old daughter. We know that the daughter loves a certain castle. We are conscientious bargain hunters, so we are looking for the best price offered for this castle. In this scenario, we are second-party buyers. We are using our own funds to purchase something for someone else who will use it. We are less concerned with its overall quality and more concerned with the price for which we can get it.  ​

Let’s say that I have an aunt whom I haven’t seen in years, with whom I do not get along. Let’s say that my father gave me some money to buy her a gift on the condition that I use all the money to get her that gift. In this case, I am using someone else’s money to buy something for someone else for whom I don’t have too much affection. I will not be concerned with price, since it is not my money I am using. Nor will I be concerned with quality, since neither I nor anyone whose opinion matters to me will be using it. This is the definition of a third-party buyer.

 
I bring this up because every single expenditure made by any government is that of a third-party-buyer. That is, a buyer using money it did not earn to buy a good or service it has no intention of using. In this case, purveyors of this good or service have no incentive to improve the quality or lower the cost of the good they provide. In the case of student loans, through the creation of the Higher Education Amendments of 1992, the Higher Education Reconciliation Act, and the creation of the Federal Family Education Loan Program (FFELP), Uncle Sam has injected over $1.7 trillion in federal tax dollars into institutions of higher education. These federal programs have made it simpler than ever for students to obtain the means to finance a college and graduate education.

The Negative Side Effect

And what has been the effect? Private college tuition is averaging $50,000 per student per year. This does not include room and board or the costs of textbooks, fraternity dues, etc., because why not? Students are being granted access to federal loans without having to provide any collateral or even decent credit scores. Enrollment is increasing across the board. The marginal costs of increased enrollment require higher prices. And Uncle Sam is underwriting all these loans. Increased enrollment, while increasing marginal costs, also increases the probability of increased drop-out rates.


As such, these same institutions that have all these incentives to increase tuition rates are also incentivized to lower the degree of academic rigor offered by their classes. This happens across the board with scandal after scandal of grade inflation, students protesting perceived unfairness of exams, and professors increasingly pressured to favorably grade substandard academic work. Realizing all of this, it becomes painfully clear why so few of the students who were granted acceptance to these institutions of higher education through the bribery and cheating of their parents have encountered such little academic adversity. The system of academic meritocracy that colleges once embodied is abandoned at the gates of many of these institutions.

 
I studied at the University of Chicago. I also walked on to the swim team. I dealt with the rigors of a 5-hour-per-day swim practice schedule combined with a full academic course load. I got some of the first C’s of my life on midterms. I remember feeling the sense of doom and panic when I saw these marks and discussing strategies with my academic adviser to overcome these marks. I had to come to grips with the fact that I either learned the material well enough or I did not. If I did not, then I had to find the right way to apply myself rigorously enough to understand the material. These lessons were painful, but they helped me develop the academic muscles and calluses necessary to build my own path to success once I left the ivory tower.

Everyone Gets a Medal!

Today, these painful lessons are not taught in colleges or in any other institution frequented by young people. Messages that our young people receive emphasize how special they are and how the world should bend to their will. Social media is replete with examples of students protesting for softer academic treatment and administrators and professors acceding to their demands. An American college has become less of an institution of higher learning and more of a social club with a credential factory, bestowing on its inhabitants unearned credentials and connections. The utility of these credentials and connections may be quite high, but the character-building lessons and academic meritocracies are largely absent.


Children who never have to struggle become adults who are not willing to work. As parents and stewards of our country’s future, we can and must do better. We have outsourced the job of instilling responsibility in our children to government-funded educational institutions and colleges. This cannot continue. I am very fortunate to have had parents who instilled these values in me, and I plan to work as hard as they did to instill these values in my baby daughter and all my offspring to come.


Learn about a New Approach

The Junior Veteran Opportunity Plan (JV Plan)  allows us a rare opportunity to strike back. As a new parent, I want the best for my child, but I also want her to learn how to earn it for herself. For this reason, the day she was born, my wife and I set up a JV Plan for her. We are contributing $400 per month. The cash value growth rate has averaged returns comparable to the market. She is the insured. We are the owners. As she grows older, my wife and I plan to go over the growth with her, showing her what this account is worth. By her 18th birthday, the cash value will be worth roughly $150,000.


If she keeps her grades up, does her school work, stays out of trouble, and shows us that she is mature enough to handle the responsibility, on her 18th birthday, my wife and I will transfer ownership of the account to her. She can spend the entire cash value on whatever she needs, be it tuition, rent, room and board, etc. But it will be at my discretion and that of my wife when or whether we transfer ownership to her.


The beauty of this is that even if she spends 90% of these funds on college-related expenses at this age, the cash value can and will regenerate. She can contribute to it herself as she gets older, and she can even use it as a tax-free retirement account for herself when she gets older.


She could choose to behave the way that Felicity Huffman and William H. Macy’s daughter is behaving, making Instagram videos expressing excitement about partying, blowing off class, showing no maturity, etc. In which case, I have no obligation to transfer control of these funds to her. I can spend them myself on a new car.

 
Using the JV Plan, we can simultaneously protect our children from the effects of the bloated student loan system and instill in them the value of earned rewards and privileges and give them the leg up we desperately crave for them. The ability for parents to choose when/if to transfer custody of these accounts to their children and the lack of obligations for the children or parents to spend these funds exclusively as a college savings plan or on education-related expenses in general, also goes a long way towards re-balancing the equation in favor of parents and students. Unlike a 529 college fund, with this plan, children have sources of funds that they can choose to spend on college tuition, or just as easily choose to spend on a starter home or to open a business. Before you know it, education will be purchased more often by first party buyers. Purveyors of education will have to weigh the opportunity cost of education against one of the aforementioned options. They will have to rein in what they charge for tuition and reemphasize the quality of their education. In short, colleges will have to start competing for our dollars again.

 
In this way, not only can we use the JV Plan to provide the best for our children, but we can use it to introduce some free market competition back into our educational institutions, and thus improve the quality of higher education for all children.



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About the Author Ethan Samuels

After serving as an Intelligence Officer with the U.S. Navy, Ethan spent years providing comprehensive financial planning and investment solutions to individuals and businesses. As Director of Financial Solutions at US VetWealth, he now manages a team of professionals that helps service-members, veterans, and their families learn how to navigate and leverage their financial benefits to maximize their lifetime of service.

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