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'Mental Accounting' in College Funding for Couples

College planning can be a divisive issue for couples.

Justin A. Reckers and Robert A. Simon, 01/20/2011

Last month we talked about applications for applied behavioral finance in divorce negotiations. It was a natural place to start, since financial disagreements are among the most common reasons cited by divorcing couples for splits. The fact is that we are all raised with different money lessons from our parents and communities. We develop values and learn to incorporate them into our day to day financial decision-making. Some learn how to survive on food stamps and develop self control over money because they don't have the opportunity to spend today at the cost of tomorrow. Some never learn how to balance a check book because there will always be enough money to cover the expenditures. Once we learn these values and how to incorporate them into decisions to buy, sell, borrow, invest, and lend, they are hard to unlearn. Depression-era people can still be found with stockpiles of canned food and garages full of junk because they learned to live without these things and now can't bear to throw them away. Young, upwardly mobile professionals let food spoil in their refrigerators because they place a higher value on earning money than spending it. So what happens when two people come together from different sides of the tracks or simply learned different values as children, adolescents and young adults? Conflict happens. Decision-making processes become family conflicts fought out over pillow talk and dinner conversations. Even worse, they become conflicts that are discussed only in one place; your office. We will talk about many sources of conflict in coming months of this column. First is college funding.

Parents make decisions every day about whether they wish to support their children financially through college. It is no cheap commitment in our current environment. This decision-making process can turn into conflict when the parental financial experiences, and values, do not match. One parent may have paid their own way through college with a full time job, night classes and student loans while the second was supported completely by parents with tuition, room and board and spending money. A generalization might lead you to think that the parent who was supported believes they should support their own children through school while the other believes children will value the experience greater if they must pay their own way. I have seen it both ways. 
How each party created their money values is important to this scenario but step one to resolving the conflict has nothing to do with their money values and more to do with "mental accounting." We often see clients planning to finance their children's college expenses before planning to finance their own retirement. The first and most important step in planning for college funding is removing a client's propensity to account for the money in a completely different way than their own retirement. Remind your clients they can get loans for college, but nobody will loan them money to pay country club dues in retirement. Help your client see that these pools of money are mostly fungible (meaning they cannot easily discern the difference between availability or value in each circumstance) and make sure they are paying themselves before the local university system.

You may find the root of one party's dissent to college funding just from this conversation. Most people, given unlimited resources, would choose to pay for their child's college education. But, if they don't feel safe and secure that long-term planning needs (like health care) in retirement are met, they will not be able to commit to spending money in other places. Refocus the client energy on solving the long-term problems first, then come back to the values-based conversation around college funding.

It may come down to different experiences for each parent so help each of them express their concerns. We often hear parents say they think their child will try harder if they are on the hook for tuition costs. This may be true, but what if one parent believes the child should be rewarded for good performance? There are two ways we have come up with to fill the void in this decision-making process. Now we can use mental accounting to our advantage. You can fulfill each parent's goals and values at the same time.

Start by planning to pay the bills and saving the necessary funds to do so. Don't commit them to the end game just yet. Have the parents and child fill out and file the Federal Application For Student Aid. Maybe they will get scholarships and grants. Maybe they will be offered Stafford Loans and Parent Loans for Undergraduate Student loans. Have the parents talk with the child and let them know they want to support them financially through college, but they need the help right now and/or they want to be sure the child understands the value of hard work and remains committed (Insert whatever excuse they decide). The parents will be planning one of two things. 1) They plan to pay off all student loan debt once the child has finished their education successfully, or 2) They plan to pay off each semester's accumulated debt at the conclusion of a semester where the child attained a certain grade point average. Either of these scenarios fulfills the parent's needs for promoting the value of hard work and commitment through financial obligations of the student and gives the other parent security that their child will not be forced to eat ramen noodles and suffer through cold winters with no heat as a student.

These ideas won't work for everyone as the underlying money values will be different for each couple. The key is to use your expertise to facilitate communication, craft high quality decision-making processes and use your knowledge and experience to offer creative solutions with the clients in mind.

We will continue our applied behavioral finance "couple counseling" series next month with a look at applications to decisions about life, disability and long-term care insurance.

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