Rising college costs frequently weigh heavy on the minds of families with teenage kids. We often hear feedback like, “How are we possibly going to afford to pay the equivalent of another mortgage for my child to attend college?”
We’ve compiled a few of the best (and worst) ideas and strategies to consider as you start thinking of sending your child off to college:
- Borrow an amount no greater than the average first-year salary in your chosen field.
If the total debt taken on by the student is less than the anticipated starting salary, the debt should be able to be fully paid off within 10 years of graduation. As a ballpark figure, for every $10,000 in student loans incurred, expect to pay $100/month.
- Complete the FAFSA application every year.
Even if you think your family makes too much money to qualify for any financial aid, still complete the FAFSA. There are many colleges nationally that award merit-based scholarships for simply completing the FAFSA application. Additionally, a completed FAFSA is a pre-requisite to qualify for any of the federal student loan programs and their more generous repayment and interest terms.
- Distribute Grandparent owned 529 Plans in the student’s junior/senior year.
As a general rule of thumb, money distributed from a Grandparent owned 529 plan to the student for qualified education expenses is considered to be earned income of the student. This is different than if the 529 plan is owned by a parent; as earned income of the student can affect financial aid eligibility by as much as 50%!
Because the FAFSA looks back 2 years, postponing grandparent 529 distributions until the student’s junior and/or senior year would mean that this earned income for the student would not need to be disclosed on the FAFSA.
- Take out Parent PLUS Loans to cover a significant portion of your child’s education expenses.
While Parent PLUS loans are available to all parents and can be utilized to borrow up to the full incurred cost of your child’s education, these loans can dig parents into a large debt hole that includes less favorable interest rates and repayment terms than your student would qualify for via the Federal Direct Student Loan programs. As a general rule of thumb; if you cannot afford to send your child to the school without PLUS loans – you probably cannot afford the college in general.
- Wait until your child is applying for schools to have “the money” conversation.
College (both private and public schools) can be a fantastic overall investment and finding creative ways, including loans, to pay for the experience can be absolutely justifiable. However, many 16, 17, and 18-year-old children have almost no concept of what $40,000 per year in tuition is or what incurring $75,000 in student loans equates to on a repayment schedule after graduation. Having an in-depth conversation on true college expenses well in advance of applying for schools (including rent, food, car, etc…) is imperative to creating the solid financial framework needed to help your family make an informed and financially sound decision.
- Thinking that the college’s initial financial aid offer is non-negotiable.
While certainly not guaranteed to save your family money; it’s generally worthwhile to appeal the colleges initial financial aid package if there’s justification. An appeal should be sent in writing to the college’s admissions/financial aid office and should include a genuine reason for the appeal, why this specific college is of great interest to the student, a specific request (increase in aid to match a competing college offer as an example), and any supporting documentation.
Deciding to send your child to college is one of the largest financial decisions you will make as a family. Many students choose their colleges on the basis of being a strong academic and social fit, however, few students consider the actual affordability of the college or university without guidance from their parents and/or financial professionals.
At Sterling Retirement Resources, we can help you navigate the many moving parts of the college planning process so that you can feel confident that the financial aspect of college planning fits well within your overall financial roadmap.
Please note: Before investing in a 529 Plan, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.