$250,000 would be a tremendous burden for anyone to shoulder, and you would be hard pressed to find a single person who wouldn’t have genuine concern for any student graduating college with that amount of debt. At least once a week you see a story in the national headlines about the tremendous expense of college and the enormous debt students own when they finally graduate and enter the job market. So naturally we should all be concerned with this problem. However, the real problem no one is talking about lies not with the students, but with the parents. The question must be asked, “Who is actually responsible for the majority of debt of college graduates?” When applying for financial aid, students are actually limited to a maximum of $31,000 in Federal loans while pursuing an undergraduate degree. Other than Federal loans, the only option most students have is to acquire private funding, an option most of them can’t qualify for because of inadequate credit histories. In many cases what actually ends up happening is that the parents absorb the majority of the student loan debt, because $31,000 doesn’t even come close to touching the average cost of a 4-year public university, which is around $125,000. So, why do we have all this hype about students graduating with this obscene amount of debt?
While most families are concerned about their son or daughter graduating college in a reasonable amount of time with a manageable amount of debt, the greater concern should be with the parents, many of whom will acquire debt that could equal the size of a new mortgage for each child in their family. When faced with this challenge, the alternative for most is to scale down their dreams and what they have worked so hard for, and accept a lesser college with a lower price tag. Let’s face it, $31,000 is not an unreasonable amount of debt for a 23 year old to own when graduating college. Many will agree that owning some debt gives them some skin in the game, and this amount can be paid off in a few years with the proper planning. The student could live at home after college and pay down the loans instead of having a new apartment for the first 2 years. By staying at home for 2 years beyond that, the money could be used to help pay down student loans in the parents’ names. While this seems pretty funny it is actually what could happen, especially in this tough job market where many are graduating and not finding the jobs they want right away. If this seems too bleak of a picture, understand that there are practical alternatives to help you deal with this problem:
1) Set an amount that the parents and each child are willing to OWN over the course of the college experience. For example, if the maximum amount for your son/daughter is $31,000 over 4 years, then establish a maximum contribution from the parents for each year based on their budget. If that amount is $15,000, then the student should be prepared to attend a school that costs no more than about $22,000 per year. That puts a manageable limit on what to expect going in. Keep in mind that the student can stillapply to better schools, but any differences should be made up with scholarships or other financial aid.
2) Have a plan on how to pay it off. Living at home for 2 years after college might not be attractive but it could be a great strategy. The parents should also have a timeline to finish their payments. 5-7 years after the last child graduates might be reasonable.
3) Learn how the colleges determine what you have to pay for their service and put yourself in a position to maximize what you get from them in free money. Every university in the country has a different financial formula to determine what you pay. Before you choose a school, learn what your true cost to attend that university can be and how you can take control and put yourself in the driver’s seat.
4) Save efficiently. The only ways we often hear to save for college are with plans such as 529, MET, MESP, Coverdell, UGMA, UTMA, etc. While these serve a purpose and work well to save for tuition, they do not reduce what you have to pay. Get the facts. If you have children in high school and have these plans sit down with a college expert and see what the actual cost of saving for your family is. Then determine if you want to keep saving that way.
5) Have a negotiation strategy in place before the senior year of high school. You would not buy a car by only going to one dealership would you? So why only let one school give you an offer? Some universities will compete with other schools for your child.
6) Don’t rule out private colleges or out of state universities. They sometimes have more money to give and while the sticker price might be higher the actual cost to the family could be a tremendous savings. Let a college planning expert help you understand what you would actually pay for each university that you plan on applying to.
7) Learn how to save by having more than one child in college at the same time, even at different universities. Families become very concerned with paying for 2, 3 or 4 children to get through college. The truth is you will pay the same base price for one child as you will for 3 in college at the same time. Then, your cost increase is based on the formula from each college. So if you have multiple children, make sure you pick a college that is friendly to more than one child in college at the same time, even if they attend a different university.
8) Finally, make sure that your retirement doesn’t suffer because you spent more on college than you should have. Our team meets with families all of the time and we have several “aha” moments with each conversation. Every dollar you save on college will have a compounding impact on your retirement. Let us help you navigate this part of your family’s life.