It’s that time of year again- families are receiving scholarship and financial aid awards and comparing net costs at different schools. And while it’s certainly important to read the fine print of an award letter, understanding what you are going to pay for one year is just the beginning.
How do you make a financial plan for all four years? You’d be surprised how many people I talk to who are so focused on getting through the first year that they forget there are three more that need to be figured out. And once you run the calculations for your oldest, you should probably plan for your next child too. And if you have more than two, you’re going to have to plan for every one of them!
Where Should You Start?
When making a four-year plan, you’ll first want to anticipate how expenses might change over time. We all know tuition/room/board costs will increase – don’t forget to budget those increases in, and don’t hesitate to ask the college what their recent increases have been if you need more information. How about room and board? Depending on the real estate market in their college town, your child might be able to save money in later years by renting an apartment with some friends instead of living in the dorm and buying groceries instead of a meal plan. And then try to account for other experiences your student is planning for, like study abroad, internships, and co-op programs. Are there extra costs associated with those experiences? Does the college offer assistance to help cover them, or will you need to manage those expenses on your own?
Any successful plan to pay for college will likely have one or more of the following components: paying out of savings, paying out of current cash flow, and borrowing. Do the math, and figure out what you have available from each of these sources.
How Will You Pay?
First, let’s talk about savings. For efficiency’s sake, I’m going to refer you to a previous post, Six Tips for Spending Your 529 College Savings Account, for an in-depth look at what to consider when spending down your 529 Plan. Some of the suggestions apply to other forms of saving as well.
Second, let’s talk about cash flow. If you haven’t already, you’ll need to create a budget, or as we like to call it (because it sounds nicer), a spending plan. When doing so, pay special attention to what you currently spend on the high schooler who is about to leave for college. Add up the groceries, the activity fees, the prom dresses and tux rentals, the dinners out, and even the hot water expenses incurred by that child, and think about redirecting those anticipated savings toward a monthly payment plan for college. As an empty nester, I can verify that your discretionary income will increase as your children leave the household – you’ll be surprised how little food you need on hand when you are no longer stocking the pantry for teenagers.
Also think about other items in your monthly budget that might change and could affect your ability to pay out of pocket. If you were saving for college, that monthly cash flow can now go directly to the college. If you have other expenses like car loans and mortgages that are ending, use those windfalls, as well as annual bonuses. If you get paid bi-weekly, don’t forget about those two extra paychecks each year! Even if it turns out the amount you can pay out of pocket is small, if your alternative is to borrow and incur interest and fees, every little bit will help.
Finally, there is the B word – borrowing. A reasonable amount of financing is often unavoidable, can be manageable, and should be viewed as an investment in your child’s future. The question is: what is reasonable?
There is no one-size-fits-all answer to that question – only you and your family can decide how financing college will or will not fit into your other financial goals. However, you must take the time to do the math. In today’s world, where information is available at your fingertips, there is no excuse for not knowing the consequences of borrowing decisions.
Find an online student loan repayment calculator (there are dozens out there) and work with your student to anticipate what their payments will be later on, as well as what yours will be. Be an informed consumer about the college your student wants to attend and the degree they are pursuing. What percentage of students graduate? What is the job placement rate? What is the average starting salary in the field your child intends to pursue?
Stay tuned to this blog for a more in-depth discussion of how much might be too much to borrow (coming in April). In the meantime, I implore you to have an honest conversation with your student about what you can manage. In my work as a College Coach educator, it is not uncommon for me to talk to parents who have borrowed more than they can afford to repay, and wish they had had the tough conversation with their child up front, before it was too late. Don’t be one of those parents. If a particular college is just too much to manage, help your student move to the more affordable option on their list.
Even though the numbers can be overwhelming, planning for all four years assures that your student can complete their program without interruption and become (as my grandfather used to call each of his grandchildren when we got our first job) a productive, tax-paying member of society.