How am I Going to pay for college?

How am I going to pay for my kid’s college education?  That’s the question just about every parent asks themselves at some point. The whole process of applying to colleges can be stressful on a family but the sticker shock that occurs when parents and students see the cost of attendance when receiving those acceptance letters can often make their head’s spin.  Here are some key things to keep in mind when you start your college planning efforts.

1.       Three phases of the college funding cycle

Saving Period

Not everyone begins their college planning strategy at the same time. Obviously the earlier you start to think about and are able to start putting money away for those future educational expenses the better off your family will be. For example, if when your child is born you start saving $200 a month into a 529 plan or other savings vehicle then by the time the child is 18 years of age you would have approximately $78,000 saved up for college assuming a 6% return. If instead you waited until the child was 10 years old before saving that same amount each month the amount saved would be closer to $33,000.

I know it can be hard sometimes to put money away but the earlier you can start saving, even small amounts, can make a big difference. When children are young many parents have to pay a lot of money each month for child care, sometimes even  thousands a month. Once strategy to consider is that once you are done paying for child care  is to try to allocate some of the money you were spending each month toward their college savings. Doesn’t have to be all of it, but if you are currently spending $1500 a month on daycare , are you able to commit maybe $400 a month of that money toward college savings once the child care expense ends?

What if your child is starting high school and you only have a few years to save?  Any amount you can start saving now will help reduce the amount you and your student may need to borrow later so just start, even if the amount is small.

Some parents ask, “Won’t saving hurt my kids chances for financial aid?”.  No, not really. This is covered in more detail in another post but one thing you need to understand is how the FAFSA formula treats assets that are in the parent’s name like a 529 plan that they are the owner of or cash in their bank account. The formula counts 5.6% of a parent’s assets so for example if you save $15,000 into a 529 plan that would reduce your EFC by only about $840 which isn’t going to have much of an impact on any financial aid awards unless you have a very low family income.

 Cash Flow Period

The Cash Flow Period is any amount you can contribute to the college costs during the years your child attends school. Many schools either offer their own payment plans or partner with a third-party vendor who for a small setup fee will spread payments over the course of a year.

Say for example that you don’t have a large sum of money in the bank to put toward college costs but can afford to pay $500 a month for an installment plan. That would reduce the amount that your student would need to borrow by $6,000 per year or $24,000 over there 4 years of attendance.

The ultimate goal is to try to reduce the amount of student loan debt your child graduates with so anything you can do to chip away at the COA (cost of attendance) after any financial aid or savings resources are applied will make a big difference down the line.

Payback/Recovery Period

The Payback and Recovery Period is the time after your student graduates where the loan payments begin or in some cases continue to be paid.  There are subsidized loans, unsubsidized loans, parent plus loans and private loans and each will have different interest and payback requirements. Yes, every parent would love for their child to be able to graduate debt free from college but often times that is simply not a reality and after any financial aid, merit aid, savings and cash flow is applied there is a balance that will need to be borrowed by either the student through government loans or by the parent through a Plus Loan or by a parent cosigning for private loans for their student. 

Sometimes the loan payments can be really overwhelming for new graduates who are just starting out and sometimes parents decide to help them out.  If you were paying $500 a month for an installment plan while they were in college, can you continue paying that for a year or two after they graduate to help them pay down their loans? Can you let them live rent free at home for a year or so they can allocate a lot their income toward their loans instead of rent?

Some parents are willing to help their children pay back their debt if they are able to but by no means should parents jeopardize their retirement or put themselves in a tough financial situation in order to help. Before submitting the deposit to their school of choice the student should be made very aware of what the total cost of attendance will be and how much debt they will accumulate and what that means in terms of future payments. It is debt that they have agreed to take on for their education and it should be their responsibility. One thing to keep in mind though is that only the government loans are eligible to be taken out in the child’s name without a cosigner. Parent Plus loans are the responsibility of the parent to be paid back and parents are also on the hook for any private loans they cosigned for if the student doesn’t pay them back.