The beginning of your child’s senior year of high school can be difficult. You have given her much room to explore her college options, but it’s time to get realistic about cost. What you want to avoid is the heartbreaking scene of your child learning on April 1 that she has just been admitted to the college of her dreams and you learning moments later that its price is entirely out of reach.
So, if you haven’t begun the dreaded family conversation about how much you can afford to pay for college, the time is now. But before you can sit down to talk and know which colleges will be affordable and which will not, you will need to create a budget to learn what you can pay. And just as important, what you are willing to pay. This is no time for wishful thinking or magical realism.
How much can parents pay for their teen’s college education?
You have many non-discretionary monthly expenses: mortgage or rent, car payments, insurance, groceries, healthcare costs, retirement contributions, etc. Add these up. Then, add up your discretionary expenses: restaurants, entertainment, travel, gifts, etc.
Add the two figures together, and subtract it from your after-tax monthly income. Hopefully, there’s a surplus. Add to this surplus the amount you can contribute monthly from savings, and you have arrived at a figure available on a monthly basis for college costs.
Paying for college usually requires tightening the family belt, so if you can reduce your discretionary costs, that will help. College will be costly, but what you can contribute must be a number you can reach monthly for nine consecutive months each year.
Suppose after creating your budget, you learn that you can contribute $30,000 a year towards your child’s college expenses. How big a financial aid package will she require? If her dream school has a total cost of attendance (COA) of $80,000, she will need a financial aid award of $50,000. But it’s important that you, and your child, understand long before it arrives in the mail what that package will look like.
Three parts of a financial aid award
At most colleges, the award will consist of three parts:
• Federal student loans
• Campus employment
• Institutional grants and scholarships
1. Federal student loans – typically the first dollars to be packaged because it is government money, not the institution’s.
A few highly selective schools with large endowments have replaced loans with institutional grants, but most can’t afford to do this.
For a first-year student, this portion of the award will likely be $5,500, the federal first-year cap. For second-year students, $6,500. For third- and fourth-year students, $7,500. This equals $27,000, the likely amount of loans packaged in your child’s financial aid awards over four years. Monthly repayments begin six months after graduation for a repayment schedule that lasts ten years.
2. The offer of campus employment – the second source of dollars in the financial aid award.
It is a commitment by the institution that the student will find an on-campus position reserved for financial aid recipients. These jobs in the library, at the coffee shop, or in the admission office typically pay between $11 and $13 an hour, and the student would receive a weekly or biweekly paycheck to be spent however the family sees fit. A reasonable estimate of total earnings for an on-campus job of 8-10 hours per week is about $2,500.
3. Institutional grants and scholarships – The third part of the financial aid award which is free money that does not have to be repaid.
So our hypothetical $50,000 financial aid offer, including the “parents’ resources”, would look like this:
$5,500 Federal student loans
$2,500 Campus employment
$42,000 Institutional grants and scholarships
$30,000 Parent Resources
$80,000 Total cost of attendance
If borrowing is essential to make college affordable, as it is for many families, federal student loans are the best choice. The interest rate is low, the fees are low, repayment plans are flexible, the income-based repayment plan can keep monthly payments at reasonable levels, and there are built-in protections against loss of job, illness, injury, and even death.
Six things to discuss with your teen about paying for college
Now that you have done your budget and know how much you can afford to contribute towards your daughter’s college education, it’s time for the family pow-wow. Here are some items I suggest you discuss as a family long before your child submits her college applications and hopefully as she is first assembling her college list:
1. How much can you afford to pay each month, and how much are you, the parents, prepared to take on in additional debt? Many parents are reluctant to discuss money matters in front of their children. But college is an investment in her future; she should be in the conversation.
2. If your child is eligible for need-based aid, it is likely that her financial aid awards will include $27,000 in student loans over four years. Is this a reasonable debt for your child to face after graduation? A helpful rule of thumb on educational debt: Do not borrow more than you expect to earn annually at your first job after college. And there is reason to believe that having skin in the game can motivate academic engagement.
With low-interest rates and fees and flexible repayment plans that protect the borrower against loss of job, illness, or injury, these are the first loans to take if needed. But is he aware that he will be taking on this debt? Is he aware that the loans are in his name, not yours? When repayment begins six months after graduation, who will make those payments, you or him?
3. Campus employment will likely be part of her financial aid award. Is she okay with a work commitment of 8-10 hours a week for 25 weeks of the school year? Are you?
4. Have you run the net price calculators for each school on your child’s list? These are located on each college’s website. Though not perfect predictors of what the college will cost you, they are a guide. And the difference between what you think you can afford and what you will be expected to pay can be startling. Are there enough affordable schools on his list? Is he willing to add more “financial safeties” if there aren’t?
5. Are there any additional ways your family can tighten the belt to increase your family contribution? Any other sources of funds? Will your child begin to look for outside scholarships?
6. Finally, is your child prepared to walk away from an acceptance to a school that will cost more than you can afford? Are you?
As you see, this will be a tough conversation. But don’t focus exclusively on the financial hardships. Explore the enormous advantages that a college education bestows. It is the gateway to your child’s dreams and aspirations and probably the most important investment your family will ever make. But it is also one of the most expensive. The cost of this investment needs to be understood, managed, and embraced by all of you.
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