As a parent, it’s natural to want to help your children succeed. In fact, in our recent survey of parents, 37% of respondents said no investment goal is more important than saving for a child’s college education.
If you plan to pay for all of your child’s college expenses, you can expect to shell out tens of thousands of dollars for one year, according to the College Board’s 2017-2018 figures:
While it might feel good to give your child a head start in life, choosing to pay for their education might not be an easy choice for everyone.
“The decision to contribute to a child’s college education is a deeply nuanced and personal decision,” said Jeff Motske, a certified financial planner and the president of Trilogy Financial.
How you approach your child’s college costs is all about your individual situation. Here are five questions to ask yourself as you decide how to tackle the cost of your child’s education.
1. Can you afford to pay for everything?
Start by being realistic about how much you can afford.
When you apply for federal student loans using the Free Application for Federal Student Aid (FAFSA), you’ll learn your Expected Family Contribution (EFC). It determines how much the government thinks you should be paying for college. Your family circumstances might reveal that you aren’t capable of covering all education costs.
For example, I’m the oldest of five children. Even though the EFC formula indicated my parents’ income was high enough to cover a good chunk of my college costs, they didn’t pay for everything. While they provided help, they knew that they needed to take a measured approach if they were to help my siblings as well.
Look at your situation, including how many children you plan to have, and what you can save without jeopardizing your own financial future.
2. Are you putting your retirement at risk?
If you decide you want to help your child pay for college, it’s important not to jeopardize your retirement, warned Travis Boyer, an LPL financial adviser at Secure Planning Group.
“A parent’s earnings timeline is much shorter than their children’s,” said Boyer. “Parents should be saving for retirement during their peak earning years, not diverting that money to pay for college.”
In addition to making sure your retirement is funded, Motske pointed out that you should fulfill other financial goals, such as having robust emergency savings, before devoting a large amount of money to your child’s college.
“There are no scholarships or loans for retirement,” Motske said. “Don’t contribute a child’s college education at the expense of your retirement or other important financial goals.”
Figure out how much you need to set aside for retirement (and other goals) each month to secure your financial future. Only contribute to college savings after you’ve met those obligations.
Both Boyer and Motske also warned against taking on your own debt, such as a Parent PLUS Loan, to pay for your child’s college costs. The last thing you need is your own student-related debt as you approach retirement.
3. Can you use a hybrid approach?
Rather than looking at it as an all-or-nothing decision, consider how you might help pay for a portion of your child’s education. For instance, you can:
- Offer to pay only for tuition costs. That makes your child responsible for all other expenses.
- Provide a housing and meal stipend. In exchange, you could make your child cover tuition and fees by getting scholarships, a job, or their own student loans.
- Set a yearly or four-year amount you can contribute to your child’s education (e.g., $3,000 per year). Then, let your child determine how to use that money for college costs.
My parents used a combination of the last two approaches with my siblings and me. We could go anywhere we wanted — as long as we found a way to cover tuition. My parents foot the bill for other costs, up to $10,000 over the course of four years.
I received scholarships to cover tuition and used my parents’ offer to pay for housing and a meal plan. Eventually, my on-campus housing was paid for when I became a resident adviser. I covered other costs with a part-time job.
4. Do you have a college savings account?
Starting early can make a big difference in how much you can put toward your child’s college education, according to Motske.
“You don’t actually have to pick between your child’s college and your retirement,” said Motske. “The earlier you start planning for both, the more options you create.”
If you start saving for retirement with your first paycheck out of school, you’ll need to set aside less money each month to reach your retirement goals. That frees up more income to put into a college savings account, including a tax-advantaged 529 investment account.
The key, said Motske, is to create a plan early on — before your options are limited. “Earmark money for college savings as your child grows,” he suggested. “Once your child moves from daycare to public school, take the money you were spending and put it in a college fund.”
He said you can continue to use that approach for both your personal financial goals and your child’s college savings throughout the years, as your situation changes and as your income increases.
5. Are there ways to help without using cash?
Boyer pointed out that sometimes it’s not about providing cash directly to your children. Instead, there might be other ways for you to help without paying for education costs.
“One way parents can help, without borrowing themselves, is to cosign a private student loan,” said Boyer. “However, it’s important to look for a company that has a cosigner release so you aren’t responsible for the debt after school.”
Boyer also recommended that parents discuss realistic education options with their children. For example, parents could encourage their children to go to less expensive schools and help them consider the return they’ll receive based on their potential future salary.
Other ways parents can help their children with college costs include:
- Allow your child to live at home for all or part of their college career, reducing housing and food costs.
- Encourage your child to get a part-time job in high school to save some money for college.
- Review college options with your child, including starting at a community college to reduce long-term costs.
- Help your student apply for scholarships ahead of time by noting due dates and creating a schedule they can follow.
- Make sure your child fills out the FAFSA — and accurately fills out the parent information. This can help them get grants, work-study, and qualify for other programs.
Not every parent can pay higher education expenses, but it’s possible to provide help and support to students.
Communicate with your child
No matter what you decide about paying for college, set clear expectations for your child.
My parents let me know while I was in junior high that I’d be responsible for my tuition. That helped me stay focused on grades and extracurricular activities throughout high school, leading me to scholarship opportunities.
I’ve used this lesson in setting expectations with my own son. We’ve talked about different options for college, including the local community college and the possibility to receive a discount by attending the university where his dad teaches.
He knows I’m saving in a 529. But he also understands that it’s probably not going to be enough to cover four years of school — so he’s on the hook for part of his costs.
Don’t wait until the last minute to talk to your student about the reality of paying for college, Motske said. These are ongoing conversations that you should have with your child as early as is practical.
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College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 11/4/2019. Variable interest rates may increase after consummation.
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3 Important Disclosures for Discover.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
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Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
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Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of December 1, 2019, the one-month LIBOR rate is 1.70%. Variable interest rates range from 2.80% – 11.06% (2.80% – 10.91% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.
Please Note: International Students are not eligible for the multi-year approval feature.
|2.84% – 10.97%1||Undergraduate, Graduate, and Parents|
|2.87% – 10.75%*,2||Undergraduate and Graduate|
|2.80% – 11.37%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|2.80% – 11.06%5||Undergraduate and Graduate|