“Working to help parents raise money-smart kids.”
Hello, friends!
It’s back-to-school time!
Are you like me, staring college straight in the face? Can you believe the kids who originally inspired The Money Mammals are now both in college? 🤯
And if college seems a ways away for some of you, I can assure you that it creeps up quickly!
With the most expensive colleges now reaching a whopping $90,000 per year all-in (including tuition, room, board, books, travel, etc.), we could all use a little help figuring out how to pay for higher education.
Ann Garcia has written a wonderful book, How to Pay for College: A Complete Financial Plan for Funding Your Child’s Education, and she joined me on the podcast for a conversation.
While I highly recommend that you listen to our entire episode for an abundance of Ann Garcia knowledge bombs, you can collect a few key takeaways in this week’s “3 Ideas to Share & Save.”
— 1 —
Is there a Goldilocks amount of debt for your student?: While the obvious answer to this question is zero, with prices as high as they are, many of us need a more realistic heuristic, or rule of thumb, to know how much debt is – in Goldilocks’ words – “just right.”
A useful heuristic I learned a few years back – one we’ve shared with our kids – is to not take on more debt than you might expect to make in your first year out of school. There’s one obvious flaw with this rule of thumb: change. For example, what if your kid switches from pre-law to social work in his junior year? Much of that debt is already locked in at that point. This rule won’t help.
It’s a bird! It’s a plane! No! It’s Ann Garcia to the rescue with a more realistic heuristic:
Ann recommends your student not take out more debt than the federal government is willing to give her. First-year students can obtain $5,500 in direct student loans, second-year $6,500, and third-through-fifth-year $7,500.
$2,000 of those yearly loans are unsubsidized, which means they start accruing interest immediately. The balances ($3,500, $4,500 and $5,500 respectively) are subsidized. These are the best possible direct student loans because the federal government pays interest until after they finish school.
So, if your child graduates in four years and uses all the direct student loans available to her, subsidized and not, she’ll have a reasonable amount of $19,000 in total student debt to pay off. Incidentally, you have the option to accept the subsidized loans and deny the unsubsidized ones. It’s not all or nothing.
— 2 —
Don’t Do This!: It can be hard to say no to your child’s dream of going to a super selective, pricey private school, but we parents have to consider our own futures as well.
Good friends of ours made the difficult decision to say no to a pricey private school for their child because the University of California option had just as good of a reputation, and was half the cost. There were a lot of tears, of course, but their daughter, now a senior, is thriving (and they didn’t have to mortgage their own future to help her find her way).
Parents can fairly easily get into big trouble trying to give their kids the dream education they think they deserve because, as Ann astutely points out, “college is the only financial decision in which the amount of money available to you in loans is not tied to your ability to pay it back”. 😬
Ann cautions us to never, ever, ever take out a loan against our employer’s 401(k). Why? Because if you leave that job, voluntarily or involuntarily, that loan is due within the next sixty days. 😱 This type of invaluable information is why I highly encourage you to listen to our full conversation or, better yet, pick up Ann’s terrific book. She covers seemingly every nook and cranny of the college process from a financial standpoint.
— 3 —
Start early. Be selective: Just like the money smarts conversations with our kids, we should begin the college discussion early. Our family would often walk through college campuses during family trips to give our kids a feel for the types of options that are out there. We also discussed college costs at each visit, and our kids knew how much we’d saved in their 529 college funds by the time they were tweens. (Here’s a resource to find the right 529 for you.)
In retrospect, though, we should have added another dimension to our early college conversations. My wife and I both wish we’d talked more about which schools were generous with which types of aid and curated our college tours around that. Just as schools are selective with our children, we need to be selective about the schools that we show them.
For example, with some colleges’ all-in costs nearing triple digits, it’s imperative to find out the type of financial help you’re likely to get. Scholarships come in the form of need-based aid, merit aid, and outside scholarships (for which you’ll need to apply).
In the year when your child is applying, you will need to fill out the FAFSA (Free Application for Federal Student Aid). This will help colleges determine if your financial situation warrants need-based financial aid. Many schools will meet 100% of need-based aid. This is terrific, though there are many folks who aren’t helped in this way. You’ll need merit aid from the school and possibly outside scholarships for which your student will need to apply.
Fortunately, each school is required to include a net price calculator on its site that will allow you to enter information about income (and sometimes academics) to give you a better sense of what your all-in cost will be. If it appears unlikely that you’ll get enough aid to make the all-in college cost affordable, you might want to avoid visiting or applying to particular schools.
Because demand is high for the most selective schools, they tend to offer less merit aid. Still, there are plenty of excellent, very selective schools, that offer very generous merit and grant aid. Discovering which schools make sense for your family before the application process can save you some pain. Because however rational your conversation seems to be with your son (“Yes, I understand that if I get in, I can only go if we get enough merit aid”), you’re still dealing with a teenager. If he is accepted to his dream school, emotions, not rationality, are likely to drive the discussion from that point.
I’ve gone on long enough, although I’ve only scratched the surface of this ever-important topic. Remember, Ann is the expert when it comes to paying for college. Dive into our discussion for more details.
Ann also made a wonderful point later on in our conversation. Research has shown that our college investment is less about the specific college our kids attend, and more about how much our kids invest their time and energy in whatever college they choose.
Wherever the college process may take us, let’s remember to try and enjoy the journey!
John, Chief Mammal
P.S. Please consult with a financial or investment professional before engaging in any decisions that might affect your own financial well-being.
Like what you just read? You can sign up for the newsletter here.