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Graduation: How to Prepare for the Cost of College

by Pete the Planner®

It’s graduation season and so it is natural that as a parent you’ve dreamed about the day when your own child will don their cap and gown. And then quite possibly you will suffer a panic attack as you contemplate the cost of a college education. Here are some tips to help you navigate this new territory so that you can make an informed decision that both helps your child and meets your own financial wellness goals.

First, breathe… No matter where you are on the journey, there is a way for you and your child to get to the destination that you envision.

Obviously, start by saving. That’s easy to say, but it may not feel easy to do when you have competing demands on your wallet. Planning for retirement must come first; you do neither yourself nor your children any favors by failing to save for your own future. But with that accomplished, you may feel there is little left over each month to put towards a college fund. In fact, that may indeed be true. But consider the power of time: even $200 a month invested for 17 years at a 6% rate of return, will yield almost $68,000 by high school graduation day.

You can maximize your savings outcome by using a 529 account. Money invested in a 529 account compounds tax-free and is not taxed upon withdrawal when it is used for qualified educational expenses. And in certain states, your contribution can be a deduction or even a credit on your state income tax return.

When your child enters high school, start the conversation about their future plans. Be open about your expectations, and your limits. Share with your child the realities of the cost of higher education, not to scare them into a particular decision, but so that as a team you can strategize to meet their goal. And while it may seem premature, if graduate school is likely to be part of the plan, this needs to factor into the choice of how much to spend on undergraduate education. As much as you want to support your child or even shield them, let them be a full partner in this decision.

When crunch time comes and the college application process begins, do not rely on assumptions about what assistance may be available to you. Every year, millions of dollars of aid go unused because families that would have been eligible did not apply. Regardless of your situation, complete the Free Application for Federal Student Aid (FAFSA), which is used by virtually all colleges and universities to make a determination of financial aid.

Hand in hand with that, do not make assumptions about the cost of a specific school based on its advertised “sticker price’. It is often the case that a school that seems more costly at first glance will offer a financial aid package that ultimately brings the cost below what seemed like the less expensive school.

No discussion of paying for college would be complete without addressing the topic of student loans. We are in an era when paying for higher education without borrowing anything at all is simply unrealistic for many. The key is to borrow both sparingly and knowledgeably.

Sparingly means choosing an affordable school option (which may include community college for two years or a local school that allows you to avoid room and board costs), using savings, and having the student contribute income from part-time work. Maybe surprisingly, research has shown that students who work a moderate number of hours while attending school do better academically than their non-employed peers.

Knowledgeably means choosing a borrowing option that is not just low cost, but also allows for flexibility. For example, you may be able to borrow money at a very low-interest rate by using a home equity loan. But is this wise? If your circumstances changed unexpectedly, would you be able to keep up with the loan payments? On the other hand, if your child has a federal student loan, they will have a myriad of repayment options available after graduation, geared to their circumstance. If your situation does permit it, you can always help them when their payments begin.

Knowledgeably also means being fully aware, in dollars and cents, of what repayment of a student loan looks like. You and your child can forecast their post-graduation loan payment here. Before signing the promissory note, your child must be intimately familiar with the terms of the loan and the implications of each repayment option. Explore what sort of monthly income your child can expect in their chosen profession once they graduate. A $500 per month student loan payment may be reasonable for an accountant or engineer, but not as appealing for an elementary school teacher.

None of this is easy or completely straightforward. But with planning and honest, open conversations, paying for college is completely achievable regardless of your starting point.

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