In just a generation or two, we’ve gone from students working their way through college without too much trouble, to many parents still being able to write checks to cover tuition out of current income, to sticker prices being so high that two decades of savings may not be enough to cover two children from relatively affluent families.
The uncomfortable reality of paying for college is often compounded by a noxious combination of parental confusion, compressed time periods and teenage uncertainty. After all, it’s hard to predict what sort of discounts you might get come springtime based on your financial need or your child’s academic or athletic merit, plus it’s nearly impossible to know how your child’s needs might change between the ages of 17 and 22. Nevertheless, families stagger into senior year and try to make one of the biggest financial decisions of their lives.
THE DATA For families with little or nothing saved, the process has to begin with a crash course in how colleges make decisions about financial aid. First, you’ll want to know your expected family contribution, the number that the federal government will use in figuring out how much federal aid you are eligible for once you fill out the Fafsa (Free Application for Federal Student Aid) form later in a child’s senior year in high school. Colleges will also use this number, with additional tweaks in some cases, as a baseline for what you can pay each year, though it’s no guarantee that they’ll make up the difference with grants or work-study jobs and not a link to a bunch of loan applications.
After that, you need to figure out a school’s average cost of attendance, including room and board and other expenses. Colleges maintain their own net price calculators, where you can input your financial data to get a rough sense of the amount of aid they might award you.
You are probably not going to get rewarded for having saved nothing. Everyone seems to know a family in their area with a big house, fancy passport stamps and no savings with a child who nevertheless got an amazing financial aid package from a top school. Don’t believe the stories. The details of financial aid are so complex that many families don’t understand their own packages, or the rumormongers transmit the details incorrectly. Income tends to matter in financial aid more than assets and savings, especially at public universities.
THE COLLEGES Most families with no savings will be hoping that at least some colleges they apply to will offer large grants and ask them to borrow less money than others. But popular, highly ranked schools tend to have a lot of applicants. Even if you do get in, many of them may not offer outsize rewards or be flexible if you appeal for more money once you get in. Apply and cross your fingers, but don’t count on generosity here unless the school is particularly well endowed.
Parents with no savings and higher incomes need to be more strategic, encouraging their children to apply to at least some colleges where they would be among the very best students. Those institutions may offer more grants in an effort to enhance the quality of their student body.
THE DEBT The sad fact is, most families with no savings will be borrowing a fair bit of money to send their children to college. The best loans are the federal student loans, and most traditional-age students can take out $31,000 in loans during their time as undergraduates. If you get in trouble later, you can enroll in an income-based repayment plan to lower your payments.
These plans tend not to be available from private lenders who peddle what are known as private student loans. This week, the Consumer Financial Protection Bureau issued a scathing report, calling the lenders out for making little progress on helping distressed borrowers. You should read every single word of it if you’re considering these loans, since parents almost always have to co-sign for them and then suffer the consequences if young adults don’t or can’t make the payments. The nearly inevitable conclusion of reading the report is that you should do everything possible to avoid taking out loans like this.
That leaves parent borrowing, often in the form of federal Plus loans. It will be tempting to rack these up, come what may, to give a child a shot at attending a dream school. The cost, however, may be payments that last well into what are supposed to be your retirement years. Perhaps your children will help make the payments one day, but you won’t be able to refinance the loans into their names.
THE FINISH The steps above should help you avoid at least some of the confusion. As for the sadness and despair that can result from too much debt or picking the wrong college, that often happens when giddy families, acceptance letters in hand and nothing in the bank, make hasty decisions over just a few weeks in April. It is never easy to determine the prudent amount to spend and borrow, but you’ll have a much better chance of making the right decision if you start considering the options now.