What do You Mean by That? – Big Questions Families Have to Answer When Saving & Paying For College
- Brainz Magazine
- Nov 4, 2020
- 5 min read
Written by: Jack Wang, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Try this experiment with your spouse/other parent:
Have each parent take out a piece of paper and write down the answers to these two questions. Don’t peek - you’re going to compare answers later.
1. How much do you want to contribute towards college costs? Express either as a dollar amount per year or as a percentage of the cost.
2. Where will the money come from? For example, which account or will you have to borrow? If borrowing, what type of loan.
For both questions, be as specific with your answers as possible. Answers such as “it depends” aren’t allowed!
In my work with hundreds of families across the US, I have yet to have two parents answer the same. If you ask families if they want their students to go to college, many will say, “Yes.” Same if families are asked if they want to save for college.
But as the saying goes, the Devil is in the details.
The answer to the first question often depends on the educational background each parent has, how much financial support from their parents, and their hopes and dreams for their student. It’s not uncommon for one parent who hopes their student attends a prestigious private school while the other spouse is just as happy with a local state public university. Those hopes lead to very different financial outcomes. A prestigious private university can easily near $80,000 per year, while a public may cost around $30,000 for an in-state student.
There is also the issue of “fairness” for families with multiple children. In my experience, parents who put one through often will want to contribute the same amount to a second student since, after all, parents wouldn’t want to play favorites. Financial reality, however, may not allow for that, which leads to parents and students taking on more debt. This then leads to the student debt stories of the future or parents having to work past their intended retirement age.
The student, of course, has a say in this as well. Students may hear of their friends headed to the expensive school and would want the same for themselves without having any context of another family’s finances. Parents don’t do themselves any favors by not setting expectations with students on how much is truly affordable - often because parents themselves really don’t have any idea beyond “something affordable.”
This lack of communication impacts younger families, as well. Parents often will say that they have no idea what their students will want to study, and therefore have an idea what colleges. As a result, families don’t know how much to save. As an example, if parents would like their newborn to attend a prestigious university at $80k per year for 4 years, assuming a 6% rate of return and a 3% increase in the cost of college would require saving $1,371/mo for 18 years!.
On the other hand, using the same assumptions, a $30k public school would only require $514/mo.
Figuring how much money you’re willing to spend is only part of the equation. Where the money is going to come from is another.
For families that have saved adequately, often in a 529 plan, the answer is relatively straightforward. The bigger question occurs when families haven’t saved adequately - or at all! What then? For most families, this means taking on debt, but even this seemingly simple solution can vary widely.
Who will be the legal borrower?
Would unsecured loan options be better than secured?
What is really important - besides the interest rate?
If families have to borrow, the first thing to determine is who should borrow. Remember that your typical 18-year-old student without a steady full-time work history or a credit history will be unable to borrow by themselves outside of the Federal Direct loan program. Any amounts above the Federal loan limits will require a co-signer.
Or would the parents borrow themselves, leaving the student off the hook legally?
This simple question brings up issues about students having a stake, financially, in their education, and even what message parents want to send. As an example, one family used co-signed loans to reinforce the message to the student that these loans were for the student and the student’s ultimate responsibility for repayment. Other families are vehemently against burdening their students with debt, so the choice is to have the parents borrow.
One note - colleges are required to publish the average amount of debt a student would have upon graduation. This figure only includes Federal loans plus any loans offered by a college itself (not all colleges do this), so the figure may be optimistically low. The figure reported by schools do not include any private loans taken either by the parents or co-signed by the parents.
If the parents decide to be the borrower, the next question is whether to use a ParentPLUS loan (the parent version of the Federal Direct loan) or using a private loan, or even some other form such as a mortgage or home equity line of credit.
I’ve heard answers ranging from wanting the lowest rate to not using a mortgage-related loan as the parent wouldn’t risk their home for college loans. All of the answers are “right” in itself, but families may have to choose between a low-interest rate on a mortgage loan versus the risk of losing the home in the event of job loss or other financial crisis.
As a financial planner (not me) once said, “Personal finance is far more personal than finance.” This is certainly true when figuring out how to save and pay for college.
Now, have your 2 pieces of paper? Go ahead and compare answers.
How far apart are you with the other parent?
Why did you - and they - answer the way they did?
What is the right answer for your family?
This exercise will help families and students set expectations around where the student may end up for college. The last thing you want is to have that tough conversation that occurs for many families when the student wants to go to a school that the family can’t afford. And the stress that comes when families stretch to pay that bill!
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Jack Wang, Executive Contributor Brainz Magazine
Jack Wang is a noted expert in helping US-based families with middle to high school age students lower the cost of and pay for college by navigating the complex, stress-inducing financial aid system while still being able to retire. He's helped hundreds of families and students (including his own 2 children) understand financial aid, student loan options, and payment strategies in the context of overall family finances and retirement plans. Jack studied finance at the University of Texas at Austin and started in the banking industry, where he spent 12 years as a commercial banker helping small to medium-sized businesses. Then he transitioned to be a corporate trainer for 10 years before starting his own firm.
