Paying for college is a partnership between the student and parents. Each partner has a role to play and is dependent on the other to make college as affordable as possible. Neither student nor parent should do all the work on his or her own.
One of the secrets to any successful partnership involves good communication between all parties. As parents and students work together, openness, candidness and honesty with each other are crucial factors in paying for college.
Discuss College Affordability Early
If the parents have determined that particular colleges are likely to be unaffordable, they should discuss this with the student as early as possible. Otherwise, they are setting the student up for a major disappointment later.
Nothing is more disappointing for a student than to have invested time and tears in completing a college admissions application after falling in love with the school during a campus visit, only to learn later that the family cannot afford its share of the cost. Don’t let the student visit colleges the family cannot afford. Families should have frank discussions about financial affordability early in the admission process.
Show the student the realistic costs of each college under consideration, which colleges are affordable and which are unaffordable, instead of just telling them. This allows the student to see the differences in cost and to put the cost of attending each college in a real context. It softens the blow if the student reaches the conclusion on his or her own.
Begin by showing the student a budget that summarizes the available financial resources to help pay for college, including income, assets, college savings plans, scholarships, student loans, student employment, parent loans and education tax benefits. Each college is required to have a net price calculator on its web site. Use this tool to determine the discounted sticker price of the college after subtracting gift aid (free money such as grants and scholarships) from the cost of attendance. Students and their families should work together early in the admission process to understand each college’s actual cost, estimate of the family’s out-of-pocket expense and potential for financial aid.
Some parents are understandably reluctant to share details about parent income and assets. But, for some parents, personal financial information is just too private. In such a circumstance, share only the contribution from income and the contribution from assets and not the total income and total assets.
Often the most difficult task for a parent is saying “No” to their children. The last thing any parent wants to do is cause their children heartbreak by denying them their dream schools. But being a parent oftentimes means making tough decisions for our students. Sometimes, it means saying, “No.” But, not saying “No” can be even more devastating if the student is forced to drop out when the parents run out of money. Or worse, the parents take on unaffordable debt.
Teach the Student How to Manage Money
This presents a good opportunity to teach the student about managing money as well as making smart borrowing and smart college choices. Help the student understand the consequences of each option for paying for college, such as the likely monthly loan payments associated with the amount of debt the student and parents plan on borrowing.
Learn about college loan options together. Borrowing money carries with it serious responsibilities and obligations. Parents should make sure the student understands the loan terms and conditions for the loans he or she plans to borrow.
Some parents are sometimes unrealistic about the student’s ability to pay for college on his or her own. College is a lot more expensive today than it was when the parents graduated from college.
Parents have a tendency to overestimate the student’s eligibility for merit-based aid and underestimate eligibility for need-based aid. Less than 0.3% of students win a completely free ride through scholarships. Only about one in eight students use scholarships to pay for school and they receive only about $2,500 a year. Scholarships are part of the plan for paying for college, but not the entire plan.
Parents also need to be realistic about the ability of a student to work his or her way through college. Except for low-cost community colleges, those days are long gone. Moreover, students who work a full-time job while enrolled in college are half as likely to graduate as students who work 12 hours or less a week.
Financial Planning before College
The parents should prepare in advance to pay for college. It’s never too early to begin the planning phase for college expenses, the second largest expenditure many families will face.
Start saving as much as possible for college as soon as possible. Every dollar saved is a dollar less borrowed. Every dollar borrowed will cost about two dollars by the time the debt is repaid. So, it is literally cheaper to save than to borrow. Save in the parent’s name rather than in the student’s name, or use a parent-owned 529 college savings plan, to minimize the impact on the student’s eligibility for need-based financial aid.
Parents (and grandparents) can incentivize the student to save by matching student contributions to the student’s college savings plan.
Retirement plans do not count as assets on financial aid application forms, but the current year’s contributions are counted as part of total income. So, parents should maximize retirement plan contributions up until two years before college. Be sure to maximize the employer match, since that is free money.
Parents can also reduce their reportable assets by paying down debt. They can also accelerate necessary expenses such as home repairs and major consumer purchases.
Parents should be careful with their finances starting about two years before the child plans on enrolling in college. Financial aid formulas base their calculations of the family’s ability to pay on the student and parent income during the tax year prior to each academic year. Avoid artificially increasing income during the prior tax year because that can have a big impact on eligibility for need-based financial aid. For example, avoid realizing capital gains and retirement plan distributions during the prior tax year and each subsequent year until the student’s senior year in college.
Start Searching for Scholarships ASAP
It’s never too early to begin to search for scholarships using free tools such as the Edvisors Scholarships Database. Students should also answer all optional questions on a scholarship search site, as this increases the number of scholarship matches. The student should apply to all of the scholarships for which he or she is eligible. As students begin to complete scholarship applications, they should prioritize those awards to which they apply. The more scholarship competitions a student enters, the better the student’s chances are of winning a scholarship. Students should always consider applying for both large and small scholarship awards. Oftentimes, there are fewer applicants for smaller scholarship awards so the student’s chances of winning an award are enhanced.
Parents should ask their employers whether they offer any scholarships for the dependents of employees. They should also ask fraternal and social groups to which they belong about scholarship opportunities.
Complete Admissions and Scholarship Applications
Students should work closely with their school counselor and parents to create a list of potential colleges to attend. Take the time to make the right decision before applying for admission, not after acceptance where time pressure may lead to a rushed decision. Once the list is created, students should create a college calendar with application deadlines and other dates. Parents can serve an important role in maintaining the college calendar and reminding the student of upcoming deadline dates.
Students and parents should work together to review college and scholarship applications. Meeting application deadlines is a crucial step in this process. Failure to submitting a complete application by a published deadline will almost always result in disqualification. Students should be encouraged to share their application essays with parents, counselors, and teachers. Each of these individuals can provide valuable feedback to the student’s submission.
Parents should resist the temptation to completely rewrite the student’s essays. College admissions staff and scholarship selection committees can tell when the student didn’t write the essay. Maintain the student’s voice and personality in the essay. Do not edit all of the life out of the essay. Ideally, parents should limit their role to correcting spelling, grammar and diction errors.
Students and their families should work together to apply for financial aid. By collaborating on the Free Application for Federal Student Aid (FAFSA) and asking questions of school counselors, the college financial aid administrator, and the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243), students and parents are less likely to make submission errors.
College Decision Time
The student and parents should review financial aid award letters and eligibility determinations together. Figure out which college is most affordable and best meets the student’s academic and career goals. Carefully review the terms and conditions of any offered aid.
If the decision is difficult, try creating a decision matrix. List each college in a column and decision criteria in each row. List the most important criteria at the top. Highlight each cell in the matrix in green if the college wins for that criterion (ties are ok). This can help stop the decision process from spiraling in circles from one criterion to the next. It may make it easier to decide which college is the best choice overall. Presenting factual information in this format can also shift the decision discussion away from emotion.
If the student’s dream college is clearly unaffordable, the student should be ready to compromise. Being stubborn does not make the process any easier. Most colleges can provide the student with a very good quality education, so, insisting on a specific college may not be realistic. Plus, there is a wonderful sense of freedom that comes from graduating from college with less debt.
Don’t fall prey to the myth that a student will only appreciate college if he or she has to suffer through the pain of working a full-time job and excessive debt, as though college graduation is a rite of passage that requires mental mutilation. Debt will cause resentment, not gratitude.
When it comes to life, and in particular, family finances, don’t make promises you can’t keep.
Parents should spend down the child’s assets before tapping into the parent’s assets (including 529 college savings plans). This strategy will increase the student’s eligibility for need-based financial aid, since financial aid formulas assess student assets more heavily than parent assets.
Parents should reserve $4,000 in tuition and textbook expenses to be paid with cash or education loans to qualify for the $2,500 maximum American Opportunity Tax Credit. Internal Revenue Service (IRS) rules prevent getting two education tax benefits for the same educational expenses, so one cannot use a tax-free distribution from a 529 college savings plan to pay for qualified higher education expenses that justify a tuition tax credit.
The student has several important responsibilities during his or her college career:
- Get good grades and maintain satisfactory academic progress toward graduation, as this ensures continued receipt of financial aid funds
- Be decisive in crystalizing a choice of academic major as early as possible
- Plan a path from initial enrollment to graduation, taking the frequency with which classes are offered and prerequisites into account
- Take a full academic course load sufficient to graduate on-time
- Learn practical skills, such as financial literacy and business etiquette
- Work a part-time job during the academic year (no more than 12 hours a week) and a full-time job or internship during the summer
- Borrow a reasonable amount of student loans, no more in total than the student’s expected annual starting salary