By Melissa Sotudeh, CFP®
My daughter began her senior year with 4 AP classes, an October SAT exam, various extra-curricular activities, 8 college applications to complete, and multiple college scholarship deadlines. From my eyes as a marathon runner, her calendar looked awfully similar to a runner’s training plan, though in her case, her jam-packed calendar was a marathon of academic fitness. Yet, as a financial advisor, I was weighing the return on investment. Might it be better to focus on a few priorities rather than spread herself too thin?
By December, the end was in sight. Her final deadline was to apply for an extremely competitive full tuition scholarship worth almost $200,000, but I saw her struggling for time and energy. It was going to be all uphill to the finish line. I wondered if I should give her a pass because she had already received some early acceptances and merit aid offers from other schools. But I always tell my kids to do everything in their power to have more choices.
Planning for College Costs=More Choices
In the incredibly competitive D.C. suburbs where we live, I have seen families spend a lot of money on test prep and private admissions counselors in the hopes of giving their children more choices and a better chance of getting into their dream college. Yet even high-earning parents who can afford these services tend to underestimate how much it’s all going to cost when their child does get in to that dream school or how they will pay for it. In America, the average college savings amount is at its lowest level in three years, but the cost of tuition continues to rise. According to the Bureau of Labor Statistics, from 2005-2015, the cost of college increased an average of 5% per year. Given that rate, the cost of college for a child born in 2016 will double by the time she is 15.
No one wants to tell their children not to shoot for the stars. But if the alternatives are a heartbreaking conversation about not being able to attend that dream school or decades of paying off student loan debt, sometimes the greatest thing you can do for your children in this process is to keep them grounded in reality.
With me being a Certified Financial Planner® professional, you better believe that my kids and I have talked about the financial aspect of college choices. Last fall as my daughter was making her college list, we determined a budget and sat around the table creating Excel sheets, ranking school choices as target, reach, and safety, both for academics and for finances. I have helped dozens of families with a similar budgeting and prioritizing process to reach their financial goals. Yet despite all of my experience, my family was facing the same conundrum that so many others face. The mom in me wanted cost to be no object, but the financial advisor side of me knew what valuable and lasting personal finance lessons my children could learn.
5 Financial Lessons for Families Paying for College
- College tuition can’t be paid with wishes. While applying to scholarships is a crucial part of the college search process (more on that later!), you shouldn’t base your plans entirely on money you don’t have. Know what you have saved, what you can afford through monthly cash flow, what costs the student is responsible for, and what might be a prudent amount for your student to borrow (only if needed, especially if graduate school is in their future). My rule of thumb is to stick to the federal unsubsidized loan limit, or about $26,000 over four years. Or consider limiting loans to your student’s anticipated first year salary after graduation. Creating your college list from a financial perspective begins with understanding how much money is really available.
- Understand the true cost of attendance. Once you know how much you have to spend, you can better evaluate which schools are within financial reach and which would require a lot of scholarship money to attend. But the sticker price of college tuition and room and board can be misleading, particularly at smaller private schools that are willing to provide generous merit aid to compete with larger “brand-name” schools for students. To give just one example, the average cost to attend Mount Saint Mary’s University for the 2016 school year is about half (54%) of the sticker price of $51,610!
You can get an idea of the true cost of attendance with a net price calculator. You can find these on the school’s financial aid section of the website, or at third-party sites like College Board, College Reality Check, College Abacus or Cost of Learning. Each calculator takes about 20 minutes to fill out if you have your previous year’s tax information handy, and the more detailed the questions, the more accurate the results likely are.
- Create a written plan. As mentioned above, my daughter and I went through her list of schools and categorized them as Reach, Target and Safety, both academically and financially. But how do you determine financial categories? There are many resources like College Data that provide information on merit aid typically awarded or “no-loan” schools if you qualify for need-based financial aid. You need to understand which schools are within easy reach and which would be more difficult—and have an idea of how to prioritize choices when acceptance letters start coming in.
- You can borrow for college, but not for retirement. As part of your written plan, you should nail down an amount of what is realistically available for college costs. There may be many other competing financial goals in your life—paying off debt or ramping up retirement savings. While you might be technically able to cover college costs, you shouldn’t do it at the expense of your future retirement security.
- Don’t leave any scholarship money on the table! Merit aid (scholarships and grants) are free money that you don’t have to pay back—so make sure students know the deadlines and apply to any and all scholarships for which they are eligible. It may be discouraging when your child puts a lot of work into getting essays, recommendations and other materials in place for scholarship applications and it doesn’t result in an award. In my daughter’s recent experience, this is exactly what happened for some of the schools she applied to.
However, I’ve saved this point for last because the impact of scholarships can be so dramatic. In my daughter’s case, putting in those late nights to finish the “reach” school’s scholarship application paid off with a full ride scholarship. It placed an elite school that would have been out of reach into the running with her other college options. It really puts the tradeoff of time spent versus possible reward into perspective!
It absolutely pays to look under every stone for scholarship money, and to have a plan in case scholarships don’t work out. As my son graduates college and my daughter prepares to be a freshman this fall, I can attest to how having an organized approach can allow your family to enjoy this exciting time with so much less financial stress.
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