WHEN TO SAY NO TO DREAM COLLEGES
There are certain colleges that continually make the list of "dream schools" for high school students. You know the schools I'm talking about. They come with a certain prestige, the cost is expensive, and the rejection rates are high.
Despite high rejection rates, obviously a certain percentage of students are accepted and it can present a dilemma to a parent. What do you do if your smart teenager is accepted to their dream college, but the cost is terrifying and perhaps beyond what you can afford?
The most expensive private colleges can now cost up to $300,000 for a single bachelor's degree!
For such schools, need-based financial aid is often available to the brilliant student from a low-income family. But what about the student from an upper middle-class family that doesn't qualify for much in the way of financial aid? Even for a six-figure earning family, a $200-$300k cost for a college education is nothing to balk at.
The question for these parents then becomes whether they should bite the bullet when it would come at a severe cost to their own financial future. After all, how does a parent deny their child the option of going to their dream school?
Here are three things parents should know as they grapple with this decision:
Teenage brains aren't fully developed
The part of the brain that controls rational thought and controls emotions is the prefrontal cortex. Unfortunately, this portion of the brain for teenagers won't be fully developed until they are in their mid-20s. That helps explain why teenagers aren't discouraged at the prospects of their parents or themselves taking on huge debt for a single degree.
Consequently, parents should keep in mind that even teenagers who are academic superstars won't necessarily be thinking clearly about the college choices they face.
Refuse to cosign a private loan
I read recently of a story where a daughter was dead set on attending New York University (cost of attendance $72,000 for ONE YEAR) even though she had gotten into University of North Carolina, Chapel Hill, and North Carolina State with scholarships. When her parents balked at paying the NYU price, she trotted off to a local bank only to be told she'd need cosigners to take out loans to cover the four-year cost.
Refusing to cosign for private loans or take out large federal PLUS Loans for parents is an effective way to end the conversation.
Use a loan repayment estimator
Too many families focus on the price of the first year of college, but this is shortsighted. Parents need to see how much it would cost to pay for four years of college. And the majority of college students need five years to graduate.
When contemplating what you can safely borrow, one resource is the Federal Repayment Estimator. The majority of borrowers pay off their federal college loans using the 10-year repayment program. Since you may not have current loans to estimate, simply use fictional ones.
Most students will be able to borrow a maximum of $27,000 through the Federal Direct Loan program over four years. Students who take more than five years can borrow up to $31,000. Through the parent PLUS Loan program, parents can potentially borrow much more. Parents can borrow the difference between the school's cost of attendance and the child's financial aid award.
The Bottom Line
Parents, when it comes to paying for college, once you make a decision on what you'll do it becomes very difficult to go back on that decision. In no way am I suggesting that you shouldn't help your student with their college expenses if they make it into their dream school. What I do advise though is you go into the college years with your eyes wide open.
If you go into the college years with your eyes closed hoping for the best, you may find yourself (and your student) taking on far more than anticipated.
Go into the college years as an informed parent. Go in with a four year college funding plan. Have honest conversations with your student about the cost, and make the best decision you can for your family.
Question: There's no way for my child to go to college without taking on some amount of debt. How much is too much for my student?
Answer: The traditional advice here is a student should not graduate with more debt than what their first year's annual salary would be in their first job. For example, say the going entry-level salary for a graduating Engineering student is $50k/yr. In this circumstance, the traditional advice is your student should not finish with more than $50k in debt.
Overall, I do think this is a good rule of thumb for determining a maximum amount of debt.
In my professional opinion, I believe families should strongly consider cutting this amount nearly in half for planning purposes. Using the same example above, that would mean your student not finishing with more than $25-$30k in debt. Of course every situation is circumstantial - you should weigh the major, the future career path, and perhaps drive of your student.
Simply consider this: No high school student enters their college years knowing what their life will be like 10 years later. What will they be doing for work? How much will they be earning? Will they be married? Where will they be living? Do they have children?
The only thing we can say for certain is the financial decisions made during college will have an impact on your student's family life 10 years later. At a certain point, debt acquired can have more of an enslaving impact if it impedes your student's ability to save for a down payment on a house. Or perhaps limit what they are able to save for their own retirement. It may delay decisions to have children or set down roots, among other factors.
In limiting the amount of debt the student takes on, I also strongly believe Mom & Dad should carefully weigh the impact of how much support they provide as well so it doesn't jeopardize their own retirement plans. With the right planning, balancing paying for college and planning for retirement is possible.
Michael Howell is a registered representative with, and securities offered through LPL Financial, Member FINRA/SIPC.
This research material has been prepared by Horsesmouth.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.