Yellowstone Financial, Inc.

Making Hard College Decisions

If you have a graduating senior who’s off to college, you have probably already sent in your deposit with May 1st being the deadline for many selective universities.   College selection is a process fraught with emotion for many parents.  Among selective schools, there is much more competition than there was a generation ago.  There is also growing unease that incoming first-year students will not have the quality of life enjoyed by today’s parents.

Every parent wants their child to have the best chance possible to succeed.  For many that means selecting the most prestigious school possible in the eyes of US News or one of the other rankings.  This panic causes many parents to resolve to do whatever it takes to pay for college.  Often the student sends in their acceptance letter and the parents figure they will work out the finances over the summer.  Need-based scholarships can go a long way toward helping with college.  The issue is that your Expected Family Contribution by the FAFSA financial aid formula may show that your solidly upper middle-class family does not qualify for assistance.

While the rate of higher education inflation has eased in recent years, we are still left with world-leading tuition, room, and board rates for private and out-of-state public colleges.  University of Denver has a total estimated cost of $60,206 this year.  Warm-weather out of state public colleges are popular with Colorado students.  Arizona State University is $41,004 this year, while University of California, San Diego is even more dear with a total cost of $56,174 for out of state students.  Sure that doesn’t include need or merit-based scholarships, but your child may not qualify for either.

Once you get beyond college savings and paying as you go, the first funding sources are work-study opportunities and federal unsubsidized student loans.  A first-year undergraduate can qualify for $5,500 in federal loans in most cases.  Your student may qualify for $3,500 a year in work-study awards.  If you’re considering a $40,000 school, then that’s a $31,000 bill that remains.  Even if your student earns $5,000 during the summer, that only gets you down to $26,000.  There may be private student loans available, but consider a good general rule that a student should not graduate with more student loan debt than they can reasonably expect to earn in the year following graduation.

Now you’re involved in paying for school.  Hopefully you have some room in your annual budget and from college savings to partially fund college out of pocket.  A PLUS federal parent loan allows parents to borrow as much as the student needs (and the parent qualifies for) at a rate of 6.84 percent per year.     Another option many parents consider is a home equity line of credit, which allows you to deduct the interest in many cases and qualify for lower interest rates.  There are also private lenders such as Sallie Mae, who can loan funds up to the cost of attendance.

When you are signing off on the parent student loan, you need to be mindful of the debt you’re taking on and its impact on your personal financial plan.  In the example above, you could end up with well over $100,000 in debt for that one child’s college education.  That doesn’t include other children, graduate school, or additional years of undergrad.  A full-cost private university could result in debt twice as high.  By taking out these student loans, you may be delaying your retirement for years.  You may believe it’s a worthwhile sacrifice, but your child most likely does not want to see you living a pinched retirement because the “best” college was picked.

There’s also a growing wealth of studies that suggest that attending a higher-ranked college does not have any proven benefit: psychological, financial, or otherwise.  New York Times columnist Frank Bruni  in his recently released Where You Go Is Not Who You’ll Be cites exhaustive statistics supporting the notion that enrolling in a selective college does not result in better, measurable outcomes.  I recommend that you read this book, calm yourself and your student, and be open-minded enough to consider that the expensive college option may not be the best for your family.