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Who is Paying What?

When thinking about funding your children’s college education, don’t sabotage your own retirement. Let’s face it no one is going to loan you money to retire. Fifty-six percent of American workers have saved less than $25,000 for retirement, and 46% have saved less than $10,000.1 As the cost of college is dramatically soaring , you may be forced to make some difficult decisions regarding your child’s college choice. In today’s world most students are not given an open checkbook to go to wherever they choose and cost becomes a factor. It may be time to sit down with your child and have a conversation about what and how much you are willing to cover and what they may be responsible for covering. If your kids are like mine, spending parents’ money is no big deal but ask them to take their own money to pay for something and it’s a different story. All of a sudden they don’t “need” something as badly as they thought they did.
Funding your child’s college education may cost more than your first home (think upward of $100,000), will you allow your child to make all decisions? Ask yourself who is in charge? Think of college as an investment, kind of like buying a home. Before committing to a home purchase you probably looked at the total mortgage amount including insurance and then figured out your monthly payment to decide if owning that home was worth the long-term financial commitment. Think the same thing with college costs. You may be planning to pay for most of your child’s college expenses but still want them to take out student loans. The undergraduate Stafford Loan are fixed-rate loans for undergraduate students attending a college or university that participates in the Federal Direct Loan Program. Stafford loans can be used to pay tuition, and other eligible school expenses. Stafford loans are not based on credit, and they can be subsidized (3.4% interest) or unsubsidized (6.8% interest) depending on the student’s financial need. For undergraduate students, the lifetime limit is $31,000 comprised of both subsidized and unsubsidized loans. That means your child can borrow only $31,000 TOTAL and that’s over the 4 (or more) years of their undergraduate work. Break it down per year and that $31,000 won’t go very far.
In 2010, about 56% of students who received a bachelor’s degree from a public college or university had an average debt of $22,000. Not surprisingly, debt was even more substantial for graduates of private not-for-profit schools, where 65% of students completed their studies with an average debt of $28,100. 2
Bottom line is don’t wait to the last minute to talk with your child about your financial college planning. Let them know what you are willing to pay for them and what they may be expected to cover – it may change the schools in which they apply. Again, go back to the house scenario….when we were looking for a home we would not have been able to afford the $2M+ gated communities, so we certainly never entertained the thought of looking at them. They simply were out of our budget. It may be the same thing with college choices. Do not have your child apply to schools that you may not be willing to pay for. I would not count on that miraculous scholarship or grant money to cover the cost. It may be time to sit down with your child and talk dollars and sense.
Source: 1) Employee Benefit Research Institute, 2011
2) The College Board, 2011