Who Will Pay For College – You or Your Kids?
Have the Talk Now: Who's Going to Pay the Student Loan Bills - You or Your Kids?
As you help your college-bound son or daughter plan for college, take a step back and consider these statistics: U.S. student loan debt is $1.2 trillion, with $3,000 of student loan debt accruing every second. And the average amount owed by a 2016 grad? $37,000.
Then factor in that only 20 states require high school students to take a course in economics, and it's no wonder that for many parents, explaining the ins and outs of taking on a loan — and paying it back — rests heavy on their shoulders.
While there is no one script to follow, there are a few touch points parents should consider when navigating the student loan landscape with their kids; these include who pays for what, how budgeting and debt repayment work, and what scholarships and financial aid might be available to help defray the cost of college.
To pay or not to pay
Preparing for college is an emotional period. For many families, it's the first time a child will be living independently outside of their childhood home. Parents want to make the process as stress-free as possible, and set their kids up for success by reducing the financial strain their child will face upon graduation. But with only 48% of parents currently saving for their kids' educations, paying college tuition outright is often not an option.
For many parents that means calculating if it makes sense for them to assume responsibility for all or some of the cost of college, or leave that obligation to their kid. Those that opt to bear that financial obligation may risk their retirements by tapping into their 401(k)s to foot their child’s tuition bills. Others assume debt in the form of a home equity loan to free up some cash, or take out a parent loan from a private lender. Being realistic is key in this situation, says Jason Flurry, CFP and president of the National Center For College Planning, since "research shows that parents with multiple children are at risk of not being able to afford college for their other children if they overuse loans for their first child."
Others may decide to leave the debt responsibility in the hands of their child. In those cases, parents will want to help their child figure out the cost of college and understand how their decision to enroll in one school over another will impact the amount they will owe after graduation.
Parents and student should make sure to understand the financial responsibilities associated with their student debt before borrowing.
"Parents often want their kids to have some skin in the game when it comes to paying for college," says Flurry. "The problem with that approach is most kids have never been in debt. They don't know what it means or feels like to have to make those payments."
A good starting place is calculating how much your child is likely to owe, then putting that number in context. Mock-up a budget based on what he or she can expect to make in an entry-level job, and then subtract anticipated rent and spending money, before layering in his or her post-graduate debt obligations.
Don't be afraid to show how directly a school's tuition will affect the amount owed upon graduation — or the employment a student may have to find to pay for the tuition not covered by loans.
"One big misunderstanding I see from time to time is people don't know how much they can borrow for college," says Flurry. "From a federal standpoint, there is limited loan eligibility through FAFSA. Federal Direct Loans are capped at $5,500 for freshmen, $6,500 for sophomores, and $7,500 per year for juniors and seniors. If someone is looking at an out-of-state school or private university, those loans are probably not enough to cover their expected family contributions."
In situations where tuition exceeds the available federal loan, private loans are a common solution.
Know your options
Parents that don't want to assume full responsibility for their kids' tuitions, but want to contribute in some way may opt for a federal Direct PLUS Loan. These loans are government-sponsored loans that allow parents of dependent undergraduate students to borrow up to the cost of tuition minus any other financial aid at a fixed interest rate for the life of the loan. Parents will also pay a loan fee on the total amount of the loan, which is then deducted from each loan disbursement.
Parents can seek out loans from private lenders, too. Many banks offer parent loans that are competitive with PLUS loans, as some may charge a lower interest rate for existing customers, or offer a loan without any fees.
Loans aside, Flurry says a big mistake families make is not looking for "found money" — scholarships and assorted financial aid, for example — to help defray the cost of college.
"There are a lot of scholarships out there that can reduce a family's need for loans, but most people don't educate themselves on how to access them," he says. "Some colleges are far more generous than others and people should take the time to understand what their net costs will be before they apply instead of waiting until they get a financial aid award that is loaded with tens of thousands of dollars per year in loans."
If you have questions, or would like more information about paying for college call 877-367-3207 to speak to a Student Lending Specialist.