This isn’t because parents or financial planners like us have lost faith in the power of higher education. In fact, since our doors first opened for business almost twenty years ago, we have never stopped stressing the critical importance of an undergraduate degree followed by graduate credentials, if at all possible.
What’s changing is how much parents are willing to pay and how they divvy up the costs between themselves and their children.
More and more affluent parents are measuring the wide gap between the $15,000 per year cost at a state university (at least in Florida) and the $55,000 or more due at a private institution. Many realize they no longer have the wherewithal to spend $200,000 or more per child at a pricey school. Or even if they do, they’re no longer sure that the right approach is just to hand over the money.
“The boomers are the first generation shifting the cost of college to their kids,” says Susan Dynarski, a professor of education and public policy at the University of Michigan, in a Wall Street Journal article.
As a veteran financial planner, and the parent of a rising college junior (at a private Northern university) and a high school senior just starting the college application process (who wants to go the in-state route), here’s what I’ve learned about planning for college expenses.
Whatever you’ve saved, it isn’t enough
When my kids were born, I started putting aside what I thought was enough to fund four-years of private college each. I came pretty close (my daughter’s money will run out as she starts her senior year), but the fact is that college costs increased faster than anyone thought possible. Thanks to the double-whammy of stagnant investment markets and double-digit college inflation, even the most disciplined savers are coming up short.
Cover a lot of bases
There’s no one-trick pony here. You have to do a little bit of everything. In my daughter’s case, I funded a 529 plan with the bulk of the savings. She is also receiving generous financial support from her college. And, we also used the Florida Prepaid to help cover tuition (sad to say, but liquidating four entire years of prepaid tuition at a Florida state university only covered less than one-half of one semester at a private institution). For her last year, she’ll probably need to borrow through student loans. For incidentals, there’s always the Bank of Mom (Mom being me).
Don’t borrow more than common sense dictates
As mentioned above, my daughter will undoubtedly need to borrow, but only a manageable amount. I once worked pro-bono to counsel a working class young woman who had racked up almost $100,000 in debt at a for-profit educational institution of questionable quality, all to obtain an entry-level job that she would have been just as qualified for (and much less indebted!) had she prepared at the local community college. One rule of thumb says don’t borrow more than one-year’s salary at the job you hope you obtain after school. Otherwise you’ll be paying it back forever.
Make sure they have some skin in the game
There’s a growing consensus, even among the wealthy, that kids should have to contribute something to the college endeavor. Student loan organization Sallie Mae says among families earning $100,000 or more, students paid 23% of their total college costs through loans, income or savings. That’s up significantly from 14% in 2009. Some parents can afford to pay more, but they want their kids to feel like they’ve helped earn their education.
Provide a spending cap
Here’s a technique I’ve seen savvy parents use. They tell kids the maximum amount they’re willing to contribute. Above that, kids are on their own. For example, the parents will cap their college contribution at $50,000 (almost four years of expenses at a Florida institution). If the student wants to go to Harvard instead, or takes an extra year to finish, or goes on to grad school, it’s on his or her dime.
Don’t get sucked in to the “everyone does it” argument
Affluent parents can get easily sucked in to the whole guilt trip of paying for the “best” for their kids. In communities like ours, it starts with the extravagant birthday parties at six, the iPhone at ten, the luxury car at sixteen, and the expensive out-of-state college at eighteen. We urge parents to do what they can afford and what they value for their kids. If you can’t afford it, or have a different vision of how your kids should earn their own way in life, that’s OK. We work with many well-off parents who think state universities are plenty fine for their kids. Everyone does not “do it” and you shouldn’t feel you have to either.