College - Who Pays (Part 2 of 3)

Where is the money going to come from to pay for college?

At the end of the article are ways parents of our clients have handled this issue.

Parents should decide in advance how much they are willing to contribute for their child’s education costs.  Make this determination by the child’s freshman year of High School at the latest.  The earlier the better, as it helps you to save and prepare for this huge expense that many kids think is a non-event from a financial perspective.  Communicate this to the child as part of your college conversations.  This allows you to figure out how much can be paid from your savings and cash flow versus how much debt will be incurred.

For example:  If you decide to pay for 75% of a state university, the breakdown might look like this:

$20,000 per year for 4 years

     X 75% =    $15,000 - Parents contribution via savings, cash flow and debt

     X 25% =    $  5,000 - Childs contribution via savings, scholarships, loans

This allows you to have a conversation with your child early on as to what they can expect from you.  It also helps manage the child’s expectations when they start having dreams of going to a more expensive university that may cost $40,000 to $60,000 per year. It helps the child understand that additional scholarships will be needed to make up the difference.

We have found with our clients that when this is discussed early on that there is less friction in the college selection process.  Children often don’t consider that the cost of college is paid with after tax dollars.  If a parent is in the 25% federal and 5% state tax bracket that it takes about $28,000 of income per year to end up with $20,000 to pay for college or $112,000 of earnings over 4 years to pay for $80,000 of college expenses.

I am not opposed to putting a parents commitment in writing and getting the child to sign it.  It obviously should have caveats in it to protect the parent due to job downsizing or other financial perils that could change things.  Part of the reason of putting it in writing is a case we had where the parent and child thought they had agreed to a commitment, then after the 1st semester when a certain GPA wasn’t achieved, the child claimed that he didn’t know about the arrangement and what his responsibility was. It ended up costing the parent a little more out of pocket but the story has a happy ending as the child graduated and is gainfully employed.

We have some parents who want to pay for 100% of all college costs (room & board, tuition, fees, books, entertainment), the whole bit.  Before you agree to this have a good idea of what that cost will be, especially the entertainment and trips for a possible semester abroad.

Other parents decide to pay for only room & board, tuition, fees, and books.  The entertainment is paid by the child.  The child works in the summer and on school breaks to fund their own entertainment costs.  We generally find the kids make different choices on what to spend their money on when it is their own money.

We have had parents who pay a percentage of college costs based upon the child’s GPA.  This may mean a child has to take out loans to pay for the next semester when there was an underachieving semester.

Some parents have said they will pay for four years of college.  If it isn’t done in four years the rest of college is at the child’s expense.  This encourages the child to get their courses lined up and not change majors too frequently and get sufficiently good enough grades to not have to take a course a second time.  Make sure that the child’s major can be accomplished in four years.

One parent who had planned to pay 100% of college made an agreement with their kids that if they earned scholarships (which reduce the cost the parents had to pay), the parents would give the child 50% of the scholarships in cash at graduation.

One parent said they had set aside a certain amount of money for college (I believe it was for a state school education) and told their child if they wanted to go somewhere more expensive it would have to be via scholarships or the child taking out loans.  Once the money was gone they were done with their funding.

We had one child who went to a community college while they were in high school and got a lot of college credits.  This reduced the number of years they needed to attend college.  If you go to a community college to get a lot of the basic education courses done while living at home, make sure those credits will transfer to the college you plan on attending.

Bill Reno CFP®