Should parents pay for their kid’s college? After a mortgage, the cost to attend college will be the next most expensive thing a family tries to pay off.
The average annual cost for an in-state public school is a little over $25,000. The average annual cost for an out-of-state public school is about $40,000. However, less than 40% of students are able to graduate within 4 years at a public college. It’s better to assume it will take 5 to 6 years.
If your child wants to attend a private college, the average annual cost is around $55,000. However, there is a better chance your child will end up graduating in four years compared to the public-school options.
When you start extrapolating the cost of college over the years, and possibly over multiple kids, trying to figure out how to pay for all this can feel like an impossible task. Honestly, most families screw this part up. You hear in the news all the stories about the skyrocketing amount of college debt both the students and parents are undertaking. You hear people asking for loan forgiveness. There are countless stories about retirees still trying to pay off college debt. It’s a financial disaster.
Frankly, all of these problems can be avoided, or at least minimized, if families would simply hire an experienced college planner who factors in college costs, the family’s budget, and the student’s career aspirations.
Before you answer the “Should you?” question, you have to answer “Can you?” Can you help pay all, or part, of your child’s college costs?
Can You Afford to Pay for College?
The first thing to consider is whether or not you can afford to pay for your child’s college education. To do this, you must get an accurate estimate of each school’s “net-cost”. Net cost is the school’s estimated cost of attendance minus any free money for which your child qualifies. A student may receive free grant money based on eligibility as determined by the Free Application for Federal Student Aid (FASFA) or they may earn free scholarship money based on their merit.
Once you have an estimate of a school’s net cost, be sure to extrapolate that out over the number of years they’ll need to graduate. Again, if they attend a public university, it’s unlikely they will graduate within 4 years. You also need to consider whether or not you have multiple children attending college.
Then you need to assess if you have saved enough money for college. If you set money aside in a 529 savings plan, a life insurance plan, or some other tax-advantaged savings vehicle, you are a leg up on the non-savers and you might be able to better afford those college costs. Note, this does not mean stealing from your retirement savings to help pay for college. That generally is the worst solution in the long term.
Assuming you have not saved enough to pay for your child’s college in its entirety, next you have to assess the possible loan options and their costs. I outlined your loan options in another MAC blog, https://www.macifs.com/blog/2022/05/best-college-loan-options-for-2022-2023. Using a financial calculator, estimate what the monthly payments would look like if you were to finance the net cost of college minus your college savings. Can you reasonably afford the loan payments without compromising your other financial obligations, such as saving for your retirement? Will a higher debt-to-income ratio hurt you if you need to borrow for something later on, for example if you want to refinance your home loan or maybe you want to finance a new car. If you are still able to adequately contribute to your retirement plan and still have a favorable debt-to-income ratio while paying the college loans, then you have a much greater ability to help pay for your child’s college education.
Try a Hybrid Approach to Pay for Your Child's College
Parents paying for college doesn’t have to be an all-or-nothing situation. Generally I recommend the student take out their allocated Direct loans that come from completing the FAFSA (refer to the previously noted article about loan options). As for how much the parents contribute, maybe you offer to help pay for room and board costs and your child borrows the tuition or vice-versa. Or maybe you offer to co-sign on student private loans and help cover the payments while they are enrolled in college. But after they graduate, the student takes over the payments. Just know that if you co-sign, you are legally on the hook until that loan is paid off. It would be wise to consult your financial advisor in this process.
The Bottom Line – Should You?
College is expensive. Before you think about whether or not should you help pay for college, you have to calculate if you actually can pay for college, or at least help partially pay for college. Remember to take into consideration your financial needs, such as retirement. You can’t borrow for your retirement so you cannot afford to compromise that.
Consult your financial advisor to help you determine if, or how much, you can afford to help pay towards college. Once you’ve calculated how much you can afford to help pay for college, then you can ask the question of whether or not “Should You?”
Assuming you have the financial means to help pay for all/part of college, “Should You?” is a very personal question that ultimately only you can answer for yourself. Many parents want to help pay for college just so their child has minimal, if any, college debt. It’s true that the last two generations of students have graduated with so much debt that they are postponing other major life decisions, such as marriage, purchasing their first home, etc.
Do you want your children to be burdened with excessive college debt? Is helping pay some, or all, the college costs the right answer? If you want to help alleviate the financial stress that comes from college debt, go ahead and do so, but only up to your own financial means. Or do you consider alternatives, such as trade school instead of college?
This is where hiring a College Planner who helps students think about possible careers can be a life saver. These kinds of College Planners can help steer your child towards the right colleges, including ones that fit your budget. Or their work may help your student discover a college alternative is the better route for them.
Have questions? Contact your in-house college planner at MAC Insurance & Financial Services today.