Most families overpay for college. Here are six danger signs that you might be heading in that direction too.
You have not made a budget for college.
As a parent, I know how much we want to tell our children that anything is possible. All of us are guilty of saying something like this at some point. When it comes to college, it comes out as “Apply to whatever schools you want and we’ll figure out a way to pay for it.” Applying to colleges without any sense of what their net cost will be and what you can afford is a recipe for disaster.
Both the parents and students need to know the family’s budget for college. This includes knowing what would be a reasonable amount of debt to take on as well. A good rule of thumb is to keep student loan debt in sync with the expected first year’s income. If the student’s loan debt is less than their first year’s income, the student has a good chance of being able to repay their student loans.
As for the parents, they need to assess how much, if, and when they can borrow by considering factors such as their mortgage debt, credit card debt, retirement plans, other future obligations such as weddings, a new car, etc.
You send your child to college to figure out what they want to do.
Colleges love to say come here as an undeclared major. Take a variety of courses in different subjects and you’ll figure out what you want to do. The reason colleges love this so much is because students end up taking a lot of classes they don’t need, which ends up generating more revenue for the school. It’s gotten to the point where less than half of college students graduate within four years. In fact only 64% of students graduate in six years with a four-year degree at a public university.
However, students who have a sense of purpose and know the general direction they are going in life tend to perform better academically and graduate sooner. Yet most parents don’t know how to help their children in this way.
You believe your child deserves to go to their “dream” school.
I work with a lot of affluent parents. These families aren’t going to qualify for any need-based grants. But even so, that doesn’t mean they can afford to let their children go to any school without consideration of the cost.
I remember one family I was helping who had twin boys. One son was looking to apply to Colombia, University of Southern California, and Brown University. The other son was looking to apply to Colombia, University of Rochester, and Johns Hopkins University. Both sons had good enough grades to arguably be admitted, but nothing worthy of earning scholarships.
When I talked to the parents about the school selection, their attitude was their children deserved to go to whatever school they wanted because they worked so hard for it. Look, as a parent I get it. We want the best for our children. We want to reward them for their hard work. But we have to keep realistic expectations when it comes to money. So when I pointed out that if both sons attend one of their top three schools, the parents will pay over $500,000 for college, they got squeamish.
It doesn’t matter how rich you are, paying over half a million dollars on college is a big hit to your finances. As it turns out, their financial advisor was also telling them the same thing and begging them not to do it as it would put their lifestyle plans for retirement in jeopardy. So instead, I helped them find other really great schools yet offered scholarships to their sons. Now the parents are on track to pay about $150,000 for both son’s college education.
You’re counting on scholarships to pay for college.
Admittedly the previous family that I just spoke about ended up being a unique success story. I say that because scholarships are not a strategy that you can count on. Private scholarships are the smallest source of financial assistance. They account for about 5% of the available financial aid. As for full ride scholarships from colleges, there are only about 300 available.
As for athletic scholarships, just 2% of high school athletes end up getting an athletic scholarship. And only some of these are full ride scholarships, which are usually reserved for the sports that make the most money such as football and basketball.
You don’t apply for financial aid.
Sometimes I meet families who assume they won’t qualify for financial aid. But truthfully you don’t know for sure until you actually apply. I’ve met families whose income was $100,000 and they qualified for a good amount of financial aid. And I’ve met families with the same income but didn’t qualify for financial aid. My point is you should not assume that you won’t qualify. There are more factors than just your income.
To get an idea ahead of time, you can use a school’s net price calculator. Or someone like me, who is a former director of financial aid, I like to run FAFSA estimates of the Estimated Family Contribution (EFC) and I compare that against a school’s cost of attendance plus I research each school’s historical financial aid awards so I can estimate how much free money we can expect to receive.
Here’s an interesting statistic - the U.S. Department of Education reports that about 20% of undergraduate students never apply for financial aid. Because of that, more than a million students each year could have qualified for the Pell Grant if they had filed the FAFSA.
The only semi-valid reason I’ve heard from families as to why they didn’t apply for financial aid is because they were concerned it would hurt their child’s chances of being admitted. I will say that some schools’ admissions offices are blind to a family’s financial circumstances and some schools’ admissions offices do know a family’s finances.
For the most part, if a college admissions office does look at a family’s financial situation, it’s because they don’t want to admit a student who they know cannot afford it, hence tempting the family to take on far too much loan debt just to send their child to their school. I know many parents deplore that stance, but honestly I don’t hate the school’s viewpoint. It’s a sensitive issue for sure. When I work with families, I explain I help the student find colleges that are good fit. I define a good fit in terms of academics, social elements, but also in financial terms.
Asking for help too late in the process.
I like to compare going to college to buying a home. When you buy a home, do you go directly to the homeowner and make an offer on their house, sign a contract, and then subsequently go to a real estate agent, order inspections, and get approved for a loan afterwards? No – that would be backwards. Instead what we do is first go to the bank to get an idea of how much of a mortgage you qualify for. Then you find a real estate agent to help you find the best home in the best neighborhood that you can afford.
Unfortunately most families approach college backwards. The financial planning for college costs should happen as soon as possible. Many families talk to me about saving for college right after their children are born. Some talk to me when their children are in elementary school. But once we hit 9th grade, we’re no longer saving for college in the future. We are now dealing with late-stage college funding issues. This is when we have to figure out how to make our current income and assets stretch as far as possible. We need to have a very efficient plan in place. But we also need to calculate our budget for college and stick with it.
Also keep in mind the college application begins with the 9th grade. Lots of parents reach out to me when their child is in their last few months of their Junior year. By that time, there is only 8 months left to do 2 ½ years’ worth of education consulting, college searching, creating strategic extracurricular activities and such. It’s not possible to do everything in that short time span. So some things get cut and we do the best we can with the short time span. Depending on the circumstances, I may get the family good results or really great results. But if you want to get the best results, education consulting should begin in the 9th or 10th grade.
In the end, remember hope is not a plan. The most successful people in the world surround themselves with experts smarter than them. If you have any concerns about college for your child, reach out to MAC Insurance & Financial Services today.