Teach Your Children Well-Part 4: Have the College Cost Conversation Early

I see parents let down their college bound kids all the time. Not because they can’t afford to foot the often insanely high bill for a four-year private college education, but because they don’t explain the family’s college finance reality up front. And by upfront, I mean ninth grade. No later. To wait until senior year of high school is incredibly disrespectful to your child. Have the conversation early and you and your child can work together on the best college plan that fits your family’s finances.

Here’s how:

Explain Why Saving for College is Job #2. Job #1? Well that’s saving for your retirement, of course. Look, I know this isn’t easy, but it is necessary that your child understand that there are strategies for finding an affordable school (more on this in a second) and there are loans for college. But there are no loans for retirement. Don’t feel guilty about this. Nor should you make a child feel guilty. Just lay out the reality in a non-threatening way that makes it clear what you think your annual contribution to their college expenses may be. If that’s going to be zero, say so. If $5,000 is reasonable, say so.

Introduce the Financial Safety School Concept. There are two general strategies for reducing your family’s out of pocket expenses for school: choose a private college or university that will be so eager to have your child enroll that they will likely pony up a significant aid package that is true aid, not boatloads of loans for you and your child. The other option is to consider an in-state school; the cost of attendance for in-state residents is typically a fraction of what out-of-state students are charged, and much less than private-school costs.

Build your Borrowing Plan Early. Debt to pay for an education is my idea of “good” debt, but only if it is done with care. I have four rules for smart college borrowing:

• Your Kid Borrows First. Federal loans for kids are cheaper than any other type of college loan. Stafford loans are available to everyone.

• A child’s total borrowing should not exceed their anticipated first year’s salary. College finance expert Mark Kantrowitz pored through student borrowing data and found that putting this limit on your kid’s borrowing reduces the risk that they will be unable to pay back their loans. 

• Parents should only borrow what they can pay back before retirement. The federal PLUS loan program for parents has a dangerous flaw. It allows parents to borrow as much as they want, without any advice on what is a responsible amount to borrow. That’s on you. Listen up: You are to only borrow if you can also stay on track with your retirement saving. And you are only to borrow an amount that you can pay back before age 60-65. 

• No Private Loans. Neither you nor your child is to take out private student loans offered by banks and credit unions. The rates are often variable, and that in itself is dangerous given the likelihood that rates will rise from their current lows over time. And the payback options on private loans are very rigid. Federal loans come with a variety of payback programs, including loan forgiveness for public-service.

By having these conversations sooner than later you are empowering your child. A ninth grader can double-down on getting great grades and building out her extra-curricular resume in pursuit of a solid financial aid package. You are also laying down an incredibly important goal: You want your child to attend the best school possible that also meets your family’s financial needs. That’s not settling. That is setting you and your child up for a very secure future that is not over-run with disappointment and too much school debt.