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The Biggest Financial Mistake College Bound Families Make


One question I see coming up over and over again goes something like this "My child is going to XYZ University, any ideas for loans and scholarships?"

As a financial planner who works with parents to prepare them to pay for all four years of college down to the penny, my heart sinks. You are a parent whose child has already committed to a school, and you do not have a plan in place to pay for it. This is an emotional time for you. You are excited for their child, but anxious about your finances. This situation is ripe for decisions that can affect your finances negatively for years to come.

what to do


Have a Conversation About Money With Your Child


This is the tough part. You need to be honest about the money situation with your child. You've signed up together to make this HUGE investment over the next 4 (or more) years and he or she needs to know what the financial reality is. They may need to get a job to help pay. They may need to live at home for a while. 

And although this is not a particularly pleasant realization, they may have to change their plans more drastically. It may not be possible for them to attend the school they had planned on without you jeopardizing your financial future (more on that later).


Submit the FAFSA


If you haven't already, submit the FAFSA (Free Application for Federal Student Aid). You can submit this for the 2017-2018 school year until June 30, 2018. So even if you find yourself going into second semester without enough money to pay, you can file the FAFSA to get access to Federal Student Loan programs. 

Depending on when you apply, you may have already missed the deadline for state and institutional aid, but getting Federal Student Loan money is better than nothing. Check out my YouTube video on Borrowing for College to get more information on yearly loan limits for student loans, or go to the federal student loan website. These loans are use it or lose it each year.


Assess Your Own Finances

Look back at your budget for the last year and see how much you've been spending on your child. It's likely they've cost you a couple hundred dollars a month that you can use to help pay for college. Are there other ways you can reduce your expenses to help free up cash flow? 

Though not the most ideal solution, it is better to reduce contributions to retirement plans, than it is to cash out retirement savings or take loans from them. Do you have other savings you can use to help pay? Are there grandparents who might want to help out?  


Ask the School About Payment Plans

Many schools offer monthly or other payment plans. Find out which plans are available, and if there are any fees associated with them. These plans can help you spread payment out over the year, especially helpful if your income is variable.


Scholarships

The sad truth about scholarships is that the vast majority of merit based aid is given out by schools themselves. Publicly available scholarships are usually smaller, may only be for one year, and depending on how late in the year it is, may have already been awarded. 

You can certainly search legit websites like these below to see what you find, but they probably aren't the silver bullet you are looking for.


what not to do


Finance it all via Parent PLUS Loans

If you take my advice and submit the FAFSA, you're all of a sudden likely eligible for Parent PLUS loans up to the Cost of Attendance (COA) at your child's school, minus any need-based aid you qualify for. 

I wrote a whole blog post about why these loans suck, and I advise against using this strategy to pay for school. 


Use All Your Home Equity

Many parents tap their home equity to raise cash to pay for college. Beyond the fact that you could lose your home if you can't make the payments, you're also raiding a resource that many count on to help their retirement plan work - either through eliminating their mortgage payment or selling the home and downsizing. 

While using a small amount of home equity might be smarter than other types of loans to cover a SMALL gap, it shouldn't be the primary source of college funding. 


Raid Retirement Accounts

The obvious reason this is bad is that you're spending money earmarked for retirement on something other than retirement. It's made even worse by the fact that you may be subject to higher taxes and penalties on withdrawals for using these funds. 


Think About This as a One Year Problem

This is not going to be a problem for one year. Whatever solution you come up with needs to be able to work for several years. Oftentimes, one bad financial decision leads to another. Parents may find themselves in dire straits financially, when their original intent was to help their child reap the benefits of higher education.

While this goal is very noble, I want to stress the importance of prioritizing your own financial health first. Do you have an emergency fund? Are you contributing to retirement accounts and have you calculated how much more you need to save to reach your retirement goal? Is your family budget healthy? 

The majority of students in college don't graduate in 4 years, with only 56% graduating within 6 years. 37% of students transfer schools at least once. What is your plan if your child drops out?

A plan for how you'll pay (or not) for all 4 (or 6) years of your child's education is the best way to avoid making the biggest financial mistake - failing to plan at all.