One of the most important steps in many high schoolers' lives is figuring out where to apply to college. For most, they hop on an online search engine, put in a couple of criteria like major, location, type of institution, campus setting, and school size. They end up with a long list of schools and likely pick out a couple whose names they know, maybe where their friends are going, or perhaps one their guidance counselor recommended.
What's the problem, you ask? Is that how you search for a house? Is that how you search for a car? This process completely ignores the financial ramifications of your college choice. It leads to potentially disastrous choices that parents make down the line to risk their retirement, put their homes at risk, or work longer, just to finance their child's choice of institution.
Follow me for a second. Your child comes to you with a list of schools. They apply to several. They get all excited for their dream school. In the spring of their senior year, you receive the financial aid award letters. And surprise! You realize you can't afford any of them given your current financial situation.
So what do you do? Disappoint your child? Many parents can't bring themselves to do this. So they start thinking about their options. Perhaps visiting a financial planner to help them. At this point they can do a few things. Find some more income to pay the bill. Take out loans to pay the bill. Borrow from retirement accounts to pay the bill. Take a second mortgage on their house to pay the bill. And if they do this for their first child, where does that leave them for subsequent children?
It doesn't have to be this way. What happens when you start thinking about buying a house? What is the first thing you do? You figure out how much house you can afford. And if you don't start there, your mortgage lender will quickly drag you there (or at least they should!). At this point your dreams may be shattered because you realize you can't afford as much house as you want. But this is for your own good. It protects you and the lender.
Why isn't shopping for college this way?
We know that investing in your child's education is still a good investment. Here's the thing. It's only a good investment if it doesn't jeopardize your financial future! I'm here to help you protect that future.
So the first step should be figuring out how much you can afford to PAY. At this point ignore your potential EFC (another blog post coming on that soon). I can promise you that what the government says that you should contribute and what you can actually afford, are VERY different numbers. Do it when your child is a freshman in high school, or right now if they're older than that.
- Take a look at your income. How much can you realistically take from current cash flow to pay college bills? Remember that colleges expect to be paid at the beginning of the semester so make sure you start putting that cash flow aside during your child's senior year.
- Does your income allow you to qualify for tax credits while your child is in school? Count those as available funds.
- Do you have any expenses that will go down in the near future - car payments, loan payments, spending less on kids' activities? Are you willing to restrict your lifestyle a bit to save money?Count the cash freed up by those as well.
- Can you redirect some funds that are currently going to savings or retirement accounts? Count those - but only if your retirement is on track.
- Will you have any non-regular funds like bonuses, inheritances, or other income to use for college? Think about counting those, but remember they're not guaranteed.
- Consider loans - that your child will take out. Every child can borrow through the Federal Direct Loan program. They can borrow $5,500 their first year. And if they borrow the maximum from this program each year of four years, they will come out of school with a monthly payment of around $300. That's not the end of the world, and it will help them have a vested interest in their education.
- And finally, if you've saved for your child's college education, count a portion of those (somewhere between 15% and 20% - just in case your child doesn't finish in 4 years).
Add those all up. What do they amount to? Is it $10,000 a year? $15,000? More? Less? That's your budget. It doesn't matter if your EFC is $35,000, you are not going to be able to afford to send your child to a school where your net price is $35,000. Neither the government, nor the college itself knows how much you can afford. Their calcuations are for them - to decide if you are eligible for need-based aid.
So what do you do once you determine how much you can afford? Stay tuned for future blog posts where I will lay it all out.
If you can start by thinking about how much you can afford, you are WELL on your way to making smart financial decisions and becoming an informed college consumer!