A college degree can be affordable if you hatch a smart plan. Extra credit for starting before high school.
America’s collective college debt is now almost $1.5 trillion. Yes, trillion. (If you stacked that many dollar bills on top of one another, they would reach more than 99,000 miles into the atmosphere, which is about 40 percent of the way to the moon!) Astronomical numbers aside, there are plenty of smart ways to plan for the expense, says certified financial planner Joe Messinger, cofounder and director of college planning at Capstone Wealth Partners in Dublin, Ohio. Here’s how to help your family emerge from those college years in solid financial shape.
1. Save what you can.
Most families pay for college through a combination of savings, monthly cash flow, and financial aid, says college-financing expert Mark Kantrowitz, publisher of Savingforcollege.com. If you can start saving 10 or so years before college, put a chunk of money into a low-fee index fund. If you can start even earlier, consider opening a 529 plan, in which savings grow tax-free for qualified educational expenses. (To maximize your family’s financial aid prospects, Kantrowitz says it’s best for a parent to own the 529 account, not a grandparent, and to have the child as the beneficiary.) But it’s never too late to start. If you’ve got a ninth grader, tuck $250 a month into a high-yield bank savings account. In four years, you could have more than $12,500.
2. Engage kids early.
“Make it a family decision that at least 25 percent of every financial gift from grandparents or earnings from babysitting or other job goes into a savings account for college,” suggests certified financial planner Beatrice Schultz, co-owner of Westface College Planning in Vancouver, Washington. Consider upping that percentage if your kids take on regular after-school and summer jobs in high school. And make it a family project to scope out scholarships long before senior year. Go to cappex.com for a free database of scholarships.
3. Get an estimate of what you may pay out of pocket.
Colleges use a formula to figure out how much they expect your family to pay out of pocket versus how much will be covered by aid. The Expected Family Contribution (EFC) is an estimate of the amount your family can put toward one year of college—measured by factors such as income, assets, the number of kids in college simultaneously, and possibly home equity—and is used to determine how much federal and institutional aid you’re eligible for. When your kid applies to college, you submit one or more detailed financial applications. The federal one is called the Free Application for Federal Student Aid (FAFSA). Many colleges also require the CSS Profile application for institutional aid, and some have their own financial aid application. From the information on these forms, the school will determine your EFC for freshman year. You can get a general estimate right now with the free EFC calculator on collegeboard.org. “Focus on schools where the out-of-pocket expenses make the most sense for your budget,” says Messinger.
4. Don’t focus on sticker price.
Some good news: Private colleges often offer deep discounts for students they’re eager to have enroll. (The average discount for college freshmen in 2017 was 50 percent.) Search a school’s website for its average net price—what the typical family pays after grants and scholarships are factored in. “With a lower net price, a private college could cost less than an in-state public school,” says certified financial planner David L. Martin, president of Advanced College Planning in Rocky Hill, Connecticut. Divide the estimated net price for freshman year by your adjusted gross income (on your federal tax return), says Kantrowitz. If the result is above 25 percent, that’s a sign the college may require you to borrow too much.
5. Fill out all the aid forms.
Don’t assume you won’t qualify for need-based aid, especially if you’ll have multiple kids in college at the same time. All students can get federal loans, regardless of family income, but they must submit the FAFSA to be eligible. Martin advises clients to also fill out all other aid forms. Think of them as insurance. An illness, layoff, or divorce can drastically change a family’s needs. “Many schools won’t consider you for aid later if you don’t file the FAFSA the first year,” says Martin.
6. Limit borrowing to one year’s income.
Once the acceptance letters arrive, stay focused on making the financially smart choice. You can always appeal for a better aid package, but if the final offer means your family’s EFC is more than you can cover from savings and cash flow, carefully consider a safe amount to borrow. Kantrowitz says that if students borrow no more than what they expect to make their first year out of school, and if parents borrow no more than a year’s gross income (to pay for all kids combined), they should be in good financial shape.
7. Students borrow first.
Federal loans for undergraduates for the 2019-2020 academic year have an interest rate of 4.5 percent. That’s lower than the 7 percent rate for Federal Direct Plus loans, which parents can take out to pay for a child’s education. Direct Plus loans also have a loan fee (the amount deducted from each disbursement) of 4.25 percent of the loan amount. “I encourage having the student borrow first. It’s a way for them to get some skin in the game,” says Schultz. Students with need-based loans are not charged interest while they’re in school. And student loans have a fantastic built-in guardrail: The current annual borrowing limit ranges from $5,550 for freshmen to $7,500 for juniors and seniors, so sticking to federal student loans protects against overborrowing. Avoid private loans, which often have variable interest rates (all federal loans are fixed-rate) and lack the flexible repayment options offered to federal-loan borrowers.
8. Stay on schedule with loan repayment.
Check with your servicer; many offer a six-month grace period before you’re required to start paying back the loan. Behind on your repayment? Make it a priority. Being late with payments or defaulting could sink your credit score. Kantrowitz recommends aiming for the standard 10-year payback period for federal loans. Even though there are repayment plans that give you more time, you’ll end up paying more in interest. Enroll in autopay, which will pull your payment from your bank account each month so you stay on track. Some servicers will give you a 0.25 percent reduction on your loan interest rate for doing so. If you work full-time at a nonprofit or for the government, you may qualify for the Public Service Loan Forgiveness Program, which will wipe out any remaining debt after you make 120 consecutive on-time monthly payments.