Parents today are often hit with a financial triple whammy. They need to balance helping their children pay for college, saving for their own retirement and often taking care of aging parents.
Meanwhile, the cost of higher education has skyrocketed in the past few decades, with the 2017-18 average in-state tuition and fee price over three times as high as it was in 1987-1988, according to the College Board.
Student loan debt has become the norm. More than 44.2 million Americans owe $1.5 trillion and the average student loan debt for graduates from the class of 2017 was nearly $40,000, according to Student Loan Hero. Regardless if they’ve saved for college or not, one in three parents say they will help their child pay back some or all of their student loans, according to a recent survey by College Ave Student Loans, an online lending company.
While it’s good that parents are willing to help their kids, college financing should not come at the expense of other long-term financial goals, according to financial experts.
Here is what financial advisors and college finance experts say to consider while deciding how to pay for your child’s education.
Make sure your kids know what they need to about your financial situation. Have you been saving for them to go to school? Will they need to take out loans, or will you help them? What field do they plan on going into and what will their future salary potentially look like?
Even though it may be a difficult conversation to have, it’s a necessary one to make sure you’re on the same page.
“I always tell people you will use your SAT score once, but you will make a monthly payment hundreds of times,” said Joe DePaulo, CEO and co-founder of College Ave Student Loans. “I wish kids understood this more so it doesn’t put the parent at risk and impact their retirement and future financial plans.”
Once you have that conversation, you can work together to compare all the options available.
There are many different events that could impact college planning. Having to care for an elderly parent, having multiple children that are college-bound or even getting divorced or remarried will probably change how your family decides to pay for school.
Most states require divorcing couples to address the cost of college in their divorce agreement, said Lili Vasileff, author of “Money & Divorce: The Essential Roadmap to Mastering Financial Decisions.” Even if it is painful, this decision making should include children.
“I think open communication is essential,” said Vasileff. “Giving choices and full information to children is a good thing.”
If your family is in a complicated situation that makes it difficult to prioritize a finite amount of resources, Vasileff said that it’s helpful to consult an objective third person who is knowledgeable of the topic to go over options.
“It’s tinged with emotion and fairness, which is what makes it a charged topic,” she said.
“An important fact for parents to remember is that there are financing options available for their child's education but there are no loan options when it comes time for their own retirement,” said Kirk Licata, a certified financial planner in Atlanta.
While many parent’s may feel bad about saddling their kids with debt, it is important to remember that they have the benefit of time to pay off the loans after graduation. After they get a degree, their earning power will increase, said DePaulo from College Ave Loans. But parent's salary, however, will not increase because of the degree.
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Ultimately, prioritizing retirement is also helping your children.
“In the long run, you’re giving them a great gift which is independence from their financial support later in life,” said Jim Shagawat, a CFP with Windfall Wealth in Paramus, New Jersey.
There are many options for financing a college education, and it’s important for families to consider all of them before making a decision.
“The beauty of it is that you don’t have to use one way to pay – you can use all slices of the pie,” said Jodi Okun, founder of College Financial Aid Advisors.
Families should look first at how much they have saved for college, then go on to ‘free money,’ such as certain grants, and scholarships. Then, consider what loans are available to the student — federal or private- and the parents.
If you’re considering private loans, it’s likely the parent will need to be involved as a cosigner or borrow the money themselves.
“Borrowing a private loan means you have to read the fine print, you have to understand the terms of what you’re signing up for,” said Kathy Ruby, director of college finance at College Coach.
In addition, you should calculate your monthly payment and how much interest will be paid over the life of the loan, Ruby said.
“If you can’t afford to at least pay the interest, it’s probably a sign that you’re in over your head,” said Ruby.
For families that have the means, Okun said to ask colleges about payment plans, which are usually run through a third party and let you pay for tuition in agreed upon installments. This is a great way for families to space out payments without accruing interest, she said.
Students should also consider a range of schools, from community college to state universities and private universities, DePaulo said.
“There are so many options,” said DePaulo. “Get out ahead of it, have a plan.”