This time of year, parents of high school seniors may find themselves experiencing dual emotions related to their kids – pride over the top-tier colleges their child has been accepted to and shock over how much it’s going to cost. Another emotion might quickly set in for those who haven’t saved enough for college – panic over how in the world they are going to pay for their child’s dream college. With the average annual all-in cost of a private university now approximately $50,000 and some elite schools in the $70,000 range, many people can’t easily pay for college out of cash flow. What’s the panicked parent to do?

While the best solution is to start saving for college in a 529 account when your child is very young, if you find yourself wondering how you can afford your child’s dream college, here are a few tips:

  1. Understand how much you can afford. Ideally before your child has been accepted to and gotten their heart set on a particular school, it’s best to sit down and figure out what you can realistically afford for college, either by yourself or with the help of a financial planner. It’s important to take into account your big picture and other important financial goals. College has gotten so expensive that paying for it without consideration of your other important goals may have serious impacts on the attainability of your other goals, such as when you can retire, your standard of living in retirement, and sending younger children to college.   As I like to tell my clients, there are many ways to pay for college, but only one way to pay for retirement. Furthermore, if offered the choice of going to a less expensive school or supporting their parents in retirement, most kids would choose the less expensive school.
  2. Understand your loan options. In general, take advantage of any federal loan programs before you consider accessing private loans. Your child can take out student loans under the Federal Direct Student Loan program (formerly known as Stafford loans), even if they don’t demonstrate financial need. This program offers low, fixed interest rates (currently 3.76%) and flexible repayment options, with attractive forbearance and forgiveness benefits. The catch is that there are low limits on how much can be borrowed under this program (e.g., $5,500 in Year 1, maximum of $31,000 for all years). Parents can borrow using the ParentPlus program, at slightly higher interest rates (currently 6.3%), but still with attractive forbearance/forgiveness options. On the other hand, private loans, offered by banks and other institutions, require credit underwriting, typically have variable interest rates that are also much higher and don’t have the flexible repayment options and attractive forbearance and forgiveness benefits.
  3. It’s ok for the child to have “skin in the game”. While many parents aspire to paying fully for any school their child wants to attend, this may not be financially realistic and not in the best interest of the child. Research shows that kids who have to pay a portion of their college expenses do better academically. However, saddling them with debt loads disproportionate with their future earning potential can have negative consequences as well, so it’s best to limit the amount of debt students take on and instead encourage them to work part-time to help pay their way. A good rule of thumb is to not allow them to take out more debt than their starting annual salary is likely to be upon graduation. Borrowing the maximum under the Federal Direct Student Loan program would result in a student debt load at graduation of $31,000, probably manageable for most career paths.

In summary, don’t despair if you haven’t saved enough for your child’s college education. With a bit of creativity and effort, you can find ways to pay for college that don’t bankrupt your retirement plan or quality of life.