Figuring out how a college education will be funded is a huge challenge. Before we get into the main considerations that families need to consider, let’s first clear out a couple of misconceptions.
- Parents are under no legal obligation to pay for their child’s education. (Yes, there are some very limited circumstances, such as when required by terms of a divorce, but for the vast majority of the time, this rule holds true.)
- Working hard during the summer, and even during the school year, is no longer sufficient to fund a college education. Many parents may have paid for their entire education by working menial jobs, but what was possible a generation ago is no longer achievable due mostly to rampant tuition increases.
When making college funding decisions there are no hard and fast rules. It really comes down to what is best for each individual family. Issues to consider include finances, job outlooks, the best interests of the parents, and the best interests of the child.
Here are some of the more important considerations:
Ability to Pay Now
This is a major consideration due to the time value of money.
Student loans often have interest rates that easily outpace nearly all interest-bearing accounts and many types of investments. This means that the money you have today will pay for far more school than the money you will have in 20 years.
Ability to Pay in the Future
This is where the ability to contribute really shifts.
Most parents have far more cash on hand than their children and are in a much better position to help pay upfront. However, as the years go by, the ability for most children to pay for the debt will start to exceed that of their parents.
Looking 20 or 30 years into the future, most parents of college-age children will want to be retired and will likely be living on a fixed income. For students planning on college, most would expect their prime earning years to be in the next 20 to 30 years.
The lesson here is that students may be in the best position to handle the long-term obligations of student loans.
Cost of Education
A family’s ability to pay for college is directly related to the cost of education.
If junior decides to go to a community college or State school, mom and dad might be able to pay for most of junior’s schooling.
However, if junior insists on the expensive private school or overpriced for-profit university, it will be much harder for mom and dad to shoulder the costs.
Parents need to carefully consider the impact that their decision will have on their child.
On one hand, paying for a child’s education can be a valuable lesson on the unending love a parent has for their child and the importance of sacrifice. However, the same action can potentially spoil a child and leave them with an entitled attitude.
What is the best practice?
Figuring out how to pay for college should be a team effort.
Thousands of Americans have made decisions that haunt them to this day. Time and effort spent selecting the right school and funding plan is essential.
College should be an exciting time in life, not a source of hostility or regret between children and their parents. Time spent researching, asking questions, and learning from the mistakes of others could pay dividends.
Does your student loan plan work? Use this checklist to make sure you are not making any mistakes.