What I learned from funding my kids’ college...and what I wish I knew sooner
There are few events that bring that intersection of money and emotion more than funding your child’s college.
Numbers are logical but money is emotional.
Over the last several years, I have watched my kids apply to college, get accepted and work toward their degrees. I still am writing tuition checks in 2023. Can I tell you a secret? I enjoy writing the check because I personally love learning and college. It’s great to see what it sets up for them and know what it signifies for them.
But years ago, I was a parent who was hearing confusing anecdotes along the way and could have benefited from a bit of advice…and some of it was really wrong but confidently stated. I now help families in an unbiased manner where I am compensated only for my time and work product without selling other financial products in any way. Here are some key thoughts that I wished I had heard when my kids were in elementary school:
INITIAL THOUGHTS ON FUNDING COLLEGE
Save. Save what you can when you can. If your child is 12 or under and you can put away some portion of money in a 529 beginning today through their senior year, I would generally recommend it. That is what we did. It can certainly require saving $500+ per month for eighteen years to fully fund a college education, but savings $200 per month can take the sting out of the first year or two as you identify additional funds. For some, saving money in an unrestricted/taxable investment account (such as a brokerage account at Fidelity, Schwab or Vanguard) is a perfectly good option as well in lieu of a 529. College funding doesn’t need to be in a separate account or fully funded. Some parents have blended funds and some will “cash flow” college on a year by year basis when their kids are in school.
Understand your household financial situation and figure out a rough college budget during your child's sophomore year in high school. Do this so that boundaries and parameters can be set before college lists are developed. Make your budget inclusive of your other financial goals (such as retirement). Do not sacrifice your retirement for your child’s college cost. I can virtually guarantee you that, if your child tests well and/or has good grades, their high school counselor will encourage them to apply to prestigious schools that cost $75,000 per year and don’t offer merit-based financial aid. Every year, there are kids who lock themselves in their room and cry because they got accepted to a school that their family cannot afford. Don’t be that family.
Communicate with your kids about what your budget is and who will pay for what. These are statements that are healthy to say; let’s normalize saying them:
“We have saved $75,000 to pay for your college. We would expect you might have to borrow up to $25,000 and earn another $25,000 through your work. We don’t intend to co-sign your loan; they are your responsibility”
“You are our oldest child, we have three kids and are committed to helping each of you as equally as possible. We need to factor this into your choice of schools that you apply to.”
“We have the funds available to fully fund your college, but we need to understand how your choice fits into your career plans before we agree to pay for that particular school.”
You will sometimes hear comments related to “positioning” for financial aid. This relates to taking financial actions or strategies that can enhance the amount of aid your child will receive when you apply for financial aid. This seeks to lower your expected family contribution (EFC), on the FAFSA form, which in turn raises your child’s aid eligibility. Here are my basic thoughts:
Avoid doing extreme things just "to look good for financial aid", such as spending your emergency fund, pay down mortgage, buying annuities, etc.
Do think about the things you are planning to do anyway and how their size and timing might impact your college aid calculations. Items such as home sale proceeds and custodial parent status can have an impact on how your child is viewed for financial aid. Understanding the impact before you do something big. Selling your primary residence and putting $800,000 of proceeds in your checking account will affect your financial aid!
Some of the actions that others may bring up specific to positioning can cross ethical boundaries at the least, so please understand the implications of your actions.
Ask for the qualifications and incentives for those that wish to help you or give you advice on any aspect of your child’s journey to college. My recommendation is to work with professionals that provide clear explanations of their fees and who pays them. There are college counselors that have licenses to sell insurance. That is disappointing but not shocking, as some firms recommend their insurance products to “position” clients for financial aid. However, that wouldn’t be my first choice for where I get my college advice.
SCHOOL SELECTION
Develop a list of schools that includes:
Reach schools are those schools that you’re unlikely to get into, but provide great alignment with your goals if you do.
Target schools are those schools that you have a pretty good shot at. A target school puts you in the 50% range of acceptance, so like a reach school you can’t count on being admitted, but unlike a reach school, you shouldn’t be surprised if you do.
Safety schools are those schools for which you have over an 80% chance of acceptance.
You can estimate how you fit in by looking at looking at sites such as this one in order to build that list. Consider private, out of state and in-state options. Know that private colleges will start with a higher sticker price, but may offer financial aid that will make them competitive. Understand regional preferred options, such as the Western Undergraduate Exchange. It is very location and major specific but is worth considering as you build a list of options.
Do a quick google search on a school’s financial stability, especially smaller private schools. Ask follow-up questions, if warranted. This story on Whittier College is instructive.
Applying to ten schools and waiting until late March to hear decisions is stressful for everyone. Here is a huge stress reliever: apply early to a school that has a rolling admission policy and is a safety or target for you. If accepted, it will take enormous pressure out of the process as you head toward the traditional decision days in March. University of Arizona has rolling admissions and may grant competitive financial aid for certain students.
MORE THOUGHTS ON FUNDING
Run Net Price Calculators, typically available on each school’s website to give you a sense of price and options.
Understand that, while your child is awesome, financial aid and admissions decisions can be challenging for many families. This is especially true at prestige schools such as the Ivy League and elite public universities. If receiving significant aid is your goal, you may have to apply to a less in-demand school in order to be viewed as above average. Your child may not want to hear this, but this can yield some great opportunities if you are flexible.
Be prepared to pay the equivalent of in-state cost for your child. That is roughly $25,000 to $35,000 per year (all-in cost). Improving on that is great, but assuming you will do better could set you up for disappointment.
When you buy a car, you consider more than the sticker price. You also look at gas mileage, maintenance costs, insurance, even tax credits for certain vehicles. As well, with colleges and universities, please consider the all-in cost with questions such as:
Will your current health insurance cover your child or will you have to pay $3000 per year to the university for their insurance? Most schools have strict criteria and proof of insurance that dictates this purchase and eligibility.
What is the financial cost of travel for the holidays, move-in trips, parents’ weekend, etc. These can really add up!
Travel has a logistical and time cost as well for certain locations, especially on impacted weekends and holidays. Getting home for Thanksgiving? Flying in and out for parents weekend? Hermosa to Penn State can be a challenge at times.
Understand student loans and their parameters. A student can borrow up to $27,000 over four years without a co-signer. Additional sums require a parent to co-sign and interest rates vary. While selecting a safe borrowing amount is a personal decision, some would suggest that a total amount that is equal to a child’s first year’s salary is a manageable amount. Debt can restrict future choices and freedom for all of us. Be wise in making these decisions.
Finally, parents and grandparents need to ease up on the “good old days” stories when thinking about how college is funded. Since 1990, the California minimum wage has increased from $4.25 to $15.50. The annual cost of UCLA (tuition and fees only – without housing) has increased from $1,533 to $14,478 (in-state) and from $7,332 to $47,052 (out of state). The ability of any student to pay for their college through summer and part-time work has been greatly diminished. It is estimated that 1 out of 3 college students are “food-stressed”. It’s a different world now.
College opens doors. Be smart and flexible in your choice. Be smart about the choice of major and consider trade schools or other programs if college is not the right fit. A trade school education and apprenticeship paired with basic business education in marketing and accounting can also be a powerful platform for earning and freedom.
I work with clients to independently assess paying for college as part of an overall plan. I do this without selling investment products or requiring asset minimums. In doing so, my help is available to everyone. Reach out to discuss and see if I can help.
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Dave Pedersen is an Advice Only Financial Planner. Based in Hermosa Beach California, he shepherds clients (typically age 40+) through “The Complicated Years”, where they have overlapping goals and need insight from a trained professional. Compensated only for his time and work (and not commissions or management fees), Dave provides true independent insight. Interested? Reach out to discuss further.
Mr. Pedersen is an investment advisor representative of and offers investment advisory services through Hermosa Advisors LLC, a registered investment adviser offering advisory services in the State of California and other jurisdictions where registered or exempted. This communication is for informational purposes. Nothing in this document is intended as legal, accounting, or tax advice, and is for informational purposes only.