Parents: How Much Money Should You Give or Loan Your College Student?
Share the college financial burden with your child.
Sending a child to college, and paying for it, are tasks that are not for the faint of heart. Most parents agree that they want their child to have the benefit of a college education, but the financial burden on the family can be quite onerous. Depending on the amount of financial aid received, sending a student off to college could add thousands of dollars to the family budget - and that doesn’t even take into consideration travel expenses back and forth to campus, semester abroad opportunities, or occasional entertainment expenses.
Even if the family can pay these expenses with a combination of federal and private student loans, there is still a debt load that is accruing in the background that will have to be confronted at some point in the future. What’s a family to do?
A Three-Pronged Approach
- "Free" Money Through Scholarships and Grants: The best way to pay for college is to obtain money that does not have to be repaid. This is usually provided in the form of scholarships and grants. Many are included in the financial aid package right from the college itself, but families can put a full-court effort into searching for other sources of money. These may come from corporations, community organizations or professional associations.
- Available Cash Resources: The next option is to utilize the family's existing cash resources. This could be money that the parents or grandparents have saved since the student's birth specifically for college costs. Some families choose to take money from their retirement accounts or they might borrow against a home equity line of credit. Each of these steps may have tax and long-term financial implications for the family and, in fact, might impact the amount of financial aid granted for the next school year. The other choice is that everyone may be able to pitch in and find creative ways to either earn additional money or cut expenses to pay as much as possible out of existing funds during the college experience.
- Debt: The final option families resort to when it comes to college expenses is to take on some form of debt. Most choose to access federal student loans for both the student and the parents. If they need more money, they often explore the possibility of private student loans. It is crucial to learn exactly what is involved in each type of loan and to find out in advance what the monthly repayment costs will be in the future. Some students or families go so far as to put college expenses on their credit cards, but this leads to debt that has to be repaid immediately, often with considerable interest expense, at the exact time when money is tightest. The tough question to answer is to think about how much debt parents should take on in addition to their existing household costs. These actions may affect the rest of the family or their own retirement, or they could pass the costs on to the student, which may cause a financial strain during the first years after graduation.
There is a school of thought which says that parents who pay for everything are not doing their children any favors. On the other hand, some parents look at it as their responsibility to start their child out on a debt-free life. For most, however, the answer lies somewhere in the middle. Many families are able to endure a certain level of sacrifice, while the student graduates with some debt that will need to be repaid.
The key is to have honest money dialogues with your child throughout the teen and high schools years. Discuss family income and expenses, so there are no surprises when it is time to look for colleges. Let your student know how much money you will be able to afford, so you can select an appropriately priced college together. And don’t wait until graduation to discuss student loans. Have a very clear understanding of who will be responsible, and make sure there will be a realistic opportunity for repayment.