We heard from some SMI members recently who asked for guidance on paying for college for their children. What follows is a brief description of their situation (some facts have been changed for confidentiality purposes) along with my response. What other suggestions would you offer them?

The Situation

The couple—we’ll call them the Savers—have been dutifully saving for their kids’ future tuition bills for 15 years. Their eldest, a high school senior, has been accepted by a prestigious university. The problem is that the school’s Expected Family Contribution—the amount the school says they can afford to pay—will drain their college savings fund before their son’s sophomore year is over. Oh, and they have another child who will be college age in about six years.

The Savers are understandably proud of their son and would love to see him attend the well-regarded university that has accepted him. Should they—or he—take out loans to cover the gap? Depending on how much they could cover with cash flow, that could amount to $60,000 to $100,000.

My Response

I feel the Savers’ pain. Their son is obviously very bright. It would be deeply satisfying to see him attend such a good school. And they have done the right thing by setting aside savings for many years.

My advice?

First, while they have a decent amount in retirement savings and a fair amount of equity in their home, don’t tap either one. It would be unwise to jeopardize your own later years’ funding by raiding this money for college funding.

Second, make an eyes-wide-open decision about debt. Run some scenarios. Put some real numbers in front of your son to help him see his options and the ramifications. Tell him how much you can help him, how much he’ll have to come up with (by working part-time during school and full-time in the summers, and through loans), figure out the monthly repayment amount for the loan, guesstimate his future salary based on conservative assumptions for his chosen field, and show him how a loan will impact his monthly budget once he gets out of school (We have recommended spending guidelines on our web site and I'm hard pressed to see how a monthly student loan payment can work). 

My guess is he won't want the ball & chain of a student loan strapped to his ankle for the first 10 years of his post-college life. (A heavy student loan burden has been shown to impact everything from the types of jobs new grads take to when they marry.) That will likely point him toward a more affordable school.

That's a very disappointing conclusion. I get that. But there's just a hard reality here. If you don't have enough in savings to cover the cost of the school he’d like to attend, the options boil down to borrowing or going to a more affordable school.  

Third, if he is really intent on going to the prestigious school, consider: 

  • Having him go to community college for 2 years and then transfer to his preferred school
  • Encouraging him to take a year off to work and build savings before going to college
  • Looking into joining the ROTC
  • Seeking funding through one of the new college-focused crowd-funding companies
  • Seeing if there's a co-op program available for his field of study
  • If one of you is not in the paid workforce, join the paid workforce and pay for college with cash flow
  • Are there any grandparents who might be willing to help?

Fourth, if none of those options are viable, make the tough decision to have him go to the state school that has the best program for his field. Then make sure he excels in his studies and gets some practical experience in his field before graduation (it’ll be easier to take an unpaid internship if he doesn’t have to work in the summer to pay for school). He'll be so much more freed up to focus on doing a great job in school without the stress of debt hanging over his head. And my guess is he'll find just as good a job as he would of if he went to his preferred school. 

Fifth, to emphasize that last point, the fact that he qualified to get into such a select school is a great accomplishment unto itself. In a study cited in the book "Debt-Free U," students who qualified for a prestigious school but decided to go to an affordable state school instead typically ended up doing just as well in their career as the ones who went to more prestigious schools. If they're bright enough to qualify for the prestigious school, they're certainly bright enough to excel at a state school and bright enough to do extremely well in their career.

What other advice would you offer to the Savers?