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Why You Should Approach Your Child’s College Choice Like Buying Your First Home

Photo of author, Frank Neiderhiser, CFP®.
Frank Neiderhiser, CFP®
Regional Manager and Financial Strategist

Saving for college is hard enough. Tack on the growing cost of a college education and the ongoing student debt crisis, and you add even more stress to this life changing decision. The thought of your child starting their career with a massive debt burden can make the entire experience overwhelming. As with all large financial decisions, proper preparation is the key to making the right decision.

Too often, paying for college is not considered with the same attitude as other major purchases. The conversation with your child about college choices may start something like “We have saved X amount of dollars, where do you want to go?” or “What colleges are you thinking about so we can try to pay for it?” But actually, this runs counter to how most people think about other major purchases.

Think about it, home buyers rarely find the home they want before considering if they can afford it. Typically, they first go through a process to determine how much can they reasonably take out of their savings, what mortgage amount is affordable based on their family income, and what other financing options are available. Then the house shopping really begins! Selecting the college or university your “pride and joy” will attend should follow those same careful, deliberate financial steps.

Step 1

The first step is to review the resources available to your child. Is there a college savings plan or earmarked money that has been saved for your child’s education? How about ongoing capital you can contribute each year? Can you afford to provide support each year from your income? Did Gram or Pap offer to help? Does your child have any money saved, or are there local or national scholarships for which they can apply? Does your child plan to work during college? Adding these resources together is the starting point to helping finance your child’s education. Think of this as your ‘down payment” but, unlike the home buying process, you will be spreading this amount out over years of enrollment.

Step 2

Next, consider how much is a reasonable amount to borrow over four or more years of college. As you did with a mortgage, you do not want to borrow too much and have it upset long-term aspirations. For student borrowers, a good rule of thumb is to not graduate with debt higher than your first year’s salary. By following this rule, your child will keep their loan debt manageable as they start their career. Study average career salaries and regional job availability to gain invaluable information. Of course, parents may also have access to borrowing sources, but be careful of the interest rates and fees involved. These loans are not forgivable and are an obligation to you, not your child.

Step 3

Lastly, consider needs-based and merit-based aid that may be available as you start to review schools that fall into your now created budget. The Free Application for Federal Student Aid (FAFSA) form and Expected Family Contribution (EFC) are the starting point, as this information is used by the federal government and institutions in determining what money is available. Being familiar with how this information is calculated and used is beneficial when considering schools. Consult your child’s high school guidance or registrar’s office if you have questions.

By following the above steps, you will be on the right path to making an intentional financial decision about college planning and spending – and ultimately help to Master Your Wealth.

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