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Budgeting for College: How to Balance Expectations and Expenses

Jan 27, 2020 5 min read James Mahaney

Key Takeaways

  • Borrowing money and going into debt now may have serious financial repercussions later on.
  • Be sure to check websites, publications and other sources to get all the information you can.
  • Deciding on a college can be an emotional experience for both children and parents.


As parents, we want the best for our children. While this is especially true when it comes to college, there may be different ways to think about what's “best," particularly in the face of dramatically rising student debt levels in America.

The average amount of student loan debt for borrowers at every age more than doubled between 2003 and 2015. This means it's not just students who are borrowing much more – parents are, too.1

 


Do you hear alarm bells? The effect of higher borrowing is now a growing concern among economists, policymakers, employers and retirement experts. Young consumers already carrying student loans may not be willing to take on debt to buy a house or a car; or if they are willing, they might not qualify.2 What's more, when it comes to retirement, 401(k)s have replaced traditional pensions as the workplace retirement plan of choice. For 401(k) plans to work effectively, individuals must save an appropriate amount, especially at a level that captures the maximum amount their employer is willing to contribute. Carrying student loan debt may jeopardize the golden years if it impacts the ability to save the right amount for retirement.3

So, what's “best" when it comes to our kids' college education? There is more than one way to look at it. Attending what is considered a more prestigious college has often been viewed as the best option for a child, even though the associated cost may be higher. Another school of thought is that it may not be best for a child to choose a college that requires significant student loans if those loans hinder the long-term financial prospects of the child (or parents) after graduation. Tackling this issue with a high schooler is not an easy task. Emotions can run high. Our children have (hopefully) worked hard both in and out of the classroom and, in an era of Facebook and Instagram, face much greater social pressures when selecting a college than their parents did.

Parents may also feel similar social pressure – in addition to self-imposed pressure – and must balance these emotions against the risk that taking on too much debt to pay a costly tuition may burden their children, and possibly themselves.

There is no doubt as to the value of a college education. On average, college graduates make 65% more than their counterparts without college educations.4 However, careful consideration must be given to how much is being borrowed to pay for a degree. While saving for college in tax-advantaged vehicles such as 529 plans and Coverdell Education Savings Accounts is important, so is being educated on how financial aid is awarded. Perhaps surprisingly, schools can vary greatly as to how much “non-loan" aid is offered to a prospective applicant.

The good news is that information is now available in the form of publications, websites, and online calculators to help families become educated on the nuances of how financial aid is awarded by different schools. These tools can help families identify potential schools that will minimize the need for excessive loans.

 

What you can do next

Before the college search process gets too far along, consider the following points. First, recognize that the “best" college choice for a child may mean more than just attending the most prestigious school they can get into. Then, hit the books (and surf the web) to understand how various college options can be financed without impacting your retirement plans. This may involve having a possibly difficult, though important, conversation with your child about family finances.

 

FootnotesSources:

 

James (Jim) Mahaney is a vice president with the Strategic Initiatives unit of Prudential.

 

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