MONEY-SMART KIDS


The New Realities of Paying for College

Janet Bodnar

Shrinking investment values and loan availability are forcing families to pay attention to the economics of attending college. And that's a good thing.



One positive outcome of the current financial downturn is that families are taking a hard look at the economics of attending college. Students report lowering their sights from pricey private schools to less-expensive public colleges and universities, many of which are reporting big increases in applications.

Why do I think that's a good thing? Because despite steady increases in tuition over the past decade, families have apparently downplayed costs in the college equation. For instance, a startling 70% of parents and students surveyed by Sallie Mae said that a student's potential postgraduate income wasn't considered or didn't make a difference when deciding to borrow.

That's a recipe for financial disaster -- as in the case of one of my young co-workers, whose father informed her when she graduated that she was on the hook for $84,000 in student loans. "If I had known that," she says, "I would have gone to the University of Massachusetts instead of Boston University."

That makes sense financially, considering that the total average cost of attending a four-year public school is $18,326 for the 2008-09 academic year, according to the College Board -- about half the cost of a private school, which comes in at $37,390. In Kiplinger's 2008-09 rankings of the top 100 values in public colleges and universities, fewer than two dozen schools cost more than $20,000 a year for in-state students.

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It's too early to tell how the current situation will play out, based on the severity of the economic downturn and the amount of financial aid awarded by schools next spring. But it's important under any circumstances to talk with your teens before they apply to college to let them know what fits into the family budget and how much they'll be expected to contribute.

To help families decide how much debt is sensible based on a student's future earning power, parents and students can use the Student Loan Advisor calculator at Finaid.org or Sallie Mae's Education Investment Planner.

For example, let's say your son plans to major in accounting, with a projected starting salary of $49,100, as estimated by the Student Loan Advisor. And let's assume a student-loan interest rate of 6.8% (the going rate on unsubsidized federal Stafford loans). If he wants to hold his monthly loan payment to 10% of his income and repay the debt over 10 years, his payment would be $409, and his maximum manageable debt load would be about $35,600.

On the other hand, if your son wants to be an elementary-school teacher, with a projected starting salary of $35,900, his monthly loan payment would be $299 (assuming the same criteria) and his manageable debt load would be about $26,000. (For more guidance on paying for college, see Does it Pay to Go to a Big-Name School? and Keeping College Debt Under Control. For a look at the best deals on student loans, watch Borrow Smart, our free online video.)

It's no wonder that more families are considering creative alternatives, such as attending a community college -- where the average annual tuition is $2,402 -- for a year or two.

One California mother, who wants her daughter to attend an elite school in the Northeast, worries that it would be "crushing" if her daughter had to spend her first two years at a community college. But if money is an issue, that's far better than saddling herself or her daughter with a crushing weight of debt.




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