Advertisement
Paying for College

The New Realities of Paying for College

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.

Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement - Article continues below

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.

Advertisement

Most Popular

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020

Recommended

7 Ways the Pandemic Will Change College Forever
college

7 Ways the Pandemic Will Change College Forever

Colleges and universities face steep budget cuts, enrollment challenges and new types of competition as a result of COVID-19. We cover the changes you…
June 19, 2020
How to Fund a Memorial Scholarship to Honor a Veteran
college

How to Fund a Memorial Scholarship to Honor a Veteran

With the help of a college or community foundation, you can establish a scholarship in the name of a loved one to help students in perpetuity.
May 24, 2020
How to Endow a Scholarship to Honor a Veteran
college

How to Endow a Scholarship to Honor a Veteran

You may be able to set up a scholarship fund through a college or community foundation, or support educational programs through a charity that special…
May 24, 2020
Gifts for Grads to Build Good Money Habits
college

Gifts for Grads to Build Good Money Habits

Today’s graduates aren’t destined to share the same fate as past generations, so it’s important for them to ramp up their money skills.
May 13, 2020