Critical Conversations: Before the Financial Aid Letter Arrives

Yep, you've gotta talk about money

Photo by Alexis Brown on Unsplash

For some high school students and their parents, the fall of the senior year is filled with the anxiety about where to apply, whether to do early decision or early action, and waiting hopefully for the first “you’re in!” messages to start rolling in.

The spring of senior year may have some relief from the anxiety of waiting for admissions decisions but a new anxiety may be brewing: which schools can we actually afford?

(Note, the FAFSA is open and functional, so make sure to get that critical step taken care of ASAP if you haven’t already done so)

College is one of the most expensive decisions many people will make, so it’s key to try to go into it with a clear sense of what it will cost - both out of pocket and long-term in student loans. While many schools haven’t started sending out financial aid estimate letters yet, they’ll be coming soon. That makes now a good time to have (or revisit) some critical conversations about college costs with your student before it’s time to make a decision.

(My next post will cover how to review and compare financial aid letters, which is the next big step in this conversation, so stay tuned for that!)

Time for Some Financial Transparency

Let me be blunt here: If you are uncomfortable talking about money stuff with your kid, you’re going to need to get over it. Well, at least when it comes time to talk about college costs and compare financial aid options.

This doesn’t mean you have to reveal every detail of your financial life, but it’s important to make sure that you’ve talked about the factors that can potentially influence how much student loan debt your kid starts their real adult life with. While every family is different, both in terms of financial resources and values about college/money, I strongly believe that most families should discuss at least some of these topics:

• How much money will parents/family be able to contribute on an annual basis, if any?

  This could be funds from a 529, monthly payments to a college payment plan, or perhaps a lump sum from a savings account. For some families, that number might be $0 or perhaps enough to cover just the cost of books. For other families, that is a five digit number. Either way, I think it can be helpful to start from a perspective of “after we’ve covered all of our living expenses, including retirement savings, what resources do we have to dedicate to college costs?” and come up with a number first, rather than doing panicked budgeting after financial aid letters arrive and your kid has fallen in love with the most expensive option.

  As a reminder, payment plans may be an options, so consider both cash on hand available for lump sum payments at the start of the semester as well as whether you may be able to make monthly contributions instead or in addition to.

• Are there any conditions on parental support?

  This can be an uncomfortable one for some families, which is probably a sign that it’s a necessary conversation. This is also one that parents probably need to have with each other first to make sure they are on the same page. Some things to consider:

  • Would you continue to provide financial support if the student went on academic probation or suspension? Would you want them to possibly attend a more affordable college (like a community college) if they were having to retake credits to rebuild a GPA?

  • If they get institutional merit aid or scholarships but don’t maintain the GPA required to have it renewed, will parents make up the gap? Or have the student take on more loan debt?

  • Will you cover expenses like a study abroad trip? Or summer classes? What about fines or other punitive charges (parking tickets, library fines, disciplinary fines, late fees, etc)?

  • If you are assisting with housing costs, is that only for on-campus housing or will you cover off-campus housing as well? If covering off-campus rent, do parents get a say in where the kid lives and/or who they live with? Who is responsible for security deposits or damages?

  • Do they have to continue to be enrolled full-time?

• Does the kid need to have “skin in the game”?

  What will the student’s level of financial obligation be for college? If they have savings, do you expect them to use part (or all) of that to contribute to college costs? What about books? Living expenses? Optional but fun things like spring break travel or Greek life? Do you expect them to work during college? Different families will have different expectations, but the key is to talk about those expectations so everyone is clear. FWIW, I am firmly on the “students should be paying for something” team because increasing their level of financial independence seems like it should be one of the goals for this stage of young adult life.

• How many years of college will parents support?

  A sizable percentage of bachelor’s degree seeking students will take longer than four years to graduate (the actual percentage varies by type of institution the student attends), so it can be helpful to discuss if parental financial support will be available (and at the same level) for however many years it takes to get to graduation. It’s also a good idea to be clear on whether or not parental support will extend to cover the cost of graduate school, if the kid is considering a career path that makes grad school likely. FWIW, my daughter will start college (assuming they both choose to go) four years after my son, so we’ve let both of them know that whatever help we are able to give them is limited to four years.

• Will you consider taking out Parent Plus Loans?

  Parent Plus Loans are an option for parents of undergraduate students who need additional loan capacity to fund their education and who have a high enough credit score to qualify. These loans are in the parent’s name and must be repaid, regardless if the child graduates or not. In the increasingly unlikely scenario where there is federal loan forgiveness, these loans would NOT be included, so parents who take them out must be fully prepared to pay them back. These loans have a higher interest rate (currently over 9%) than federal loans taken out by students (currently about 6.5%), so they are a more expensive way to borrow, but likely cheaper than private loans. The advice I always give families: do not sacrifice retirement savings to take out Parent Plus Loans!

• Are private loans an option?

  Private student loans (i.e. loans that are not disbursed through state or federal government) are, in my personal opinion, the least desirable form of financial aid because they typically have quite high interest rates, may not have as flexible repayment plan options, and allow for students to take on levels of student loan debt that may be excessive for their chosen degree. The upside? They do provide access to more expensive higher education options for students who may find themselves in the financial aid “donut” (too middle class to qualify for need based aid, too middle class for parents to be able to pay out of pocket at schools that have high costs of attendance). For my family, private loans are a no-go because my son is planning to go into education as a career, so limiting his student loan debt and the size of his monthly payments after graduation is a priority. For us, if we can’t make a school work without private loans, that school is just too expensive for us.

  (Side note: this can be a hard thing for some families to acknowledge but it’s the truth- some schools *are* just too expensive for some families)

• What’s the total student loan target?

  If student loans will be part of the financial plan for college (as they are for roughly half of all college students), is there a cap for how much debt you’re comfortable (or maybe “willing” is a better word) having at graduation? This number will likely vary by family, but my family’s guideline is “total student loan debt at graduation will be less than the graduate’s likely starting salary”. So, for my son who wants to be a high school teacher, the goal is to keep is loan debt below $49,000, which is the minimum starting salary for a teacher in our school district.

  (Side note: While my son wants to be a public school teacher and would, under current guidelines, potentially qualify for public service loan forgiveness programs, I’m not convinced that program will survive the Trump administration, so we’re not going to borrow with the assumption he’ll have that option. I’m encouraging him to start with the assumption that anything he borrows, he’ll have to pay back. If there is a good forgiveness option available to him in the future, that will be a nice bonus)

• Are there college locations where the cost of living might make it financially inaccessible?

  Honestly, this is a conversation that is better to have before doing applications, but the cost of living off-campus and how that will be handled is important if considering any colleges in very high cost of living areas.

• How big of a factor will cost be in the financial decision?

  This is a big one: Once all the financial aid letters come in, is cost going to be the main driver of decision making? Or is it one factor of many? I strongly encourage doing your best to calculate the total loan debt at graduation for each school and then run some student loan repayment calculators to try to help your kid see what kind of difference it makes to have $40K in loan debt versus $60K.

As I mentioned above the next post will be about how to compare financial aid offers, so feel free to drop a note in the comments if you have any questions about that you’d like me to address!