How to Have the College Money Talk with your Children
If parents don’t talk to their children about college affordability and student loans, who will? Talking to your children about paying for college and student loans can be an uncomfortable subject. Parents sometimes struggle to have these conversations with their children. However, it’s best that your children hear about these topics from you first, rather than learn the hard lessons that come with enrolling at a high-cost college and borrowing too much money.
When to Have the College Money Talk
Plan on having the college money talk when your child is old enough to have a responsible discussion about college affordability.
Sometimes there will be a trigger event that makes it necessary to start talking about college costs sooner than you might have wished. For example, children start getting interested in colleges during their sophomore and junior years in high school and may have questions about how to pay for college. The start of their curiosity about financial aid and student loans often occurs in October of the junior year, when they take the PSAT and start preparing for college admissions tests.
Try to talk to your children about paying for college by the time they are 15 years old.
If you have the college money talk when your child is younger, there will be more time for them to apply for scholarships. They can’t get financial aid if they don’t apply. It may also encourage your child to get better grades in school and to practice for college admissions tests.
Establish an Ongoing Conversation
The college money talk should not be just one big talk, but part of an ongoing conversation. Discussing paying for college more than once will help your child avoid running into problems. It will reinforce the lessons they learn and emphasize the seriousness of student loan debt and college affordability.
Have an open and frank discussion. If you feel comfortable doing so, tell them about your own mistakes involving student loans and credit. An honest conversation can provide your child with protection against over-borrowing and student loan stress, and will help them focus on free money first.
Keep the lines of communication open. Let your children know that they can come to you with questions at any time. Ongoing communication is essential, because your children will not think of some questions until later, when it is time to pay the piper. Make clear that this is not a one-time conversation. Tell them, “If you have questions in the future, please feel free to chat with me.”
Use stories about student loans and college affordability in the news as an opportunity to reopen the conversation about how to practice safe borrowing.
How to Have the College Money Talk
The college money talk should be a sit-down talk, to signal the seriousness of the conversation and to avoid distractions.
Stay calm during the discussions. Respond to questions in a non-judgmental manner, even if your child asks about student loans or repeats one of several common myths about student loans. Your goal is to make your child comfortable asking questions later, when the decisions they make matter more.
Student loans are neither good nor bad. They make it possible for a student and his or her family to pay for their education. Education debt is sometimes referred to as good debt, because it is an investment in your child’s future. But, too much of a good thing can hurt you. It is best to use student loans in moderation and to practice safe money management, such as borrowing as little as needed, not as much as possible.
Some experts argue that student loans are addictive, serving as a gateway to future financial challenges. They say that you are either in debt or you aren’t. But, the amount of debt is a matter of degree. So long as you exercise restraint, borrow as little as necessary and make every monthly payment on time, you can keep the student loan debt from ballooning out of control. The horror stories about student loan debt multiplying tenfold almost always involve an extended period of nonpayment, often for decades, and students who borrowed an above-average amount of debt.
Do not avoid controversial topics, such as delinquency, default and discharge. Student loan problems are like a disease that is transmitted by a lack of knowledge and experience. It is better that your child learns about these topics from you than that they get inaccurate information from other people.
Encourage your children to ask lots of questions.
The college money talk is also a good opportunity for parents to improve their own financial literacy skills. It is ok to admit that you don’t have all the answers.
Discuss the Emotional Aspects of Paying for College
Be sure to talk about the emotional aspects of student loan debt and college affordability.
Your child should understand that student loans have an emotional aspect. They may feel an urge to spend the “refund” money on nonessentials because it is the first time they’ve had easy access to so much money. But, the refund isn’t free money. It must be repaid, usually with interest. Every dollar borrowed will cost about two dollars by the time the debt is repaid. Your child also needs to learn to budget, so that they can reserve the refund to pay for college costs as they occur throughout the academic year.
Student loan debt can also be a big source of stress before and after graduation.
Your children are young and lack experience with student loans. This can contribute to their making bad decisions, especially if they make decisions about student loans on their own, without seeking help. They need to make sure they are emotionally ready to take on the responsibility for student loan debt. Encourage them to participate in financial literacy training, if offered by their school, to help them understand how to manage their money and learn about smart borrowing.
College choice also can involve emotional decision-making. Too often, children get their hearts set on a single dream school. If they don’t get in, or they get in and can’t afford to go, they may feel that their life is ruined. If you don’t lay the proper groundwork with the college money talk, they may blame you for their loss. These tips can help deal with the disappointment.
- Advocate for your children to pursue a pick-three approach, where they have three dream schools. The American Freshman survey by the UCLA Higher Education Research Institute reports that 94% of college freshmen say they are enrolled at one of their top three choices.
- Steer your children toward more affordable colleges and away from more expensive colleges. Use a net price calculator to get an early read on the affordability of colleges of interest to them. If you must visit an expensive college, check the weather forecast and visit on a day with inclement weather. Also check the cafeteria menu and avoid days when your child’s favorite food is being served.
Dealing with the Challenge of Private Information
Parents are often reluctant to tell their children how much they earn or their net worth. They consider this information to be private information and worry that their children might share it with their friends or their friends’ parents.
But, parents should not use this as an excuse to skip talking with their children about college affordability and student loans.
Parents don’t need to share information about income and assets to have a meaningful conversation about college affordability.
- Discuss how much has been saved for college, as opposed to your net worth.
- Discuss how much you (and your child) can afford to contribute each year, as opposed to your annual income.
- Discuss how much student loan debt is reasonable and affordable, as opposed to how much you owe.
The focus of the discussion is on how much you can afford to pay for college overall, as opposed to revealing too much personal financial information.
This is also a good opportunity to talk with your children about privacy and what information should and should not be shared with other people. Some information can be shared on financial aid applications, but not with people who don’t have a need to know. Obviously, it is always best to be open and honest with your children, as much as possible.
Compare Total Resources with the Total Net Price
Resources are funds that are available to pay for college, while the net price is the discounted cost of college. Comparing the two can yield insights concerning which colleges are affordable and which colleges are not.
The total resources available to pay for college is the sum of college savings, annual contributions from income, education tax benefits like the American Opportunity Tax Credit, and an affordable amount of debt. This is the total amount of money available to pay for the child’s complete college education.
Your child should borrow no more for their entire education than their annual starting salary. If total debt is less than annual income, they should be able to afford to repay their student loans in ten years or less. Anything more is unaffordable, and will require them to stretch out the term of the loan to 20, 25 or even 30 years. Not only does this increase the total interest they will pay over the life of the loan, but they may have to delay other goals, such as getting married and having children.
The one-year net price is the difference between total college costs and gift aid.
- College costs include the full cost of attendance, namely tuition and required fees, room and board, textbooks, supplies and equipment, transportation and miscellaneous personal expenses. Be sure it includes all college costs, not just the direct costs paid to the college.
- Gift aid includes grants, scholarships, tuition waivers and other amounts that do not have to be earned or repaid. Gift aid does not include loans. Gift aid in this case is provided by the federal and state governments, as well as the college itself. Net price calculators and financial aid award letters can be confusing, making it hard to distinguish between grants and loans.
The total net price is the sum of the net price for all four years of college. Be careful about a few common problems that affect the total net price:
- The net price may change from one year to the next. About half of colleges practice front-loading of grants and scholarships, where there is a better mix of grants and scholarships vs. loans and work-study for freshmen than for upperclassmen. This can cause the net price to increase after the freshman year, even if family income remains unchanged. To estimate the increase in the net price, use the U.S. Department of Education’s College Navigator to look at the percentage receiving grants and average grant amount for freshmen vs. all undergraduate students.
- Scholarship displacement can reduce the financial benefit of winning private scholarships. Some colleges will reduce their own grants when a student wins a private scholarship, yielding no change in the net price. Other colleges will reduce unmet need, student loans and student employment before reducing their grants when a student wins a private scholarship, yielding a decrease in the net price.
Next, compare the total net price with the total resources available to pay for college. If the total resources equals or exceeds the total net price, the college is affordable. If the total resources are less than the total net price, the student may need to borrow an unaffordable amount of student loans to pay the college bills.
Net price can also be used to rank colleges according to affordability. The net price correlates with debt at graduation, with a higher net price leading to more student loan debt. Your children may surprise you and act responsibly in choosing a lower cost college when they understand the relationship between a college’s net price and the family’s ability to pay for college.
Example Calculation of College Affordability
Suppose one-year college costs at a private 4-year college are as shown in this table.
Tuition and Fees
Room and Board
Textbooks, Supplies and Equipment
Then the total costs for one year are $54,000.
If a student is awarded a $35,000 grant from the college, but no federal or state grants, the total gift aid is $35,000. Subtracting this from the $54,000 cost of attendance yields a net price of $19,000.
If the cost of attendance increases by 5% a year and the college grant drops to $30,000 after the freshman year, the total cost over four years is $232,747 and the total gift aid is $125,000, yielding a total net price of $107,747.
Consider three scenarios:
- If the family has saved $85,000, can contribute $5,000 a year from income, will qualify for the maximum American Opportunity Tax Credit (AOTC) of $2,500 a year, then the total resources, not including loans, are $115,000. Since this exceeds the total net price, the college is affordable without any debt.
- If the family has saved only $40,000, the total resources are $70,000, requiring the student to borrow $37,747. Depending on the student’s academic major, that might be an affordable amount of debt.
- If the family did not save anything for college, the total resources would be $30,000, requiring the student to borrow $77,747. That would be an unaffordable amount of debt for most jobs.
A good place to start