Borrowing Money for College

Here are the facts. In 1990, average yearly tuition at a public university was $1910; in 2019, it was $10,230. Parents who were able to complete their education with little or no debt are now wrapping their heads around the reality that the landscape is entirely different for their children. For many, it is simply not realistic to pay for higher education today without borrowing. The key is, first, to borrow sparingly and then when you must, borrow knowledgeably.

Sparingly

Sparingly starts by choosing an affordable school option. This may include attending a community college for two years and then transferring to a four-year institution. Another option is to attend a local school that allows you to avoid room and board costs. 

Having income from part-time work can be a critical part of the plan, as well. Research has shown that students who work a moderate number of hours (15 or less) while attending school actually do better academically.

Savings are obviously a component of reducing the amount that you will need to borrow. While there are terrific education-specific savings tools available, such as tax-advantaged 529 plans, the overriding principles are to save early, often, and invest in a manner that is consistent with your time horizon. If you were to set aside just $100 a month for 17 years, at a 6% rate of return you would have amassed $33,855 by your child’s first year of college. If you are starting later, you will not only have less time for your savings to compound, you will need to adjust your investment allocation to reflect the shorter time period. This will translate into a lower expected rate of return.

Knowledgeably

Knowledgeably means choosing a borrowing option that is not just low cost, but also allows for flexibility. Let’s start with borrowing as a parent on behalf of your child. You may be able to borrow money at a very low interest rate by using a home equity loan. But is this wise? If your circumstances changed unexpectedly, would you be able to keep up with the loan payments? On the other hand, if your child has a federal student loan, they will have a myriad of repayment options available after graduation, geared to their particular circumstance. And if your situation does permit it, you can always help them out then.

Are you considering Parent PLUS Loans? These are federal loans taken out by parents to meet the cost of their child’s education. Quite frankly, a Parent PLUS loan can be the death of your retirement dreams. You must run the numbers. Just as with the home equity option above, can you afford to both service this debt and save for your retirement? If not, this is not an option for your family. Re-read the above about borrowing sparingly: Is there an option available that reduces the tuition bill?

For the student, borrowing knowledgeably means being fully aware, in dollars and cents, of what repayment of a student loan looks like. You and your child can forecast their post graduation loan payment here. Before signing that first promissory note, your child must be intimately familiar with the terms of the loan and the implications of each repayment option. 

There is a popular argument that the type of employment your student is likely to have after graduation influences how much debt they can handle. And this is not wrong. Clearly, the average starting salary for an engineer looks vastly different than that of an English major. But also bear in mind that, according to research from the Federal Reserve, only 27% of graduates actually work in the field that they studied. You should be cautious of the idea that certain degrees always “pay off”, but as well that other types of degrees are inevitably “money losers.” Your child’s post-collegiate path may be unpredictable and a borrowing plan needs to work across a variety of scenarios.

Regardless of your starting point, a college education can be attainable if that is what your child desires. However, you will need to be creative in your planning, putting all options on the table for discussion, so that you do not sacrifice your future financial wellbeing, either yours or your child’s.