I talk with a lot of parents about paying for college. One of the most common questions I hear is, “But where does the money come from?” Sadly, there is no magic money tree out there– and we all know what happened to the Giving Tree in the Shel Silverstein book. The best alternative to the magic money tree is a good understanding of your family’s financial situation, a commitment to saving, and a willingness to evaluate colleges on the basis of affordability or financial fit. We can call that the magic money tree if you want. Here are its branches:
- Spending from cash flow. What’s a reasonable amount you and your student can spend each year out of pocket for college?
- College savings. If you have savings, then each year you can use 1/4 of it to cover college costs– or more if you can graduate in less than four years.
- Tax credits. If you’re eligible for the American Opportunity Tax Credit, there’s $2,500 extra dollars for you each year.
- Borrowing. Students can take out the Direct Student Loan on their own with no co-signers; parents can co-sign private loans (and assume the resulting liability for the loan) or take out their own loans if they can manage repayment.
- Add those up and you’ve got an annual college budget. Let’s say you can spend $4,000 from cash flow, your student can spend $2,000, you have $40,000 in college savings, you’re eligible for the AOTC and you’re OK with your student taking out the direct student loan. On a four year path, that means your budget is $4,000 + $2,000 + $10,000 + $2,500 + $6,500 (average direct student loan amount) = $25,000. If the student could graduate in three years, that would increase to $28,333 since you could spend more from savings each year. Perhaps the student could start at a community college and then transfer; the budget for the final two years would be closer to $35,000.
Once you’ve got your budget, those who are very close to college can do a couple of things:
- Look for outside scholarships to supplement your budget. There are plenty of good ones, and often the best ones are close to home, coming from employers, community organizations, or activities the student participates in. Fastweb, the College Board and Bold.org are just a few of the many websites that allow you to search national databases of scholarships for which you might be a fit.
- Do colleges’ net price calculators to figure out whether the schools you’re interested in are likely fits for your budget. If not, you’ll need to cast a wider net.
- Research additional scholarships available at schools you’re interested in. It may be that the net price calculator amount is over budget but there’s a scholarship that would close the gap.
- Research transfer credit policies to see whether and how much credit you’ll get for your AP or IB classes.
The biggest variable in the budget for those a few years out from college is the amount of savings available. Increasing your savings rate, requesting 529 contributions in lieu of birthday gifts, and adding to your savings from windfalls– bonuses, tax refunds, etc.– can all help to build that up.
Here’s the good news: There are lots of college choices in lots of price ranges. You just have to know yours, because that’s how you get an affordable college plan.