How to Talk About College Costs With Your Kid

By ColumnsFOXBusiness

While it’s not the most fun topic to approach with a kid sorting through college acceptance letters, parents need to talk financial aid and funding with their kids early in the process and make it part of the decision-making process.

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Although a study by Sentier Research shows that inflation-adjusted median household income increased 4% from $49,434 to $51,413 from August 2011 to December 2011, the biggest increase since the start of the recession in December 2007, tuition costs have continued to rise making it difficult for many parents to send their children to costly public and private institutions.

According to the Project on Student Debt, two-thirds of college seniors who graduated in 2011 had student loan debt averaging $26,600 per borrower.

Helping students make informed decisions about college costs and the repercussions of loan debt should be openly discussed as a family and parents need to be clear with how much they can afford to contribute tuition, says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial.

“While a parent may not want to limit their children’s choices, it’s fair that their children understand before they enroll at a college what their family can afford and how much they may need to pay from their own pocket,” she says.

For parents who are unsure of how to effectively relay a monetary message, here are expert tips on how to approach important college money decisions with college-bound children.

Establish a Budget

However families plan to pay for college (savings, 529 plans, loans, scholarships), it’s important to sit down and create an accurate estimate of the total cost (tuition, room and board, books, etc.) using a net price calculator.

“Families should estimate what a year of college tuition at a given school will cost and then add 10% to cover any unexpected costs associated with college attendance, as well as inflation and tuition increases,” says Linda Descano, president and CEO of Citi’s Women & Co.

If students have their sights set on a school that is more expensive than other choices, parents can require winning additional scholarships or sources of merit aid to make it financially possible or rule it out in favor of a cheaper alternative, says Mark Maeiwski, certified college planning specialist and founder of College Funding Advisors.

“If you cannot make it the equivalent or close to what a state school costs, then don’t do it--why spend more money for a similar education that you can get by going to a really good name state school [when the other school] is two and half times the price of the other?”  he says.

Understand Financial Aid Offers and Loan Requirements

Award letters and student loans can be difficult to understand and loan repayment terms can be hard for students to recognize while still in school.

Especially if a parent chooses to co-sign on their child’s student loans, they should set clear expectations about the seriousness of taking on debt and how it could stress both parties financially long-term, recommends de Baca.

“Parents should work to understand the ins and outs of student loans before co-signing, and they should ensure that they could make payments on the loans themselves should something unexpected happen and their child is unable to pay,” she says.

To make sure students fully grasp what their monthly payments will look like, it’s important to see the actual numbers on a loan repayment calculator, says Lynn O’Shaughnessy, author of The College Solution.

“The maximum [Stafford] loan amount is going to be $27,000 at 6.8% interest so if you do the standard [repayment] which is 10 years to repay your federal loans, the initial monthly payments are going to be about $311,” she says. “If kids know, ‘$311 is what I’m going to have to pay if I take out the maximum Stafford,’ that’s more concrete than just saying ‘you’re going to owe $27,000.’”

Discuss Expectations and Limitations

Experts say students that are responsible for funding part of their education have more of a vested interest and the perform better academically.

“If they have that mindset that I want to go to college and do well and know that I can then go get a job or position that allows me to live by myself so I don’t have to move home, if you have that goal, that’s how it’ll happen without driving your parents into deep debt,” Maiewski says.

Parents should discuss how their financial support correlates with the amount of time students are in school and how students will handle it if they take longer than four years to graduate.

“In some cases, it’s impossible to graduate in four years--the average graduation rate at a typical public university is 31%, so most students are not going to get out in four years,” says O’Shaughnessy.

Although parents may want the best for their child in terms of an education, they should never compromise their own major financial goals such as a retirement fund in order to pay for college, says de Baca.

“Parents should consider setting a limit on the amount they can comfortably co-sign for, and should also have a clear plan for which savings are dedicated to their children’s education – and which are strictly reserved for retirement.”

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