Help me demonstrate financial aid implications.

Paying for College
1

My son will be heading off to college next Fall. He’s our oldest, so this is our first time navigating the tuition/financial aid process since we went to school back in the good ol’ days. Our goal is to have him graduate with zero debt. It’s a lofty goal…which is why I’d like to demonstrate to him what the implications to our personal finances could be by school. He obviously needs to be part of the decision process and I’d like to provide the most information possible to help him better understand what we’re all committing to.

I have to admit, I don’t fully understand the implications myself yet. I currently have a spreadsheet built that compiles the COA for each school he’s applying to. I’d like to build a 10 year projected payment schedule, by year, below each school. I realize it won’t be exact, I just need a ballpark.

I read in the Parent PLUS loan thread pinned above that a decent guideline is $117 per month for each $10,000 borrowed. Does that seem appropriate in everyone else’s experience? My question is, how do the payments aggregate? For simplicity, if I borrow $10,000 for his freshman year we’ll owe $117 per month starting when? Then, should I borrow $10,000 in year 2, I’ll owe $234? Starting when? Like I said, I have zero experience with these loans.

My hope is that he’ll better appreciate the value proposition inherent to each school he gets accepted to, and then make a commitment that best meets both his and our needs.

Thanks in advance.

2

You’re in luck. I was a loan officer in a previous life. Debt free is a very wise way to go when starting out a career, but it’s near impossible to do without some kind of a scholarship or parental help. If there is a scholarship available, I would advise to take it and run! He’ll be much better off than most Ivy League graduates, because he has a debt free career he can give 100% of his focus on.

If not, loans are the great necessary evil, and I advise to go VERY sparingly on them. If the goal is debt free, the most popular, though un-glamourous way is to spend 2 years at a community college, then transfer. Universities are quadruple the cost, and when you think about it, they’re just general classes no one cares about.

Of course, the best way is to attend an in-state university vs a private college. Private universities are quadruple the cost of state universities, and really don’t provide a superior education at all. Selectivity is nothing more than an artificial shortage designed to make a school look good. It’s the graduate that makes himself successful, not the degree. The education is only a means to an end. Elite university graduates comprise 7% of the population, leaving 93% of the economy to the rest of us. Also, a master’s degree trumps a bachelor’s degree any day of the week, even if the bachelor’s degree is Harvard.

OK, enough rambling :slight_smile: The best resource is a school financial aid office. As far as student loans, the most popular is the Stafford loan. This is a loan that your son would take out himself for tuition, books, etc. This typically has a payback of 10 years and it’s fully subsidized by the government. All loan payments are deferred while he is in college and will not become due until 6 months after graduation. The maximum amounts are listed on the FAFSA website.

The next is the unsubsidized Stafford. This is also a loan that your son would take out for himself to cover any additional costs. For this one, all payments are still deferred while he’s in college, but it accrues interest and that accrued interest is added to the balance of the loan when he starts making payments.

Another one is the parental loan. They are private bank loans that are often administered by the university based on creditworthiness. They are exactly that. Some parents like to finance their child’s education this way if there is no college savings in the bank. Of course, there are other ways to finance your child’s education as well. You could go to your bank and take out a home equity loan or take out a loan on your 401k, for instance.

Now, as for payments. A good way to do that is to go online and google “amortization calculator.” Plug in 4% interest and put in a term for 10 years. There’s no easy way to predict loan amount. I like to estimate 10k per year at a university.

3

“Of course, the best way is to attend an in-state university vs a private college. Private universities are quadruple the cost of state universities, and really don’t provide a superior education at all.”

I’m not going to address the superiority, or lack thereof, of a private college, but I did want to say that many private universities give very generous financial aid so I would not dismiss them out of hand. Run the Net Price Calculators for each school the student is considering and compare. They aren’t always accurate (particularly if the parents own rental properties, own their own business, are divorced) but they can give you a good idea.

4

@coolguy40

This generalization totally ignores the fact that at many private universities need based grants and merit aid can reduce the COA to less than the COA at an in state university. Each student’s situation is different. Blanket statements are useless and show a lack of understanding of the financial aid process.

5

Have you made a financial plan that lets you know how much you can contribute to each kid for college expenses?

Have you or the student run the net price calculator for each college of interest?

Parent loans may not be a good idea if you have more kids to fund. What will you tell the younger kids if you have used up your money and borrowing capacity on the first kid, so that the others have a much smaller price limit?

6

Interest rates are likely to increase as the economy continues to slowly improve (or maybe quickly improves depending upon how things go). IMHO it is quite difficult to predict the future of financial markets at this point.

Some students find that they take on to much debt that in order to deal with it after graduation they need to live with their parents to avoid housing costs. This of course has two huge downsides. One issue is that this severely limits the jobs that a new graduate can take. Generally it is hard enough for new graduates to find an appropriate job even if they are not constrained in terms of where they can live. Also, some 23 year old adults don’t actually want to continue to live with their parents. Another problem with debt is that graduate school is getting increasingly important for a range of majors / jobs, and if you have too much debt for undergrad it might make graduate school impractical or impossible.

Generally speaking, no debt for undergrad is ideal. A total debt equal to your starting salary should be possible to deal with. I would be very reluctant to take on more. However, it is not unusual for new graduates to make pretty much only just enough to live, so that no debt is definitely the best goal. This of course does require parents helping with university expenses.

Different students are going to get very different results in terms of the cost of any particular university. For us, there was pretty much no correlation at all between the cost of universities and their academic strength. As an example, for us, the academically highest ranked school that either daughter got into was the least expensive for that daughter and second least expensive over all. The second highest ranked school that either daughter got into was the most expensive and at 65k per year would have been economically ridiculous to even consider attending.

7

I’ll assume you are using Excel for your spreadsheet and give you the calculations. Excel will do all amortization you may need. Use the functions, pmt, pv, fv to make your calculations.

For the pmt, which stands for payment function, you will need the rate, nper (number of periods), and pv (present value). So to determine what your payment would be on a loan that does not accrue interest prior to payments, you’d put in =pmt(.04/12, 120, 10000) and get a payment of $101.25. That payment would be due starting 6 months after college ends and going for 120 months.

If the loan accrues interest, you need to get the future value of the money borrowed today. So for year one, you’d borrow $10k at 4%, so in four years and six months, when you start making payments, the balance would be found with this formuls =fv(.04/12,54,0,10000) and get a future value of $11968.59. You would then plug that value in to the first calculation above to get the payment schedule over the next ten years. So the payment would be $121.17 for 120 months.

Of course all of this will fluctuate a little depending on the compounding periods and whether they use first or last of month for calculations, but it will be fairly close. You’ll notice I always use months for my calculations, that’s why you see me divide the interest rate by 12 and multiply the years by 12.

So on the first loan you will pay about 2150 in interest and for the second loan you will pay 2572 plus the increased loan balance of 1968 - so a total of 4540 in interest. There is a big difference in cost when interest is deferred vs accruing, in this case at 4% the increase is 2390. Of course higher interest would magnify these differences.

Let me know if you need more help.

8

One meta piece of advice would be to not go into this with the goal of having him graduate with zero debt. Maybe reframe it as a goal of the lowest collective (student + parents) debt. Ideally you should have an idea of a total budget as it relates to all your kids. It wont matter if your child is comfortable with you paying $x00 a month for their loan, if that means no $ left for other kids.

If you want him to actually care about this theoretical debt, then part of it should be his. Some young people will altruistically respect the idea of the parents’ debt. Others wont really care how many multipliers of $117 the parents are on the hook for, because it doesn’t impact them.

We wanted our kids to graduate with zero debt too, but they were never told that. Our S went into his college search knowing he would max out his loans before we would start borrowing for him. We had plans to help him pay off his set of loans (depending on the magnitude of ours), but he didn’t know that.

9

Interest starts accruing immediately on distribution on PLUS loans, but you don’t have to start repayments until your child leaves school. Thus, you aren’t making payments on $10,000 but on $10k plus a cruel I Teresa (4 years?)

These are not his loans, but your loans. The standard loans are his ($28000 + interest)

10

Did you run net price calculators for ALL of the colleges to which your son applied? Were the net costs within YOUR price point as parents?

Are you self employed, divorced…or do you own real estate other than your primary residence? Answer NO and the NPCs shpuld have given you a reasonable estimate of your family contributions.

Did you discuss the bottom line budget with your son before he sent his applications out? Is there a budget, or do you parents plan to take out loans for any amount not funded with merit or need based aid at these schools? How much in loans do you plan to take?

Our goals were slightly different. We wanted colleges where the PARENTS didn’t assume debt for undergrad school. That meant NO Plus loans or HELOC…or any kind of private loans.

But we did ask our kids to take the Direct Loans offered to them. Our graduation gift was paying off those loans…but they didn’t know that…until graduation evening!

11

@TomSrOfBoston
I’ve been through the financial aid process for private colleges. These colleges are not nearly as generous as they like to boast, otherwise they wouldn’t be charging 50k a year in tuition. Parent Plus loans are the reason their students typically graduate with less debt. The average loan for 4 years is $100,000…for mom and dad. After grants, a state university would still be half the cost for the same education.

12

@coolguy40 Again you are making blanket statement after blanket statement. No one size advice fits all. For some families private colleges will be cheaper. Obviously the highly endowed colleges are very generous. If the student has stats in the top 20% of admitted students at many private colleges major merit aid is possible. Conversely some state schools are very stingy with aid even for in state students e.g. Penn State.

13

Coolguy- there are kids attending private colleges for a fraction of what their state U would cost them.

And I’m talking NO Parent loans. You may have run your own numbers- but that doesn’t mean your income and assets are going to hold true for everyone else. I’ve got a niece at Princeton paying many multiples less than she’d have paid to attend Penn State (instate btw). No parent loans, just her need based aid and work study.

14

@coolguy40 So you are saying that when colleges “quote” average debt of students, they don’t include what was borrowed on their behalf??? That never crossed my mind. I kept trying to figure out how the numbers could be true, now I guess I know. That’s actually pretty dishonest.

15

@chattaChia fill out a financial aid application and do the math.

16

The $117 per month for 10 years for a Parent Plus of $10,000 sounds like a reasonable guideline. For a student Stafford loan, it would be a bit less, as students get a lower interest rate and may have up to about half their interest paid for while in college. (Parents definitely won’t.) So maybe for the parent monthly payment over 10 years you could figure 1.2% of the total borrowed, with 1.1% for the student total amount.

Students can borrow a total of $27,000 for four years from Stafford. To borrow more, the parents would have to co-sign for a private loan. You very reasonably could tell your son you’re not going to do this.

$27,000 means a monthly payment of about $300 a month for 10 years. Some points you could make to your son:
-This is like have a car payment for 10 years for a car you no longer own, while still having actual car payments on the one you do currently own.
-There will be months in those 10 years where he doesn’t have an actual car payment. There might be months where he doesn’t have to pay rent. (If you let him stay at home between jobs or something.) There will be no months where he doesn’t owe $300 a month. And if you don’t pay one month, they want $600 the next. It is extremely annoying.
-He may think “I’m going to do so well I will pay it off in three or four years.” He should then ask himself how many young people he knows who may be saying, “Look, here’s an extra $600 I have laying around at the end of the month. I’ll use it to make an early loan payment.”

The point would be that the closer that $300 a month is to zero, the better off he’ll be. For my own D, we are hoping to keep this figure at around $200. She had no zero loan options for college other than two years of community college. (Definitely not an option for her.)

As far as how much the potential Plus loan would affect your own life, things to consider would be:
-What would the total amount owed be after all children have finished college?
-How old would you be when your son finishes college and you have to start paying it back? How old will you be 10 years later? How old will you be 10 years after your youngest finishes college?

For me, with a son who is a sophomore in high school, that last number is 67. This could be pretty depressing, though for my wife the number is even a bit higher, which does make me feel a little better.

17

“He’s our oldest,”

One thing that is worth saying: If your son who is starting college soon is your oldest, then this implies that you have younger children. You should be very aware that whatever you spend on your first child, you have pretty much committed yourself to spending as much (adjusted upwards for inflation) for your other children.

You don’t want to say to your youngest “we can’t pay for your university because we spent too much on your older sibblings”. Also be aware that university inflation is generally greater than either general inflation or salary increases (at least for most of us).

18

Actually @Coolguy40 brings up a good point (and i don’t know enough about college loans/finances to comment on the rest) but its truly interesting that a college would list only what the student would take out as a loan as the total debt. When we toured Carnegie Mellon, they told us that the average debt that a student would graduate with was something like $7000 for each year…and I thought, well that isn’t so bad…most of these kids would pay that off with their tech degrees…but now I wonder if that doesn’t count the $50,000 (or whatever) that the parent took out for that kid.

19

Why would you think that the average debt of students would include parent debt? If it did, it would be the average debt of the ‘student and family’ and would be impossible to compute.

20

Thanks @SouthernHope. The point I’m trying to make is that an elite private college is not the panacea you dream about. Debt is a big problem with college graduates, and if you think about it, it’s just a bachelor’s degree. A master’s degree at a small state college will trump that any day of the week. Don’t believe me? Look at indeed.com and scour job postings. Nowhere will it say “Master’s degree or elite college Bachelors” required.