When it comes to college costs, we have entered the bad and the ugly. The cost of borrowing money for college used to be relatively friendly. Not anymore.
Recent changes to the federal student loan program have become incredibly tough on families. Interest rates on federal student loans are hovering above 6.5%. That is a massive carry cost for families. If you qualify for subsidized loans, you don’t have to worry about that interest building up until your child completes their studies. However, the vast majority of borrowing today is in unsubsidized federal loans, meaning interest starts accruing on day one.
It is a double whammy, very similar to what we are seeing in the housing market: Tuition costs have been going steadily upward for years, and now student loan rates are up, too.
The One Silver Lining in Higher Education
But there is some good news. It might sound counterintuitive, but I have been really happy that the federal government has capped the amount that parents and students can borrow through federal student loans and Parent PLUS loans.
It used to be that there was practically unlimited money available to borrow. Because of that open spigot of cash, schools would manipulate parents and students into just signing, signing, and signing for loans.
Now that the borrowing limits are capped, colleges can no longer pull that leverage. This cap is forcing a necessary change in higher education. For more than a generation, colleges have been raising tuition at three times the rate of inflation in the general economy. Those days are officially over.
The Danger of Parental Guilt
Even with those caps in place, you can still get into a lot of financial trouble if you have your heart set on sending your child to a school that costs a zillion dollars. If you don’t have the resources to pay for it, but you desperately want your kid to be able to go to their “dream school,” you are making a dangerous mistake.
By borrowing to the absolute max — and perhaps even dipping your toes or jumping fully into private student loans that carry volatile variable rates — you are creating a terrible financial hangover for your son or daughter later in life. Or, even worse, you, as a parent, end up sacrificing your own financial future to foot the bill.
Let me be blunt: Parental guilt can be a self-destructive motivator. There are so many college options available at so many different tuition levels. Yet, I see it all the time: Parents stop contributing to their own retirement accounts just so their kid can go to an “It” school.
Then, way down the road, when the parents are in retirement and don’t have enough money to live on, those exact same adult children look at them and say, “Gosh, Mom and Dad, you really should have done a better job saving for retirement.” They develop amnesia about the massive financial sacrifice that got them their degree in the first place.
It’s Okay to Say No
I am getting down to brass tacks here because of the heavy emotions involved in these decisions. But as a parent, you need to hear this: It is completely okay for you to look at your teenager and say, “We can’t afford that college. Period.”
If you want to find a compromise, here is the golden strategy: Have your child spend their freshman and sophomore years at a far more affordable institution, like a local community college.
The competition to get in as a junior transfer is generally much lower than it is for freshman applicants anyway. Furthermore, freshman year at expensive universities is often a factory experience. Your child will likely be sitting in massive, 100-level lecture halls just trying to knock out their basic prerequisites.
Why pay a premium for that? Take those identical prerequisite classes at a much more affordable place, and then let them go away to their dream school for their junior and senior years.
Here is a secret from the real world: Nobody cares where you attended; they only care where your diploma is from. And truthfully, once you have been out of school for a few years, nobody even asks where you went to college anymore — unless your alumni team happens to be winning a sporting event.
Final Thoughts
Every family has to make this decision on their own. I am getting into value judgments here, and it is not for me to decide what is right for your household. But I want to shift the conversation to a healthier place.
Be honest: Have open, transparent conversations with your teenager about what is financially realistic.
Watch the debt limits: Be incredibly careful about how much debt you are signing up for. If paying for a specific school requires you to go beyond the new federal borrowing limits and tap the private loan pool, it is time to pivot and pick a different school.
Start early with a 529 plan: If your children are still young and you can afford it, start funding a 529 college savings plan. The money grows tax-free and is spent tax-free for qualified education expenses.
The ultimate 529 backup plan: If your kid gets scholarships, decides not to go to college, or doesn’t use all the money, you can now roll up to $35,000 of lifetime 529 savings into a Roth IRA for them. That gives your child an incredible, tax-free head start on their retirement savings before they even hit their twenties.
Be honest with yourself, be honest with your kids, and don’t let a “dream school” turn into a financial nightmare.
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