When your child sets his sights on college and finally gets to the point where he or she actually is ready to apply, it can be a time for great joy. This is a major milestone in a young person’s life, one that deserves celebration. But it can also be a time of fear and foreboding as the financial realities of paying for college begin to sink in. Too many kids –and parents by the way – get trapped into making decisions which hurt everyone’s future. Here, then, are 5 financial mistakes to avoid when selecting a college.
#1 Do Not Wait Until Financial Aid Is Awarded To Decide Which Schools To Attend
The financial aid award letter usually follows the acceptance letter by several weeks. In that time, too many people get excited and emotionally attached to a school only to learn that the financial aid awarded is not enough to really make the school affordable. At this point, emotions can be very dangerous, leading us into decisions that reason should eliminate.
Instead, assess your ability to pay for each college or university without any aid. This includes the parent’s ability to write a check and/or the student’s ability to afford the loan payments after graduation in his or her most likely career. Simultaneously, determine how much money you can afford to spend and/or borrow.
Now you’ve got a budget and a list of schools you know you can afford. As the award letters arrive, eliminate those schools that aren’t affordable and concentrate on the remaining ones on your list. Don’t fall in love with a school before you determine whether you can afford it.
#2 Be Honest In Assessing The Likelihood Of Academic Or Athletic Scholarships
Too often parents with high achieving kids (academically or athletically) assume their child will receive a scholarship. Remember that everything is relative. A student’s or athlete’s performance is judged relative to the other students at the school. High School seniors that are in the top 25% of applicants nationally are surprised to find out that they are barely in the middle of the pack among applicants to their “reach” school. Where they won’t qualify for scholarships at the reach school, they may very well qualify for a generous scholarship at a school where they are in the top of the candidate pool. This logic applies to academics and athletics.
#3 Don’t Buy The Lie That All Prestigious Schools Are Worth It
Schools compete to have the best reputation. That’s not an insult; it’s a reality. Reputation, however, is too often based on academic measures rather than academic ones. If you can afford to send your child to any school regardless of cost, this isn’t an issue. But for most of us, cost and benefit must be related. Different majors are valued differently by employers. Make sure you’re not paying $60K per year to a school for a major which won’t garner strong earnings over the student’s career. High prices do not always mean high quality when quality is measured by earning potential. Be realistic in assessing this to save yourself years of financial heartache in the future.
# 4 Remember Scholarships Are Not Guaranteed All Four Years
Stuff happens as the saying goes. A student or athlete who qualifies for aid one year may not qualify for as much aid, or any aid, the next year. That applies to academic scholarships, athletic scholarships and need-based aid. Many times the circumstances which warranted assistance at the time of application are right on the border of qualifying and not qualifying. This isn’t something that’s disclosed, but it can be a real risk.
It is possible that a slight deterioration in academic performance or an improvement in the parent’s financial situation will adversely affect the school’s scholarship and aid decisions. Don’t pick a school from your list that’s right at the margin of affordable and unaffordable. Leave some room for changes in circumstances.
Athletically, you need to know that scholarships cannot legally be promised for more than one year. Too many student/athletes have been told by a coach that they’ve got a 4-ride only to find the coach changes his mind in future years. If your child picks a school to play sports on scholarship, have a plan-B. You may well need it.
#5 Not All Loans Are The Same
Like any other type of loan you take out, student loans differ by interest rate, term of the loan and when payments begin. You can’t simply assume that because you can afford one type of loan (say a loan with a fixed rate of 3% payable over 10 years) you can afford all loans (say a loan with a floating rate, starting at 5%, payable over 3 years). You need to understand what the payments will be when your student graduates, whether the payments can change as interest rates go up, and when loan payments begin.
In determining whether or not a loan is affordable, you should compare the loan payments against a reasonable assumption of what the student’s salary will be when they graduate. While you should always do a detailed analysis, we have uncovered two good rules of thumb: 1) limit total student debt to what the student can expect to earn in his or her first year after school, or 2) limit total student loan payments to no more than 10% of the expected gross income after school.
Going to college is a worthy goal for many kids, and the joy in achieving this shouldn’t be squelched by financial worries. There is a college or university for everyone, but not every school is right for every student. Start early and build reasonable financial criteria into your selection process. Never, never, never go to a school that you ultimately cannot afford.
“Cauliflower is nothing but cabbage with a college education.” Mark Twain