Paying for college can seem pretty complicated, but what it all comes down to is that you and your children can pay for college in one of, a combination of, or all of three ways: past, present, and future income.
Paying for college from past income means that you have planned ahead and saved for your children’s education. Clearly, this is the preferred way. If you have been fortunate enough to build up a sizable pot of money for your family’s upcoming college expenses, then you are smart, good at generating income, and probably pretty frugal too. Congratulations, and let the draw-down begin!
Now, what about the other 90-plus percent of you who will be relying on present and future income of you and your children to pay for their college expenses? What are some smart strategies that you can employ?
Of course, maybe your income is sizable enough that you will simply write a check, once or twice yearly, to cover college expenses. Seriously, you are very fortunate to be in a position to pay for college in real time and, if you don’t know already, one way to make this possible would be to consider utilizing one of the several plans that permit yearly tuition and other official school expenses to be paid in equal monthly installments, in most cases interest free. Such plans take your big “tuition nut” and break it into ten or twelve more manageable pieces.
OK, now I am still probably speaking to more than 90 percent of you when I make the point that you and your children are inevitably going to be also tapping into future income as part of your paying-for-college strategy and tactics. The key is to be as smart as possible about the borrowing you do, and to make sure that your strategy is “last resort.” The less you and your children borrow, the better.
Perhaps it goes without saying, but make sure that your borrowing is put to use for school only, and not to maintain you or your children’s “lifestyle” during a period in your lives when some sacrifice may be in order. Anything really important should have some value and carry some burden. A college education is really important.
Borrowing money for spending beyond tuition and room and board may satisfy you and your children’s cravings today, but at the expense of your standard of living tomorrow. The penalty for “instant gratification” can be quite severe.
Let me put some numbers behind my lecturing. Say you will need $50,000 for your children’s four-year education at a public institution. If you save that amount on the front end, at something like a rate of $330 a month, or $11 a day, then with an assumption of conservative interest of four percent compounded, your $39,000 will turn into the $50,000 you need. If you do not save, but you say to yourself, “I’ll just borrow the $50 grand when I need it,” then you will, at the same conservative borrowing “cost” of four percent, end up “paying” almost $61,000—a difference of about $22,000.
And the numbers above use some pretty modest assumptions. In fact, with more realistic assumptions of potential investment return of eight percent and a cost of borrowing of seven percent, then the ten-year difference between saving and borrowing is nearly $37,000!
That is some serious money, and I hope that I have given you some serious ideas to consider wherever you may be on your “paying for college” journey.