Personal Finance

Setting Expectations for the Cost of College

May 23, 2017
Four topics parents should discuss with their children about paying for higher education.

Key Points

  • Parents and children may not agree on what colleges they can afford and how to pay for them.
  • Talking about expectations ahead of time can help ensure everyone is on the same page.
  • Know the resources available to pay for college, including savings, loans, and scholarships.

The cost of a college education represents a large financial commitment for many families. In 2016, the average cost of tuition, fees, and room and board for four years at a public, in-state institution exceeded $80,000.1 "A price tag this large means it’s more important than ever for parents and children to be on the same page about who is paying for school and what actually is affordable," says Judith Ward, CFP®, a senior financial planner at T. Rowe Price. And yet, T. Rowe Price’s 2017 Parents, Kids & Money Survey found a disconnect among parents and their children: 67% of kids expect their parents to cover the cost of any school, while 59% of parents say they’ll only be able to contribute some money to college costs.

Long before a child is ready to apply to schools, parents should agree upon what they can afford and what they expect from their children. Once parents reach a consensus, they can invite their children into the discussion. Here are four conversations you should have to keep college costs in check:

Talk about your savings. If you are actively saving for your children’s educations—such as through a tax-advantaged 529 savings plan—consider letting them see how much is in their college fund. This can help them better visualize and understand what type of budget the family is working with.  

Be clear about who is covering the costs. If you are expecting your children to contribute, make sure they understand that some of the money from their summer job or job at school needs to go toward college expenses.

Understand how student loans work. For many middle-income families, funding for college will come from government or private loans. Make sure you and your children are clear on the amount you are borrowing, payments, and the time frame over which you or they will need to pay off the loan. While borrowing money can be an important strategy to help your children go to the college they want, be clear about the extra costs that loans incur for many years after graduation. (See “The Cost of Saving vs. Borrowing.”)

The Cost of Saving vs. Borrowing
Saving for college can lead to much lower total expenses compared with borrowing.
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Figures are pretax and rounded to the nearest $1,000.

Assumptions: To cover $40,000 of college costs, you would need to save $105 monthly before college for 18 years at a 6% average annual rate of return. When borrowing $40,000, assuming a 5% average annual interest rate, you would pay $424 a month for 10 years after college. All 529 withdrawals are assumed to be for qualified educational expenses at the beginning of college; 529 contributions, interest accrual, and loan repayments occur monthly, at the end of the month. This chart is for illustrative purposes only and does not represent any specific investment. 

Explore grant and scholarship options. Grants and scholarships are popular ways to help fund college because they don’t need to be repaid. They both can be used to help manage the price of college by covering tuition, room and board, or other qualified educational expenses. In general, grants are needs-based financial aid, while scholarships are awarded based on merit to students who are academically qualified. Research all forms of financial aid available to your child before either of you takes on any student loans.

Having these financial conversations well in advance of deciding which college to attend can help you build a solid savings foundation, as well as help when it comes time to pay. “Saving for that college bill now is one of the best things you can do to minimize the amount you or your child will have to borrow later,” says Ward. “Even planning to put a down payment toward college costs can really help.”

529 Plans Managed by T. Rowe Price

With T. Rowe Price, it’s easy to start saving for college, technical school, or graduate school. We manage three flexible and tax-advantaged 529 plans:

■  T. Rowe Price College Savings Plan

■  Maryland College Investment Plan

■  University of Alaska College Savings Plan

All three plans are designed with nearly every budget, situation, and aspiration in mind.

1Trends in College Pricing 2016, College Board.

A college savings plan's disclosure document includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Be sure to review the college savings plan offered by your home state or your beneficiary's home state, as it may offer state tax or other state benefits, such as financial aid, scholarship funds, and protection from creditors that are only available for investments in the home state's plan.

View investment professional background on FINRA's BrokerCheck.

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