Don't Let Their Dream School Become Your Financial Nightmare
A shared perspective from the lens of a college counselor and financial planner.
This newsletter is a special, joint article written with a fellow mom and Substack author, Kelly Palmer. As a financial planer, she offers a unique perspective on the realities families face in planning to pay for college today.
Imagine your child got into their dream school only to find out that you can't pay for it. Unfortunately, this scenario plays out far too often. But it doesn't have to be so dramatic. With careful planning, honest conversations, and a healthy reality check, applying to college and planning for the future can be a much smoother, less stressful experience for everyone involved.
I had the chance to sit down with Kelly Palmer, CFA, CFP and author of The Wealthy Parent newsletter to share our expert perspectives on budgeting, financial aid, and saving for college. Enjoy these takeaways from our chat.
How should parents approach budgeting for college?
Carrie: This is arguably the most crucial conversation. Parents need to be open and honest with their children about how much they can realistically contribute to college expenses. This includes tuition, room and board, books, and living expenses, which all equates to the Cost of Attendance (COA). Think of it like planning a road trip. Everyone's excited about the destination (dream college!), but before you hit the gas, you need to huddle around the family road trip budget map. This isn't about crushing anyone's wanderlust; it's about being honest. This upfront chat makes sure everyone's packed for the same journey and avoids any surprise detours.
Kelly: When discussing what you have saved it’s important to also ensure you are not using funds that have been set aside for your own retirement. Especially when faced with a tuition bill from a top-tier school it’s tempting to dip into retirement accounts, but this can severely impact your options for your future financial independence. If your retirement savings aren’t on track, you might find yourself needing to spend less in retirement or work longer than you would like. Even if you want to work longer to afford the expensive school tuition, unfortunately for many parents that’s not always an option. Imagine a scenario where you dipped into your retirement savings, were unable to work in your later years, and ultimately needed to rely on your child for financial support in retirement just as they are starting a family of their own. Suddenly they can’t purchase a home, they can’t save for their future, and certainly can’t save for their children’s college since they are supporting your present lifestyle. This is why it’s important to be honest about the budget. If you’re curious about whether you are on or off track for retirement check out this simplified calculator.
What types of financial aid are available to families?
Carrie: $87,150. That's the jaw-dropping price tag for a single year at Yale in 2024-25. To put that in perspective, it's more than triple the cost of a "typical" wedding, more than double the price of a car you could drive for over a decade, and in many parts of the US, enough for a down payment on a house. But before you get lost in a sea of college cost despair, remember that people pay for and attend college every day. Here are the various types of financial aid available:
FAFSA (Free Application for Federal Student Aid): Applying for the FAFSA in October of the student’s senior year is essential for determining eligibility for federal grants, scholarships, work-study, and federal student loans. Parents will need personal financial information (tax returns, bank statements).
CSS Profile: Some private colleges and universities require this in addition to the FAFSA for institutional aid.
Grants and Scholarships: Actively research and encourage your child to apply for various grants and scholarships. These are "free money" that doesn't need to be repaid. Look for merit-based scholarships (based on academic achievement, talents, etc.) and need-based scholarships.
Student Loans: Discuss the differences between federal and private student loans, interest rates, repayment options, and the implications of debt. Be clear about whether you plan to take out Parent PLUS loans or if your child will be responsible for their own loans.
College Savings Plans: If you haven't already, explore options like 529 plans, Roth IRAs, etc., for tax-advantaged savings.
Net Price Calculators: Utilize the net price calculators on college websites to get a personalized estimate of the actual cost of attendance after grants and scholarships.
How should parents approach saving for college?
Kelly: Opening a 529 college savings account for your child when they are young is a strong financial move for parents. Not only does this allow you more time to grow contributions tax-free but it also allows generous friends and family members more time to help fund your child’s education. When my son was born, we opened his 529 account ASAP in part because I’m a financial nerd but also because I’m a minimalist and this was a great way to encourage gifts without the added excess of toys. As some extra motivation if you want to take advantage of the ability to roll excess 529 funds to a Roth IRA then the 529 needs to be open for 15 years! The various savings accounts for college can feel overwhelming but for most families, a 529 college savings account along with a taxable brokerage in the parent’s name can be a strong combination. You might also hear about UTMA accounts and while they have some small tax advantages, I generally don’t recommend them for college savings because your child will have full control over those assets when they turn legal age, whether they are in college, or not. Of course, we will raise our children to be financially savvy but on the off chance they are not perfect, you might want to avoid the UTMA to ensure the college savings does not go towards an epic 21st birthday party instead. This is my favorite calculator for understanding how much you might want to contribute towards your child’s college savings.
By realistically addressing budgets, understanding financial aid, and carefully saving, parents can help their children smoothly navigate the college planning and application process all while setting the whole family up for financial success.
Thank you for reading today’s post! And a special thank you to Kelly for co-authoring this post. Subscribe to her newsletter here that helps families like yours understand the daunting landscape of financial planning.
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Such an important article. It's so hard not to get caught up in the "best colleges" you can't afford craziness.
I get hung up on this whole “dream college” idea. There are some pretty good bargains out there.