Paying for College Is About to Change

Most high school students will use Thanksgiving week as a chance to catch their breath before the final stretch of the semester. For some seniors, though, this time won't be quite as relaxing because it's a chance to finish that last round of college applications. While students do their best to burnish their resumés in hopes of getting into their dream schools, parents are often more reflective as they contemplate the financial strain of supporting their child through four years (or more) of college. For many families, this will be the largest expenditure of their lives apart from purchasing a home.

Make no mistake: parents and college-bound seniors will soon be making a buying decision that can easily total well into the six figures. The strange part is that students can make binding — or at least binding-ish — Early Decision commitments before they have any real idea of the total cost of attendance. When else do we commit to a six-figure purchase without knowing the price?

In my experience, most families only begin working out the details of paying for college after their child has been admitted and the financial aid package (or lack thereof) is in hand. With only a few weeks to decide where the student will spend the next four years, families often find themselves doing "whatever it takes" to make the most selective school possible fit into the budget.

Parents often assume that student loans will be available to fill the gap between the school's cost of attendance and their own resources. They're surprised to learn that first-year students can generally borrow only $5,500 in federal student loans, even though the annual cost of attendance may exceed that amount 15 times over. Until now, parents could cover almost any remaining gap by borrowing up to the full cost of attendance through Parent PLUS loans. That's no longer the case. Legislation passed earlier this year places a hard limit for new undergraduate students of $20,000 annually per child and $65,000 lifetime for federal parent loans.

Now imagine your student worked hard, earned excellent grades and applied broadly. They get into a highly selective university — one of those schools with many willing applicants for each available spot. These schools can be generous to students who demonstrate financial need, but many middle- and upper-middle-income families find themselves underwhelmed by the aid offered. A selective university may carry a total cost of attendance close to $90,000 per year. Yet between the student's $5,500 in loans and the $20,000 parent limit, your family can only borrow $25,500 for the first year. Ideally you've saved along the way through a 529 plan, but coming up with $65,000 or more each year is simply too big a lift for many.

That's why I strongly recommend that students never apply to a college without the family having at least a reasonable idea of what it's likely to cost. Colleges with high sticker prices often highlight their lower average "net price," but this can be misleading. While it's helpful for under-resourced families, many parents who see themselves as comfortably middle class discover that colleges believe they have no demonstrated need. In that case, forget about the average net price — you will pay the full cost of attendance.

I wish it were easier to estimate how much a college is likely to cost your family. Almost every college has a net price calculator, either on its own website or through a centralized resource on collegeboard.org. As a rule, the more questions the calculator asks, the better the estimate it provides. Some calculators will even factor in grades and test scores to approximate merit aid, which is especially helpful at schools that give academic scholarships regardless of need.

Other helpful tools can give you a much quicker sense of what to expect. The Niche.com True Cost Report allows families to input financial information, grades, test scores and colleges of interest to get a four-year cost projection. The spreadsheets at bigjeducationalconsulting.com are also impressively thorough, listing cost of attendance, merit aid, and financial aid data for most universities. With a single glance, you can see whether a college typically meets full demonstrated need and whether it offers merit aid to families at all income levels.

Finally, Myintuition.org provides a simple, five-minute estimate of likely financial aid (and sometimes merit aid) for nearly 70 colleges, including the University of Denver. You don't need to create an account, and as long as you have rough numbers for income and assets, you'll get a solid early estimate.

With these tools, most families can form a reasonable estimate of the total four-year cost before applications go out. Given that federal parent loan limits will be far lower for students starting college next year, it's more important than ever to have a rough sense of affordability before your student hits "submit." Otherwise, your child may be admitted to a dream school that is simply beyond your ability — or willingness — to pay.

David Gardner is a certified financial planner in Boulder County and is admitted to practice before the IRS. He can be reached at entreewealth.com. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.