We often hear parents say, "We will pay up to a state school price, so if my son/daughter picks a more expensive private school, they'll be responsible for covering the difference in tuition." Unfortunately, there are big flaws with this thinking.
Currently, a public school education is around $25,000 (tuition/room/board). These days, if a student ops for a private school education with a sticker price of $40,000 to $65,000 per year, that would mean the student will be on the hook to finance a remaining $15,000 to $40,000 per YEAR, after the parent contribution has been exhausted.
Most students do not have access to an income stream vast enough to finance such large amounts, so borrowing money to cover the remaining cost is their only option. Not only should parents advise their child on the pros, and mostly cons, of borrowing such large sums of money, but parents don't realize what payment options students really have available to them.
Students typically don't have a credit rating at 18 years old, leaving the Federal Stafford student loan as the only loan available. This loan, backed by the federal government, is the only student loan that is allowed in just the student's name. Sounds like a perfect solution, right? Not so fast. Stafford student loans have limits as to how much the student can borrow over the four years of their undergraduate education. These Stafford loan amounts are not going to cover that $15,000 to $40,000 cost differential.
- $5,500 for freshmen year.
- $6,500 for sophomore year.
- $7,500 for junior year.
- $7,500 for senior year.
Where can students go next? Private student loans through credit unions or select banks will usually offer funding up to $90,000 to help cover the remaining gap. But who is really on the hook for these private student loans? Without that credit rating, the loan can only be obtained with an adult co-signer, thus; the parent is ultimately responsible for the loan.
"Students typically don't have a credit rating at 18 years old."
If you have been doing the math along the way, you might realize that for higher-price-tagged universities, there still may be a gap (up to $140,000 over four years) after the Federal Stafford loans and the private student loans. What's left? With a student loving their college, making close friends and refusing to transfer, parents usually end up taking out private education loans or the government sponsored Parent Plus loan to close the gap and keep their student on course to graduation. Even knowing better, parents will still take on the debt that they had originally insisted that their student had to "cover."
As a parent, if you start out with the intention to pay a budgeted amount per year for your student to attend college, then START your college search with schools that are reasonably within your budget, otherwise this is a recipe for financial disaster. Keeping your finances in check and finding schools that will maximize your students' successes during the college search will help to avoid a college graduation present of overwhelming debt for both of you! You may be ecstatic on decision day, but years later you don't want to be on the hook for much, much more, just like all the parents that are part of the roughly $1.3 trillion in college debt now.
CAPlus assists families by strategically finding colleges that are a good fit for your student academically, socially, and most importantly, financially.