How to Pay for College without Breaking the Bank | Plancorp

College Finances

 Derek Jess By: Derek Jess
How to Pay for College without Breaking the Bank | Plancorp

Deciding how much to spend on your child’s college education? Given the sticker price, it’s one of the most significant financial decisions you’ll ever make. Parents who overspend on their kids’ higher education may end up having to work longer, live on less, sacrifice other important goals and priorities, or even all the above. Kids may be no better off. Loaded down with student loan debt, they struggle to survive, let alone thrive after graduation. They may take the highest-paying job they can find, regardless of its suitability, and delay major life events such as buying their first home, getting married, or having children. They put off saving for their own child’s college education. The cycle continues.

Fortunately, we have a strategy for breaking this vicious cycle. It begins with a bit of planning… before you begin the college search.

A Broken Lending System for College Financing

First, let’s cover one of the biggest hurdles many families face as they plan for college: wrapping your head around the costs.

When you’re in the market for a new home, one of the first calls you make is to a mortgage lender to get pre-approved for a loan. You disclose your income, work history, assets, liabilities, and credit score, along with how much you can put toward a down payment. The bank then determines how much money they are willing to lend you. Under this system, they’re unlikely to loan you way more than you can afford.

There is no comparable pre-approval process for college costs – even if there was, lenders aren’t the best resource for deciding how much you can reasonably afford. Typically, student loans are not forgiven through bankruptcy, so the federal government and private lenders don’t seem to care as much about your or your child’s ability to repay.

According to the U.S. Department of Education, there are just three requirements for a dependent undergraduate student to take out a Federal Direct Loan:

  • Fill out the Free Application for Federal Student Aid (FAFSA) form.
  • Complete entrance counseling, a process that takes just 20-30 minutes.
  • Sign a Master Promissory Note.

This isn’t generally a huge concern because most undergraduate students are limited to “just” $27,000 of Federal Direct Loans. A credit check is added to the mix for Federal Direct PLUS Loans, which are taken out by graduate students, professional students, and parents of dependent undergraduate students. However, there is no consideration for household income relative to expected monthly loan payments. In fact, the only limitation on the amount of Direct PLUS Loans that can be taken out is the remainder of college costs not covered by other financial aid.

As a result, it is very easy to accept an overly burdensome student loan amount with the click of a button. You need $300,000 for college? No problem! Just click here. We believe this has made it far too easy for families to bite off more college debt than they can chew.

The federal student loan program was enacted back in 1958 as part of the National Defense Education Act. By 2008, outstanding student loan debt in the United States had grown to $619 billion, according to the St. Louis Federal Reserve. That number has nearly tripled in the last 12 years to $1.7 trillion today. With outstanding balances increasing at a pace of $465,000 per minute in the last year alone, there is little hope this student loan crisis will resolve itself anytime soon.

The Typical College-Buying Experience

So how did we get here? Unfortunately, many families opt for a strategy of “figure it out later and hope for the best.” A typical scenario goes something like this:

John and Jane Smith have a daughter, Sally, starting her senior year in high school. Together, they visit Dream University. Sally could get into this school, but it would be a stretch. The Smiths correctly assume they will not qualify for need-based financial aid, but assume that Sally will qualify for at least some merit-based scholarships.

The Smith family is mesmerized by DU’s many amenities: its beautiful campus, student resources, academic prestige, fully equipped rec center, campus life, athletics, and more.

Post-visit, Sally applies in the fall. Happy dance … she is accepted! Spring arrives, and John and Jane receive an award letter, along with the cost – $80,000/year. No scholarships, no financial aid, and the first payment is due in six months. Happy dance quickly becomes panic attack.

John and Jane decide Sally deserves to go to Dream University, despite the cost, so they take on a combination of Parent PLUS and home equity loans to make it happen. When that’s not enough, they reallocate some of their retirement savings to tuition and loan payments. Sally also takes on more than $150,000 in federal and private student loan debt – an amount that far surpasses her expected starting salary. She spends the next 20 years paying off her debt, which prevents her from saving for her own children’s college education. The cycle continues.

The Smiths’ “shoot first, ask questions later” approach can be summarized in three typical steps: (1) become enamored with a school, (2) max out student and Parent PLUS loans to attend, and (3) allocate additional resources that were once earmarked for other important goals and priorities to help cover loan payments.

A Better Way to Pay for College

Today more than ever, it is essential to enter the college-buying season with a proactive financial plan that can help position you and your college-bound child for future success. The solution is simple: flip this experience on its head by starting with what you have versus what you’re hoping for.

Step 1: Identify Resources Available to Pay for College

Start with any assets you have accumulated specifically for college, such as 529s, brokerage accounts, bank accounts, minor savings accounts, Roth IRAs, and Education Savings Accounts. Do NOT include assets saved for retirement or other financial goals.

Also include any help you can expect from grandparents. We get it – money is a sensitive subject, often hard to talk about. But if grandparents intend to help, it’s best to know how much they would like to contribute before – not after – you and your child decide which school to attend. You’re not asking for a handout; you’re only asking to understand what resources you have available to pay for college. Presenting the question in this way may help remove some of the emotional red tape.

The last and most often overlooked college funding resource is cash flow – the amount of current income that can be used to cover education costs once your child begins school.

According to the U.S. Department of Agriculture, the average cost of feeding a child between the ages of 14 and 18 on a “moderate-cost plan” is $288 per month (in case you are interested, it’s $321/mo for boys and $256/mo for girls). Assuming your child comes back home for the summer, that’s around $2,600 per year that can now be used to help cover room and board of food at home.

Were you saving $500/month into a 529 account? Did you recently get a raise that bumped your after-tax income by, say, $300/month? Do you qualify for the American Opportunity Tax Credit (AOTC), up to $2,500/year? Do you expect your child to work part-time during college, even if it’s just $200/month?

These cash flow sources may not sound like much, but they add up to more than $80,000 towards your four-year college budget. Every bit helps!



Cash Flow

Four-Year Cash Flow

Room and Board



529 Savings



Raise (After-Tax)



Reduced Expenses



Part-Time Work









Step 2: Establish a Maximum Student Loan Amount

Once you know what resources you have available to pay for college, the next step is to establish a reasonable student loan amount. This largely depends on how much your child expects to make upon graduation.

The cost of attending any given university will generally be the same, regardless of the major your child decides to pursue. But not all majors are created equal. According to the U.S. Department of Education’s College Scorecard, a Washington University graduate with a bachelor’s degree in computer science can expect an annual starting salary of around $96,000. That’s considerably higher than the $28,200 average starting salary for a Washington University graduate with a bachelor’s degree in psychology. The total cost for either Wash U degree is as high as $320,000.

While this doesn’t mean your child shouldn’t pursue a degree in psychology, it does impact the amount of student loans they can afford to pay after graduation. Paying off $100,000 of student loan debt at $1,000/month would be very difficult with a net take-home pay of $1,600/month.

But what if you child lowers monthly payments by extending the term of the loan? That’s one way to make monthly payments more manageable; however, shifting the payoff schedule from 10 to 20 years on a $100,000 loan at 5% increases the total interest paid from $27,000 to $58,000.

How about selecting an income-based repayment plan? In addition to increasing the cost of the loan over time, this may also result in monthly payments that are less than the total interest due each month. In financial jargon, that’s called negative amortization. In simpler terms, we’d call it risky business. When monthly payments aren’t enough to cover the loan’s monthly interest, unpaid interest is added back to the balance and subjected to interest again. Essentially, this is compound interest working against you instead of for you.

Bottom line, every $10,000 of student loan debt equals a monthly payment of around $100 on a standard 10-year repayment plan. A good rule of thumb is to keep the total loan balance upon graduation less than the anticipated starting salary of your child’s major or field of work. This positions them to tackle student loan debt quickly, without creating undue financial stress or setting them back on other important goals and priorities.

Step 3: Calculate Your College “Pre-Approval Amount” and Shop for Affordable Schools

Now that you have accounted for available college funding sources and a reasonable debt load, you can create a “Pre-Approval Amount” for your child’s four-year college budget. It might look something like this:

Parent Resources

529 Savings

$ 50,000

Other Assets/Outside Help

$ 20,000

Cash Flow

$ 82,800

American Opportunity Tax Credit

$ 10,000

Total Parent Resources



Student Resources

Work Study / Part-Time Job

$   9,600

Total Student Resources

$   9,600


Student Loans

Student Stafford Loans

$ 27,000

Private Student Loans

$ 23,000

Total Student Resources

$ 50,000


Four Year Pre-Approval Amount



You might read this pre-approval amount and assume a university with a stated all-in cost of $75,000/year isn’t in the cards. Not so fast! It is important to focus on net cost vs. sticker price when shopping around for colleges within your budget. Net cost is the anticipated costs of attendance after any need- and/or merit-based financial aid. If your child qualifies for scholarships, it’s quite possible that a private college with an annual sticker price of $60,000 may have a lower net cost than an out-of-state public university with a sticker price of $30,000.

As an example, Tufts University and the University of Florida are tied at #30 on the list of top universities for 2021, according to U.S News and World Report. The sticker price for Tufts University is $60,862/year and the University of Florida is $28,658. Seems like a no brainer that Florida is cheaper, right? Maybe not. When you dig deeper into financial aid awarded by each university, you’ll find that Tufts University awards its undergrads an average of $47,544/year for need-based aid, while the University of Florida awards just $7,826/year. This is just one example with need-based aid – the same could also be true with merit-based scholarships.



Tufts University

The University of Florida

Sticker Price



Financial Aid



Annual Net Cost



The actual aid each school might award your student will depend on your Expected Family Contribution (for need-based aid) and academic achievement (for merit-based aid). Universities are now required to include a net price calculator on their website to provide an early indication of what net cost may look like. But beware: Not all calculators are the same. One school may include student loans as a form of need-based aid while another school does not. Dig into the numbers to ensure you are comparing apples to apples.

Partnering with Plancorp this College-Buying Season

As you can hopefully see, it’s one thing to save for college and something completely different to actually pay for it when the time comes. There are many moving pieces at play in your financial life and it can be difficult to see how everything fits together. You don’t have to go this decision alone. Schedule a meeting with a Plancorp advisor today to discover how college fits into your family’s overall plan for financial independence.

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Disclaimer: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

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Derek joined Plancorp in 2018 after spending the previous three years of his career as a financial advisor in Boulder, Colorado. As a CERTIFIED FINANCIAL PLANNER™ professional, he is passionate about helping people make financial decisions tailored to the life they want to live. More »