How (much) to pay for college, by Suze Orman

Now that we’ve turned the corner from summer to fall, many families with high schoolers are about to embark on the college search process. I hope you will hear me out on how important it is to look for a school that is a good financial fit for the entire family.

Every parent tells me they will do anything for their children. With that in mind, I am going to ask you to do something that I know can be very hard. One of the most loving things you can do for your child, and yourself, is to be very deliberate that you don’t overspend on college.

Find the best financial fit

A big mistake parents can make is that they tell their children to just set their sights on the college of their dreams. Please listen to me. You need to find a financial dream school. College is definitely worth the investment, but only if you and your child emerge from their college years in solid financial shape.

Here’s how to make sure college doesn’t derail anybody’s path to long-term financial freedom.

1. Make retirement saving the bigger priority.

Yes, you read that right. I don’t want parents to pay for college out of their current income or to borrow for college if that means they will not be able to stay on pace with their retirement savings.

If you’re thinking that sound’s crazy-selfish, you could not be more wrong.

I need you to fast forward 25 or more years. Imagine you are retired. And because you didn’t save enough during your kid’s college years you are having a hard time covering your living expenses. So your now very-adult kid will need to step in and help. That’s going to be a financial burden on your kids at a time when they are likely raising their own family.

Prioritizing saving for retirement over paying or borrowing for college is the best move for your entire family. 

2. Plan for the student to borrow before you borrow.

Student federal loans are a much better deal than federal college loans for parents (called Parent PLUS loans.) Students pay a lower interest rate, and the borrowing limits for federal loans serve as important guardrails to keep students from emerging from school with too much debt. As long as your family completes the FAFSA (Free Application for Federal Student Aid) form, every student is eligible for federal loans.

That said, there are also private student loans that allow additional borrowing. These loans require the borrower to meet lender qualifying rules. That typically means parents need to co-sign for a child’s private loan. I don’t recommend this. It means you are legally on the hook for making the payments, and the loan will show up on your credit report, which could impact your financial life.

The best financial fit is the school whose aid package doesn’t require borrowing. But if you do decide to borrow, the key is for the student to not overborrow.

How much is “too much” to borrow? Mark Kantrowitz, a college financial aid expert, suggests that if a student’s total borrowing for a bachelor’s degree is no more than what they can expect to earn in their first year after school, they will be in a solid position pay off their loans within 10 years.

3. Say no to a school that will require parent borrowing.

The federal Parent PLUS program provides loans for parents to cover a child’s college costs. Be careful.

The PLUS loan interest rate is much higher than the rate for federal student loans, and there is an added origination fee. Unlike student-borrowed federal loans, repayment starts immediately, not after your kid is out of school.

My biggest concern with PLUS loans is that you are able to borrow as much as you need to cover all the costs not covered by an aid package, or your own cash flow. That’s where many well-meaning parents get into a financial mess. There is no lender review to determine if you can really afford to borrow. And no one is checking to see if you already have too much debt. Or if you’re on track with your retirement savings. That is on you to figure out.

I also don’t recommend parents take out private loans if it will compromise their financial security.

I am asking you to stand in your truth and do what is right for your family. Seeking out a college that does not require overborrowing is how you all will earn the biggest payoff from college: An education that does not create financial hardship for parent or child.

Looking for more tips on preparing your student for college? Check out these blogs:

• 5 traits the best student checking accounts have
• How to build credit as a college student
• How to smartly use community college as a stepping stone by Suze Orman

Listen to Suze's FREE weekly podcast

Join Suze on the Women & Money podcast (and everyone smart enough to listen) as she answers your questions and shares invaluable money lessons every Thursday and Sunday. Subscribe for free on your favorite podcast streaming app today, and don't forget to submit a rating and share the podcast with family and friends. Listen for free