How Much Should Parents Pay for College?

Little Suzy has her heart set on attending Prestigious University. She's worked hard for it, with a 3.9 high school GPA, an impressive resume of volunteer activities, a lead role in last Spring's school musical, and two summers of waitress work.

The only problem is that the expected costs of attending Prestigious U. weigh in at $50,000 per year. As her parents, are you willing to spend $200,000 over the next four years to make Suzy's college dream come true? Or will you pull off your Scrooge imitation and tell Suzy to start researching her local community colleges? Or are there other options available which can make both you and Suzy happy?

For most parents, little Suzy's college dreams create a parental dilemma. After all, we love our children, and would do almost anything for them.

Does it automatically follow that we should--or must--fund their college dreams regardless of the consequences to our own financial situation? Are we willing to put our own dreams on hold to make Suzy's college dream come true? Are we willing to trade our own retirement security for the dazzling smile that would appear on Suzy's face if we say "yes" to her dream?

This parental dilemma gets worse each year as college costs continue to increase at twice the rate of inflation. The cost of attendance at an elite university--the most selective and expensive--now averages $56,000 annually for the 2012-2013 school year. This includes tuition, fees, room and board, books, travel and personal expenses. The national average cost of a four-year private university is $42,000 annually. A four-year public university costs $20,000 annually. With increases of 5 - 8% each year, these costs will double over the next 9 to 14 years.

This parental dilemma is the most stark for middle class parents. A dilemma is "a situation in which a difficult choice has to be made between two or more alternatives". Poor parents often have no financial resources, so they have no viable alternatives: either Suzy receives a full financial aid package to attend Prestigious U., or she cannot go there. Rich parents don't face a difficult choice: whether they agree to pay for Prestigious U. won't materially impact their financial situation.

Middle class parents, on the other hand, face this dilemma directly: they can choose to pay for Prestigious U. while taking a meaningful hit to their financial security, or they can choose to dash Suzy's dreams. That's a difficult choice.

While the question of how much parents should pay towards their children's college costs will depend on the parents' financial situation and their attitudes towards higher education, there are some answers that are usually wrong. They are wrong because they are not fair to the child, or not fair to the parents, or may actually not be in the child's best long-term interest.

One wrong answer is that the parents should write a blank check and agree to fund any college Suzy dreams of attending. There are several problems with this answer. First, its not fair to the parents since they may be putting their own financial situation at risk. Not only will this cause future stress to the parents, but it may end up hurting the child in the event she needs to provide financial support to her parents later. Second, this answer is not in the child's best long-term interest because she is shielded from having to make a reasonable decision which balances the costs and benefits of attending Prestigious U. Thus, this answer prevents the child from learning an important life lesson. Third, this answer is not economically efficient since it divorces a huge financial decision from its consequences. Economically, Suzy should attend Prestigious U. only if its financial benefits will outweigh its costs. Should Suzy decide to major in ancient Greek history, she should probably attend a less expensive college.

Another wrong answer is that parents should not pay for any of Suzy's costs. Granted, there are some parents who would be well justified to make this choice, such as parents of students who goofed off in high school and will not study at college. But for parents of hard-working children who studied in high school, helping to pay for their child's college is a responsibility since college has become a prerequisite to joining the middle class. The days of graduating from high school and finding a family-supporting job are largely over, and parents need to provide at least some help to make sure their children are prepared for their future.

So the correct answer lies between these extremes. The question remains, how much should parents be willing to pay for their child's college education?

The best solutions to the question of how much parents should pay for their child's college are ones that facilitate their child's own reasonable decision about what college to attend. In other words, parents should help pay for their child's college education, but in a way that forces their child to make a responsible and informed decision about where he or she should go.

There are several ways to accomplish this. One good solution is for parents to sit down with their child and explain they are willing to pay a set amount of money towards their college. For example, Suzy's parents could tell her they will contribute up to $20,000 per year for four years towards her choice of a college, and will also help Suzy apply for her own student loans if she needs more money. This will force Suzy to carefully weigh the costs and benefits of attending Prestigious U. and then make a responsible decision whether its worth it. This will teach Suzy an important life lesson. In some cases, Suzy may decide attending Prestigious U. will be worth it because she will likely get a better-paying job after graduation that will more than offset its high costs, Or she may decide the psychic benefits of attending Prestigious U. will be worth the extra monthly payments that she'll need to make for the next 10 or 20 years after graduation. On the other hand, she may decide to not attend Prestigious U. because she doesn't want to be stuck repaying those student loans.

Another benefit of this solution is it will encourage Suzy to take actions to decrease her college costs. For example, she may decide to get a higher paying summer job, or take on a part-time job during college, in order to decrease the amount she needs to borrow. She may also decide to more thoroughly research scholarship opportunities, since any grants she receives will effectively go into her own pocket.

Note that an important part of this solution is for parents to sit down with their child and clearly explain what they will contribute towards college. Ideally, this will be done before the child starts to research her college choices in earnest, as it wouldn't be fair to allow the child to form her dream only to find its out of her reach. Its also important for the parents to commit to their contribution, and avoid reneging on their promise later. By committing to a fixed contribution, the parents can set up a college saving plan, and have a good idea of how much they need to save to meet their promise.

Another good solution is for parents to agree to contribute whatever amount is calculated as their "Expected Family Contribution" (EFC) after submitting the Free Application for Federal Student Aid (FAFSA) form. The EFC is the minimum amount that the student and her family are expected to contribute toward the cost of college. This amount is calculated according to federally-defined formulas that take into account the income and assets of the student and her parents, the size of the family, and the number of dependent children enrolled in college. Use of the EFC provides a standard amount that the parents could be willing to contribute.

The solution which I used with my children was a variation of the solution above. My wife and I agreed to contribute the entire cost of attendance at our state's flagship university, regardless of which college my children decided to attend. Based on this commitment, my children could have decided to attend our state university, where they would have received a fantastic education and graduated with no debt. Alternatively, they could have decided to attend a more expensive college, but they would have needed to pay for the added costs using a combination of their own earnings and student loans. Thus, my children were forced to consider whether the additional costs of attending a more prestigious college would be worth it. Interestingly, both my children decided to attend a different university in a different state. Partly, their decisions were influenced by scholarship offers they received from those universities. In retrospect, this was an excellent solution. I was able to commit to our promise, was able to pre-fund their college savings accounts with the required funds, and didn't need to worry about being a Scrooge if they wanted to attend an expensive private school. From their perspectives, they were able to select their colleges after carefully considering the costs and benefits. They will also both graduated with no debt and, in fact, with money in their savings accounts since their actual costs were less than what we promised to contribute. This was mostly due to the scholarships they received, which ended up being to their financial benefit rather than to my benefit. That's only fair, since they earned those scholarships.

In conclusion, the question of how much parents should pay for their children's college expenses has several good solutions. Which solution you choose should be fair not only to your children, but also to yourselves. Ideally, you should split the responsibility for making a good choice between yourselves and your children by making sure they bear at least some of the costs of college, along with the benefits. Most importantly, you should have a good discussion with your children, and use their college selection process as an important life lesson.