How Much Should I Pay for College?

Key Takeaways:

  • Before you apply to college, set expectations about your budget and who will pay.
  • Calculate what the student can borrow based on their first year salary. 
This number should include both federal and private student loans in 
the student’s name.
  • Use tools to figure out how much college will cost.
  • There isn’t a set number for what parents should borrow or pay.
  • Parents should review their long term plans on their own or with a 
financial professional before deciding how to borrow and / or contribute 
from their own finances.

How Much Should I Pay for College?

With the rising cost of college, you may be asking yourself what you should reasonably spend on your child's education. While this varies for every family, understanding your budget and setting expectations will help you determine the amount you should pay for college while ensuring both you and your student are financially successful after graduation.

Who Will Be Responsible for College Costs?

Start with a pen-to-paper calculation of what you could realistically spend on college. This doesn’t (yet) need to be a detailed monthly budget, but instead a ballpark figure that your student understands. The goal is to get a sense of what’s comfortable and what’s a stretch as you use more net price calculators and finalize your student’s list.

Here are the most common components of this contribution calculation:

  • Savings: money set aside for college, including from your 529 plan. This should not count retirement savings—those are yours and we don’t recommend using your retirement nest egg to fund your child’s college education.
  • Additional Contributions: what you and your support networks (grandparents or others) plan to contribute to the cost of college, above and beyond any savings. This could be $0—but often there is some additional money that you can put towards tuition bills as they come due. For example, if your student won’t be living at home you will presumably save on travel and food expenses, and could put that money towards their expenses in college.
  • Student Income: there are many reasons to work during college, and contributing to the cost of college is top of that list! Even earning a few thousand dollars per year (10 hours per week at the federal minimum wage comes to about $3,500) represents a real reduction in loans you’d need to take otherwise.
  • Additional Scholarships: if you do have committed or likely scholarships you know about you can include those here also.

 

Let's take a look at an example:

Annual Contributions

529 Savings Plan 

$4,000 

The family has saved $16,000 in a 529 plan 

Parent Contributions 

$5,000 

The family estimates they can put aside an additional $5,000 per year for tuition payments

Grandparent Contributions

$3,000

Both sets of grandparents plan to give modest cash gifts to help fund expenses

Student Income

$3,000

The student plans to work every summer

Total Family and Student Contributions

$15,000

If a college costs more than this, the family will need to take on loans

 

Note: whether or not your student is awarded work-study, once enrolled they will need to search and apply for campus or other jobs each semester. Your student needs to be on top of the job search, do well in order to keep the job, and may need to make some sacrifices if that contribution is critical for you to afford college.

If you aren’t comfortable with that commitment and risk, you may want to leave it out of your calculation. As you’re understanding what college may realistically cost—and what you can realistically pay for—make sure you look at all four or more years of study. Many students take longer than four years to graduate, so it’s worth considering whether you want a cushion for an extra semester or two.

Ready to build a more detailed budget? Use the College Student Budget Template to dive deeper into annual income and expenses.

 

 

How Much Student (and Parent) Loan Debt is Too Much?

Now is also the time to set some targets for how much you’re comfortable taking in loans—as a family. Student debt is actually family debt, especially if you’ll be co-signing private loans or taking parent loans. The answer to how much student loan debt you and your student can take on, and how much comes from other sources of financing, will be different for every family. Different families will have different risk tolerances based on their financial situation or the student’s goals and preferences.

 

What’s the limit on student borrowing?

Note that there are both student and parent loans for college. Federal subsidized or unsubsidized student loans are the first loans your student should take, if you take on any debt. For a dependent student, the total maximum is $31,000 in federal student loans for an undergraduate degree (unless the parents can’t qualify for a Parent PLUS loan, in which case it can be higher). If you need more, you will need to consider one of the following options:

  • Federal PLUS Loans (Parent PLUS or Graduate PLUS): Direct PLUS loans are available to parents of undergraduates.They may borrow an amount equivalent to the annual cost of attendance (as determined by the school) minus any other financial aid received. PLUS loans do require a credit check, but approval is much easier than what is generally required for private student loans.
  • Private Loans: Private student loans are available to both parents and students. Students borrowing privately will almost always need a co-signer, a person who has the income and credit rating required to be approved for the loan, and who agrees to pay the loan if the student cannot. The payment history is also reported on the co-signer’s credit report. Private student loans are considered an alternative to PLUS loans because of lower interest rates offered to borrowers or borrowers with co-signers with good credit.

The bottom line: if you have good credit, you could have the option to borrow a lot for college—perhaps up to the full cost—which might be too much debt and hard to pay off. It can be easy to get in over your head at the end of the process, which is why it’s important to set your own limits ahead of time.

 

Making sure you can repay

One guide to how much to borrow is to look at how much the student will be earning right after college. The benchmark we use: you shouldn’t borrow more than your estimated starting salary during your first year out of college. This is a good rule of thumb to ensure that you have enough income to comfortably make your student loan payments over a typical ten-year repayment term. So, if your student anticipates that they’ll earn $40,000 in their first entry- level job after graduation, they shouldn’t take out more than $40,000 in total student loans.

You can research potential salaries on sites like College Scorecard, Edmit, Federal Student Aid’s Career Search tool, Payscale, or through the college career office. You can also look at monthly payments and income numbers and aim for 10% of your student’s monthly income to go towards loan repayment (this is a slightly more conservative benchmark).

We encourage parents to look at your own goals and life plans and assess how contributing to the education of all of your children will affect your lifestyle and future retirement. When you apply for student loans you’ll be approved based on family income, not on what you can safely afford. Use a loan calculator (there are many options available online) to see how much you’ll need to pay monthly for different loan amounts. If you can’t afford to make the payment now, you more than likely won’t be able to afford it when your student finishes college.

Your contributions, plus the loans you could afford, will give you a rough estimate of how much you can responsibly pay for college over the full period. Talk through these numbers with your student and agree on them together.

 

 

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