The College Bill Is Coming: What Parents Need to Know Before Borrowing
About the Guest(s):
Amy Irvine is the founder and CEO of Rooted Planning Group, a financial planning firm dedicated to helping individuals and families achieve financial well-being. With years of experience in the financial industry, Amy is an esteemed financial advisor known for her insightful strategies and personal approach to financial planning. Her expertise spans a variety of financial planning areas, emphasizing the importance of aligning life events with financial goals.
Episode Summary:
In this episode of Money Roots, host Amy Irvine dives into the important considerations for parents and students as they navigate the financial aspects of college education, particularly in light of new regulatory changes effective from July 1, 2026. Drawing on her extensive knowledge in financial planning, Amy offers a comprehensive guide to understanding the real cost of college, the borrowing process for both students and parents, and the crucial factors to assess when selecting an educational institution.
The discussion begins with an introduction to the "real cost of college," focusing on the features and benefits of the College Navigator website. This online tool provides prospective students and parents with critical information about tuition fees, living costs, and trends in college expenses. Amy emphasizes the importance of examining retention and graduation rates, and how they should influence decision-making. The episode progresses into a detailed analysis of changes in borrowing limits for both students and parents. Amy explains the adjusted limits on PLUS loans and student loans, and the significance of understanding loan interest rates and origination fees when planning college finances.
Key Takeaways:
- College Navigator is a vital resource for understanding the cost breakdown of potential colleges, including tuition, housing, and historical trends in pricing.
- The importance of considering college retention and graduation rates, which can impact the long-term value of a college investment.
- There are limits on how much can be borrowed through government loans—$27,000 for students over four years and $65,000 lifetime for parents via PLUS loans.
- Loan origination fees and interest rates significantly affect the total cost of borrowing for college; understanding these can help in the planning process.
- Parents and students should consider future job earnings and loan repayment strategies when deciding on college options, ensuring that debt remains manageable after graduation.
Notable Quotes:
- "The 'real cost of college' is crucial for families to understand when making one of the biggest financial decisions for higher education."
- "College Navigator provides a comprehensive look at tuition fees, estimated out-of-pocket costs, and historical expense trends."
- "Understanding loan limits and origination fees is critical to managing education finances effectively."
- "Interest accumulates on student loans, adding to the principal amount over time. This is a key point families often overlook."
- "Planning for post-graduation expenses in relation to expected job salaries is essential in making a wise investment in education."
Resources:
- College Navigator - A tool by the National Center for Educational Science Statistics to explore college costs, retention, and graduation rates.
For a deeper understanding of these topics and more strategies on managing the financial journey through college, be sure to listen to the full episode. Stay tuned for more insightful discussions on Money Roots, where financial planning supports life's pivotal moments.
Transcript
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Speaker B:Hi, I'm Amy Irvine, founder of Rooted Planning Group, and this is Money Roots, a podcast where my team and I explore the real conversations behind financial planning.
Speaker B:Because life is about events supported by your dollars and cents.
Speaker B:Let's get started.
Speaker A:Hello Money Root listeners.
Speaker A:Amy Irvine, CEO and founder here of Rooted Planet Planning Group.
Speaker A:I have an episode that is near and dear to a lot of our clients that have kids going off to college here in August.
Speaker A: st of: Speaker A:So I want to walk down through a couple.
Speaker A:If this isn't your first year, you may know some of this, but if it is your first year, this is also a good review.
Speaker A:But if it is your first year, here's some resources that you can go to and of course we're here to help if you're a client of ours.
Speaker A:So one of the things that I wanted to touch base on is what's called the real cost of college.
Speaker A:There's actually a fantastic website that's available called College Navigator.
Speaker A:It's through the national center for Educational Science Statistics.
Speaker A:It actually gives you a ton of information about the various colleges that are out there, including the tuition fees, estimated out of pocket costs on campus living, off campus living.
Speaker A:It gives you all of that information in a nice summarized chart and it it'll give you for the next four, like I should say the prior four years so you can kind of see what the trends have been and what the cost increases have been.
Speaker A:So you can plan on some of that information when you're calculating, calculating out what you're actually going to be eligible for.
Speaker A:It also has a multi tuition calculator, so it'll estimate it going forward.
Speaker A:They also show information for things like alternative tuition plan and funding programs such as how to fund, potentially how to fund the cost of it.
Speaker A:The net price is something that I think is really interesting for, for people to explore.
Speaker A:It's one of the options that's listed there and it actually actually breaks down the cost to the student based on the income of the household.
Speaker A: example and it's showing for: Speaker A:If your income was between zero and $30,000, then the net price for the household for the student would be around $15,651 per year all the way up to 110,000 of average income or sorry household income or more than the net price for the student would be around 30,441 per year.
Speaker A:Now this is before any academic scholarships or athletic scholarships or anything like that.
Speaker A:But it's giving you some indication of what your net price is going to be.
Speaker A:One of the other things that I think is interesting is to look at the retention and graduation rates of the various colleges that you're looking at.
Speaker A:Because ultimately you want to walk away with some sort of degree if you're going to invest in yourself that much.
Speaker A:The website for each has for each of the colleges the first to second year retention rate.
Speaker A:So for example St. Bonaventure has a 86% retention rate for from the first to second year all the way down to overall graduation and or transfer out rates.
Speaker A:Now the again example here is 67% was overall graduation but 26 also transferred out.
Speaker A:So if you look at the sum of the two then you'd be looking at it saying okay well 93% either graduated transfer out meaning 7% didn't continue on for some reason.
Speaker A:It further goes on to give you graduation rates for students with a bachelor's degree and how long it took to get that bachelor's degree.
Speaker A:So that's of interest of course because you know you're on the hook for the number of years of college that it takes to graduate.
Speaker A:In this case showing, you know, again just showing what it takes for four, six and yes, up to eight years for actual graduation.
Speaker A:And how long on average does it, is it going to cost you those net costs that that comes into play?
Speaker A:Ideally you want a four year bachelor's degree graduation rate, not an eight year bachelor's graduation rate simply for the cost.
Speaker A:Interestingly enough it also shows the difference between for the six year, the difference between male and female.
Speaker A:It's about the same for St. Bonaventure, but other schools may have various rates in there.
Speaker A:I think one other area that's very interesting to explore is outcome measurements and how again how many of the students that are first time degree seekers receive their bachelor's degree within a reasonable amount of time.
Speaker A:This is something I think is very important because is you're planning to pay for college.
Speaker A:Most people go into it planning to pay for four, not six years.
Speaker A:Very big difference between all of those costs.
Speaker A:But if you are looking at various schools, you want to see what the net cost is.
Speaker A:I'll put this link in the show notes so you can dig into each of them and see what the information is.
Speaker A:Now another thing that I think is really important to be talking about is how much students can borrow and how much parents can borrow and how some changes have, have actually happened.
Speaker A:Effective this, this year, July 1st.
Speaker A: uld say the first semester of: Speaker A:In the past this has been true.
Speaker A:Undergrads could borrow $27,000 over four years.
Speaker A: So the first year it's: Speaker A: st semester, fall semester is: Speaker A: So you're splitting the: Speaker A:That's for the first year.
Speaker A: en the second year goes up to: Speaker A: ing between the two semesters: Speaker A:And then that's for the sophomore year.
Speaker A:And then for the next two years you're at 7,500 you each year, and that's 3,750 per semester for the last two years.
Speaker A:That all adds up to a total of $27,000.
Speaker A:That's what the student can borrow.
Speaker A:If they're looking for a government loan, they could always go to outside private loans.
Speaker A:But if they're looking for a government loan, that's how much they can borrow once.
Speaker A:And that's just for the student.
Speaker A:If the cost is greater than that, then it usually rules to the parent.
Speaker A:And in the past, parents could take plus loans to cover the difference.
Speaker A:But now plus loans are limited to $20,000 per year.
Speaker A:So $10,000 per semester for a total of 65,000 per student maximum.
Speaker A:So that's lifetime 65,000 per student.
Speaker A:So I just want to set an example for first year of college.
Speaker A:If you're looking at your responsibility being $30,000, by yours, I mean students and the parents responsibilities saying $35,000.
Speaker A:Then the student through a government loan can cover 5,500 and the parent through a plus loan can cover 20, 20,000.
Speaker A:So you're still at a slight gap in that situation of, you know, around $4,500.
Speaker A:You can arrange to have a payment plan with the college.
Speaker A:You could also go take a private loan if you wanted to do something like, you know, if you wanted to borrow for it, you could also do it.
Speaker A:It's not one of my favorite.
Speaker A:But you can also do a home equity loan potentially as an option.
Speaker A:Those are, those are ways to help subsidize it.
Speaker A:Also, of course, 529 funds could help offset that if you have any 529 savings.
Speaker A:But that would be your gap for the first year as an example.
Speaker A:So you get the notice that you're accepted.
Speaker A:You get the bill that shows the.
Speaker A:The breakdown of the various ways to pay for college and the way.
Speaker A:The reason I say that the ways to pay for college is because often when you get that award letter, there may be something in there about hey, we'll cover this due to academic scholarship or athletic scholarship, mostly academic.
Speaker A:And based on your income, you, you, you may be eligible for Pell and TAP if your income is low enough.
Speaker A:But most of the award letters that we see say that the financial aid is through student loans and PLUS loans.
Speaker A:Those are not truly scholarships.
Speaker A:They're not grants.
Speaker A:They are loans that you have to start repaying upon graduation.
Speaker A:It's possible that you might get awarded some work study as well.
Speaker A:But there is a number usually thrown in there that is through unsubsidized Stafford loans that you will have to repay and then the plus loans as well.
Speaker A:So if you were laying out a side by side of all the schools, it's important to then look at all of these items and see if one is willing to provide you more in true grants and or scholarships versus in any kind of lending option.
Speaker A:It.
Speaker A:I think it's really important to understand.
Speaker A:This is my $0.02.
Speaker A:I think it's really important to understand that these student loans come with multiple costs associated with them.
Speaker A:There is the origination cost associated with student loans.
Speaker A:So when you as an example, take out a student loan as the student, you think you're taking out a loan for, as you know, for 5,500 if you think about the first year.
Speaker A:But in reality there is a portion of that that goes towards origination.
Speaker A:So it's based on basically it looks, it's a. I would say it's around 4, a little over 4% is the origination loan for a unsubsidized loan.
Speaker A:And you know, if you looked at a $5,500 loan and you said, okay, I'm going to get.
Speaker A:For easy math, let's just say 93% of that loan, sorry, 95% of that loan is going to go to the college and the other is going to go towards the origination fee.
Speaker A:So you never see that money, but you have to pay back that money.
Speaker A:Again, I just want to explain that is something that a lot of people don't understand.
Speaker A:If you were to look at a $5,500 loan, that means that 230 $32 is going to go as part of the origination fee.
Speaker A:You're never going to see that.
Speaker A:So $5,300 ish is going to go to the college, just 53, not the full 5,500, but you have to pay back the 5,500.
Speaker A:A lot of people don't understand that when they're borrowing the money.
Speaker A:And then when you look at a PLUS loan origination fee.
Speaker A:So for parents, when you're looking at a plus loan, you're also going to be looking at a 4.228%, as I mentioned, very similar.
Speaker A:So if you were taking out a $10,000 plus loan, the origination fee is going to be $422.80.
Speaker A: So: Speaker A:Again, most people don't understand that each year the interest rates are set on student loans.
Speaker A:So you may have multiple rates for student loans.
Speaker A:They're set effective each year, July.
Speaker A:So for each student, you're going to be want to be looking at what the different rates are for the different years that you're borrowing.
Speaker A: st of: Speaker A:The PLUS loans were 8.94%.
Speaker A:Pretty significant loan rates in my opinion.
Speaker A:You can go get private student loan rates potentially for lower than that in some cases.
Speaker A:And it's good to do some research and understand what rates you'd be eligible for for the student.
Speaker A:They would definitely need a co signer to get that private student loan.
Speaker A:There's.
Speaker A:It's a good way for them to build their credit score, I suppose.
Speaker A:So if the rate was lower, that might be advantageous.
Speaker A:One of the reasons people used to go after these government loans was because of public service loan forgiveness options, although many of those have been and I won't even get into that today because it's too long to even discuss that as part of this podcast, but that a lot of that has gone away as a benefit, at least under the current administration.
Speaker A:That could change going forward.
Speaker A:Of course, one of the other key components in the borrowing side of things are obviously how much will the repayment be?
Speaker A:What's the interest rate?
Speaker A:Or sorry, what's the payment going to be once graduation happens, including the interest, because that does accumulate.
Speaker A:Even if you're not making payments along the way.
Speaker A:The Interest continues to accumulate and add to the loan.
Speaker A:So for example, if a student does take out $27,000 in student loan debt, by the time they graduate, they're going to owe more than $27,000 at that time because interest has not only continued to accrue, but add on to the base of the loan.
Speaker A:Again, that's not something that a lot of people are familiar with and they're sort of shocked by it when they get to the time that they have to start making payments.
Speaker A:We encourage people to investigate what will you walk away?
Speaker A:Like what is your first job going to pay?
Speaker A:How much of a salary would you expect to be paid in that first year based on the curriculum that you're pursuing?
Speaker A:And when you look at that, let's say that your, your first year of employment is around $80,000.
Speaker A:That's what you're going to get paid for your first year.
Speaker A:Well, if you look at a loan, let's say you're lucky enough to own, only owe $27,000 and let's say the interest rate is 6%.
Speaker A:If you elected a 10 year repayment schedule, which is the standard schedule, so you have to pay it back within 10 years, let's say the, the math could be different because interest rates could be differently.
Speaker A:But let's just say that $27,000 student loan grows to $29,000 and again, you're coming in somewhere around 6.8% for an average interest rate.
Speaker A:And you have 10 years.
Speaker A:That means that the payment would be 3,000 or sorry, $333.73 per month.
Speaker A:So if you think of an $80,000 a year job, and again, we say, you know, plan on, of course we want people to save for retirement, all of that sort of thing, but plan on only bringing home about 65% of that, that's about $52,000 per year.
Speaker A:If you divide that by 27, 6, that's about $2,000 per pay.
Speaker A:If you then take that student loan payment and you divide that by the $2,000 per pay or $4,000 typically per month, you'd have a couple extra months in there.
Speaker A:It's about 8% of your income.
Speaker A:So somewhere around 8 to 10% of your income is going to go towards the cost of that student loan for 10 years, you can extend that.
Speaker A:But understand the amount that you repay will be much higher.
Speaker A:Even on that 10 year repayment plan.
Speaker A:If you were to walk away with $29,000 and you had interest rate of 6.8%, you're ultimately going to be repaying $40,000.
Speaker A:So trying to keep that payment under 10% is ideal.
Speaker A:Not always, not always an option, but it's a target I think that you should be considering and looking and looking to try to achieve.
Speaker A:I hope this, I know it seems a little probably depressing all of this information, but I hope that at least the facts are helpful and it helps you compare the college offers that are out there so that you know what you're going to be expecting once graduation happens.
Speaker A:And I think it's really critical to sit down and have this discussion as a family because we're asking our young adults to make really big financial decisions at the age of 18, and they don't always understand what that means in the future because nobody ever talk.
Speaker A:They talk about the loan amounts, but they're not talking about the repayment amounts.
Speaker A:The first year job expectations.
Speaker A:It's a big decision and we shouldn't burden them with a lot of debt without them knowing what they're getting themselves into going forward.
Speaker A:So college is one of the most.
Speaker A:It's probably the biggest financial decision a young adult will make besides buying a house later in life, at least in a lump sum idea, you know, lump sum concept.
Speaker A:The goal is not to put them in a financial deficit so severe right out of college that they feel like they are restricted in some of the options that they have available to them.
Speaker A:Again, we hope that you found this helpful.
Speaker A:Please share this with your family and friends that might be impacted by this, and if you have any additional questions, let us know and we will be glad to have additional podcasts about this topic.
Speaker A:Thank you, everyone, and we hope that if you are being affected by this, that this is a time of celebration, but also of clarifying information.
Speaker B:That's it for today's episode of Money Roots.
Speaker B:I'm Amy Irvine from Rooted Planning Group.
Speaker B:If you found this conversation helpful, we'd love for you to share the podcast with a friend, family member or colleague who might enjoy it too.
Speaker B:And if there's a financial question on your mind, send it in.
Speaker B:Your question could be the topic of a future episode, because at the end of the day, life is about events supported by your dollars and cents.
Speaker B:Thanks for listening and we'll see you next time on Money Roots.
