Note: This article is being featured as part of Morningstar's October 2014 College Planning Report Card special report. This video originally appeared Dec. 22, 2013.
Adam Zoll: For Morningstar, I'm Adam Zoll.
The rising cost of college means that more parents are searching for ways to speak to their children about how to meet this financial challenge.
Here with some tips is Eleanor Blayney. She is the consumer advocate for the Certified Financial Planner Board of Standards.
Eleanor, thanks for being with us today.
Eleanor Blayney: Thank you. I'm pleased to be with you.
Zoll: Let's start with a basic question. At what age would you advise parents to start having this conversation, this dialogue, with their children about the expectations with regard to who is going to pay for college?
Blayney: I think it's good to get an early start, to get the boundary set so everybody understands what is available from the parents for the child's education and what the expectations are for the child--to work or to get scholarships or to get loans.
For many families, a college education is now a financial goal almost as large, if not larger in some cases, than a home purchase. It's not an easy thing to do, and everybody has to shoulder some responsibility. The earlier you start talking about that and how you're prepared to help your child, the better.
Zoll: I imagine that college is on students' radar once they hit high school, but would you recommended that parents even start younger than that in terms of getting the child to think about this issue?
Blayney: I don't know if you want to get into the dollars and cents too early. I think you start by showing them the value of the education and explaining to them why this is important, to begin to sensitize them to the fact that this is an investment that you're making in your child and that there's a return to that investment in the form of the education, the job skills, the preparation for life ahead. So begin to start talking about it as a very important investment in their future.
Zoll: There are lots of different ways that parents can go about this. I've heard of parents telling their children that there's a set dollar amount, giving them an actual dollar figure: Here is how much we'll pay; anything above this is your responsibility.
Other parents take more of a negotiating approach--more of a give and take in terms of what school the child will go to, what they will pay, what the child may have to take out in loans.
Is there a specific approach that you recommend, or does it just need to be whatever the family is comfortable with?
Blayney: I think you just have to be honest. If the parents really feel constrained by a certain amount, then probably it's good to get that on the table right away. If there are some trade-offs that they're willing to contemplate, then that needs to be said, too.
There are parents out there who can fully afford to pay for it all. … But I think that it's important that the child have some skin in the game, even if you can afford to pay full freight in terms of tuition, room, board, travel, everything else. It's always good if the child feels that they're contributing to the education. It's like setting up an expectation that, yes, you'll need to be paying for your books, and you'll want to figure out a way, perhaps, to get books more cheaply or to use online books when these kinds of things are available. Getting them involved in at least one part of the financing of the education never hurts.
I think, two, articulating your expectations for what should come of this investment. Education shouldn't be a free lunch. It's not just something that automatically parents are going to get for their kids because that's the way the world goes. In other words, have some expectations: If you do pay for tuition for a year or however long you can do it, what are you expecting from the child in terms of course load, grade-point average. Be specific, if you do indeed have these expectations.
I do think it makes sense to have them think through some trade-offs. Give them the latitude of some choices to be made, but understand that if they make this choice, another one may not be available. What I'm thinking of, for example is, if you go to a state school, we will provide money later on after college toward the first home. In other words, if we can find a lower-cost [college] option now, where we can save some money, we might be able to help you in another way later on. Then the child has to think, which is more important to me? Do I really want to go to the well-known higher-priced college, or would it be OK to go to a state school for a couple of years--by the way, state schools can be really, really excellent--and have the option to use the money for something else later on down the line?
Zoll: What about parents who are thinking about loaning money to their children to go to college. Are there any ground rules that you would recommend in that circumstance?
Blayney: I think this can make a lot of sense for families, because the parents may be able to lend them on more favorable terms.
Two cautions to the parents: Number one, if you're thinking about lending money to your child, you want to put this in writing. You want to document it. Presumably, you're lending the money because you do not want to make a gift. I would tell parents, please, do not impoverish your own retirement for the benefit of paying for your child's education.
If it needs to be a loan because you do need that money ultimately, treat it as though it were a real transaction, a real third-party transaction between a lender and the person borrowing the money. Put it in writing. Have an interest rate schedule. Have an amortization schedule that shows the terms of the loan being paid down over time. Treat it as though it were a real transaction, because otherwise, it's going to be the last thing [kids] are going to think about, having to pay back mom and dad at the end of the month.
So, if you're thinking about lending money to your child because ultimately you do expect to have it back, set it up properly and enforce the terms of the document.
Zoll: I know it's a conversation going on in a lot of households around the country. I think you've offered some very practical, useful tips for a lot of those families. Thank you for joining us today.
Blayney: Thank you.
Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.