What Should I Do If I Haven't Saved Anything for My Kid's College?

While financial planners (like me) urge young parents to save early and often for their child's college education, reality is that many families don't have enough saved by age 18, by choice or because they simply cannot. If this is the case for you, you're not going to be surprised that your options are limited, but there are still things that you can do to help soften the blow.

A lot of the information below comes from an article by Ron Lieber from mid-October, which I was reminded of by Michael Kitces' weekend commentary. Definitely check out Lieber's article here.

If you find yourself in this situation, there aren't going to be a ton of great options. One fallacy that I've heard clients tell me that they INTENTIONALLY don't save for college in the hopes that this will increase their chances of receiving student aid. While certainly having savings for college does affect the formula that determines aid (via the EFC, explained below), this is pretty terrible financial advice. The impact of available savings on the formula that determines student aid is drastically dwarfed by other factors, primarily your income, but other factors as well, such as how many kids you have in college at the same time. Bottom line: don't expect to be rewarded for not planning ahead.

Probably the first step is to find a round estimate of the annual cost of college. Speaking to a university financial aid office is probably the best way to do this. For a ballpark figure, use the Department of Education's Net Price Calculator, which accounts for aid and scholarships.

Next is to determine what you might receive in student aid, which is usually composed of grants and loans subsidized by the federal government. The College Board has a useful tool for this online to determine your Estimated Family Contribution (EFC), which is the figure that you are annually expected to provide to your child's education. Most student aid calculations are based on this number, so if it is high relative to the expected tuition, you aren't likely to receive much in the way of student aid and probably need to plan on providing those payments out of your current income.

My perception is that many clients who are in the situation of entering college years with nothing saved are expecting or at least hoping that some magical grant will become available for their child that will pay all or most of the bill, which of course rarely happens. It is possible to win a large merit-based scholarship, or receive an income-based package (don't expect this if your income approaches the median household income in the US, of about $57,000 per year), but competition for these gifts means your chances of winning are very slim. This is especially true for the more competitive (hence, usually better) schools - a college with a ton of applicants doesn't need to offer financial aid packages and won't, unless your child is truly exceptional. Scholarships are probably the best bet for finding "free" money - academic, athletic, and local - but the competition for these programs is going to be equal to the application process.

Borrowing is the option of last resort. I've written a lot lately about the challenge that student loans present (here), since you're borrowing funds today that will likely be repaid at 6.8% interest over the following 10 years or more (roughly doubling the total cost). The days of affordable borrowing for college have been gone for some time. Taking out a parent loan (Direct Plus) is problematic, since the rates can be even higher and can sometimes push into retirement years. While noble, sacrificing your retirement income in order to fund education costs is not usually a good idea, since you're likely to rely on your children to help if you get in trouble.

Probably the best strategy is to find ways to keep the overall cost of college low and affordable. Consider a school in the area, for example, to avoid room and board fees. Or a community college for the first two years of school, followed by a transfer to a larger school for graduation, since this not only decreases cost but buys an additional two years in order to prepare and to save. Finally, be careful when selecting a major - earnings for some degrees are multiples higher or lower than others.

There are few easy answers, but that's okay. Few things in life are as beneficial as a college degree, and if you're prepared to make some sacrifices you can make it happen.

Tell your friends who are young parents to start saving early, though. I can help.