How to Pay for College With Less Stress

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Your Money

In this our quadrennial season of financial hope, we might wish that the major presidential candidates would reckon with one of the large and looming numbers in our lives.

Maybe this particular pair of multimillionaires hears the parents and grandparents who are confounded by college price tags that seem to start at six figures. But the candidates’ plans don’t hold out much cause for hope. Hillary Clinton wants to make in-state tuition for four-year state universities free for families with less than $125,000 in income, but her plan would require the financial help of states that may not want to chip in.

Donald Trump has mentioned refinancing student loans and forcing universities to spend more from their endowments to help students. His website, however, has no formal proposals. Perhaps the debate moderators will demand more details.

So what we need right now is one college savings, paying and borrowing plan to rule them all. The best one I know of — the one that visibly reduces anxiety in the faces of people I preach it to — comes from Kevin McKinley, a financial adviser in Eau Claire, Wis. And you can sum it up in about 30 words:

Save a quarter of the cost over a child’s first 18 years. Pay another quarter out of current income over the next four years. Borrow the rest, split among the family.

Let’s break them down in order, for a family who has its sights on a state university and doesn’t qualify for any grants or scholarships that they would not have to repay.

SAVE A QUARTER Let’s say you think an undergraduate degree from a state university will cost $160,000 in 18 years, including room and board. A quarter of that, per the McKinley plan, is $40,000. To save that much, you’d need to put aside about $115 each month for 18 years if it earns a 5 percent annual return.

Where might it earn that kind of return? In one of those 529 college savings plans that your state probably offers, perhaps in a low-cost mutual fund with a mix of stocks and bonds that gets less aggressive as your child gets closer to 18. The website is an excellent resource for anyone wanting to learn more about 529 plans.

And where is that $115 supposed to come from? In his 2002 book, “Make Your Kid a Millionaire,” Mr. McKinley suggested looking at the things on your credit or debit card statement and asking yourself this: Would I rather help my kid go to college or would I prefer to keep buying or doing those things on my bill that add up to the number I need to save each month?

Harsh? He doesn’t think so. “I don’t judge what people choose to spend money on,” he said. “But most people with kids going to college wish they could go back and change what they spent, because a lot of it was on things that didn’t have any value in the long run.”

SPEND A QUARTER This step is harder. For parents sending a child to a college right now that costs $100,000 total, they’ll need to find a bit over $500 a month to hit the four-year number, $25,000, that equals a quarter of the total cost.

So rice and beans instead of eating out. No more vacations, or much cheaper ones. If that’s not enough or you already made those changes years ago, a side job may be in order. Doing that, too? Don’t forget that your college-age child is capable of earning $6,000 annually by working full time in the summer and part time during the school year. If your child earns that much, you’re not responsible for this portion.

Are there generous grandparents in the mix? This would be a good time for them to step in if they haven’t already or weren’t sure if they would be able to help until they had their own financial affairs sorted out.

THE BORROWING Back when he wrote his book, Mr. McKinley said that he considered debt a last resort. These days, he’s changed his tune. “You’d like to pay cash for your house, too, but it’s just not realistic,” he said.

First, student loans. Though the terminology and process is (wildly, needlessly) complex, the advice is simple for anyone wanting to borrow $25,000: Take out federal student loans from the government, not private ones that come from a bank or similar institution. The advantage of federal loans is that if your child doesn’t earn much after graduation, you can enroll in a program where you’ll be eligible for lower payments.

Then, parent borrowing. Mr. McKinley notes that we’re at a rare economic moment where three things are happening at once: Home values are rising nicely in many parts of the country, interest rates are low and lenders are a bit looser than they were in the recent past. For people with children in college now, that means that borrowing money against your home may be a good way to come up with your $25,000 chunk.

Mr. McKinley is bearish on the future of student loans and expects them to become generally less available over time. So he suggested a more aggressive way for the parents of younger children to pay for a quarter of college: Draw on home equity now while you can, put the money in certificates of deposit and treat your (often tax-deductible) interest payments on the loan like an insurance policy, where you’re paying a “premium” just to be sure you’ll have access to the capital. After all, as we saw in 2009, banks that are loose now with home equity loans can change their minds in a heartbeat.

If you do not own a home, or drawing on home equity seems too risky or needlessly expensive (or you’re worried about how that money might affect any financial aid that you end up qualifying for), the federal government offers loans to parents, too.

THE MANY CAVEATS Plenty of people don’t make enough money to save anything for college, let alone save $500 a month while their child is in school. Others could have saved but didn’t and are panicking now that the first tuition bill is close at hand. If you’re in that situation, please read the two guides I wrote in 2014 for people in that spot.

The McKinley plan is linear. Your financial life probably won’t be, pockmarked as most of our lives are with unpaid parental leave or illness or unemployment or inopportune stock market declines or a bunch of these things all at once. But the plan is also flexible. You could borrow a bit more or save a bit more or consider a gap year between high school and college to put away additional funds.

If there is more than one child, these numbers could double, and if private colleges are under consideration, they may double again or more. But at private colleges especially, paying tuition for two children at once will increase your chances of qualifying for need-based financial aid (the kind you get after filling out the federal aid form and sometimes other application forms). Moreover, many colleges (private ones, in particular) offer a different kind of help, merit aid, to good students, even if their families don’t qualify for need-based aid. That can easily lop five figures off costs each year per student, even if it doesn’t bring the private college price down to the level of a flagship state university.

Which brings us to a couple of other challenges. How do you know when it’s worth paying a whole lot more for one school than another? Mr. McKinley is facing this question right now with his daughter, who is a high school senior with an interest in web design. She was eyeing the Rhode Island School of Design or the Pratt Institute in Brooklyn, but she can study the same things at the University of Wisconsin-Stout for less than a third of the retail cost.

The family is leaning hard toward the cheaper option. “If you’re the kind of kid who can get into the more expensive school, then you’ll usually have the talent and moxie to succeed even without their education,” Mr. McKinley said.

There is also the bizarre unpredictability of the process. The rack rates are high, and while many people get discounts based on need or merit, you have no way of knowing which, if any, you might qualify for many years from now. You’ll probably get the answers some spring day in the future and then have a few weeks, at most, to make what may be among the biggest and most consequential financial decisions of your life.

So good luck with that. But don’t let the absurdity of what the system has become paralyze you into doing nothing. “You don’t have to come up with a quarter of a million dollars for your kid,” Mr. McKinley said. “Do what you can now, and just keep building off of it.”