How to Talk About Money with Your Family

For Parents of Teens: Create a Financially Honest College Strategy

College is among the best investments anyone can make—the lifetime earnings advantage for a college graduate is about $1 million. But there's a truth every family must accept: Cost matters. It's incumbent on you to develop a strategy that allows you, as a family, to send your children to college without compromising your other financial goals. Here's how:

1. Put First Things First
Before you save for a child's future college costs, you need to meet certain financial criteria: You must not have credit card debt. You must have an eight-month emergency savings fund. You must have a term life insurance policy. You must be saving for retirement, aiming to set aside 15 percent of your gross salary. Until all of that's in place, you're not to think about saving for college. There's financial aid for school. There are loans for school. But there's no aid or loans to help you in retirement, or when you run into a rough patch.

2. Choose the Best Savings Plan
If you do have the ability to save for college, I recommend doing so with a 529 college savings plan. A 529 plan allows anyone, regardless of income, to contribute money to a special savings account. The two big advantages of a 529 plan are valuable tax breaks and the fact that just a small percentage of the assets (less than 6 percent) of what you've saved will be factored in by colleges evaluating your request for financial aid.

3. Involve Your Child
Start talking about college finances no later than freshman year of high school. Your child deserves to understand exactly what, if anything, you'll be able to pay toward her education. Waiting until senior year to spring the news that you have little or nothing to offer is unfair.

4. Put a Financial Safety School on Your List
Guidance counselors advise applying to at least one school where you're likely to be accepted. Take this strategy a step further and apply to a public in-state school you know will be affordable. A public four-year school can cost one-half to one-third what it costs to attend a private four-year college.

5. Make the Most of High School
Explaining your financial situation to high school students gives them even more incentive to do well academically. Every A they receive now can help them qualify for financial aid. Advanced Placement classes can also help all of you save: Many colleges will waive some courses for students who score well on the corresponding AP test.

6. Know Your Loans
Here's the strategy: The student should take out federal Stafford loans first; then, if more money is needed, the parent should consider a federal PLUS loan; neither should take out a private loan from a bank. Ever. Federal loans charge reasonable fixed interest rates and allow borrowers to choose from various repayment plans. Private loans, however, typically charge a variable interest rate, which is often higher than the fixed rate on federal loans. If you run into financial trouble once you're in repayment, private lenders have no obligation to help you out with a different payment schedule. And most galling, in the event a private loan borrower dies, the creditor can still demand payment. (With federal loans, the debt is forgiven if the borrower dies or becomes permanently disabled.) If avoiding private loans means your child must consider a less expensive school, then that's the truth your family needs to accept.

Next: For Parents of Grown Children: Lend Only What Will Truly Help