Five ways to share college costs with your kids

If you have kids in middle school or high school, you may be starting to ask, “What is the best way to pay for college?”

And you may go into sticker shock as you start talking to friends and hear people throwing numbers around like $50,000, $60,000 or more for a single year of tuition, room and board. While it’s unlikely you’ll actually pay full price given the many types of merit scholarships and need-based aid that are available, you will be paying far more than you or your parents paid when you went to college.

The growth of tuition costs

Before the 1970s, college costs increased roughly at the rate of inflation. Since then, however, costs have skyrocketed.

For example, in 1980, median household income was  $17,710 a year, according to the U.S. Census Bureau. The average tuition for a four-year private school was $3,617, and public colleges were just $804 a year. This translates to 20% of a household’s annual income for private schools and a mere 5% of income to send kids to a state school.

Fast forward to 2015. Median household income was $56,516 per year. However, private school tuition increased to an average of $32,334 per year, and public school tuition ballooned to $9,417. At full price, households would have needed to shell out 57% of their income for private schools and 17% of income for state schools. And this does not include the cost of room and board.

Parents shouldn’t feel obligated to foot the bill

In the face of these soaring costs, parents need to accept that it is not their duty to fund a child’s higher education.

In fact, when it comes to savings, many people think chronologically rather than by priority. Many parents believe that they need to save for college first and worry about funding their own retirement later. This is backward. You need to fund your own retirement first and then worry about what you need to do to send your kids off to college.

That’s because your kids have more choices and more time. They can:

• Go to a less expensive school.
• Take out more loans if a particular school is important to them, and they have far more years to pay those loans back than you do.
• Delay going to school for a few years, go make some money, and then decide if college is the right choice for them.

You, on the other hand, as a 40-something or 50-something, have less time and fewer options. Before you know it, your working years will be over and you’ll need a healthy nest egg to cover your living expenses for what could be a 30-plus-year period of semi- or full retirement.

I’ve done the math. You really need to save from 10% to 20% of your income every year to adequately fund your retirement. If you’re doing that — great! Go ahead and plan on funding 80%, 90% or even 100% of the cost of your kids’ college no matter where they go to school.

However, if you are behind on your retirement savings, focus on catching up there and consider one of the following options to share expenses with your child.

Strategy No. 1 — The federal loan option

This strategy requires college students to take out a federal Perkins Loan for as much as $5,500 per year. They end up with about $22,000 in total debt, and you can cover or help cover the rest of the total out-of-pocket expenses (tuition, room and board), which at many state schools come in at over $120,000 for four years.

» MORE: Everything you need to know about the FAFSA application

Strategy No. 2 — The expected income option

If teaching your child the value of work is important to you, this is a great option. It is not unreasonable to expect college students to earn $10,000 or more per year at a job or jobs. Consider requiring that at least half the amount they earn go toward college.

Let’s say you use this strategy and require a $5,000 per year minimum contribution from your child. What I love about this option is it gives the student a choice: “I can make enough money over the four years to cover my responsibility and exit school with no debt, or I need to take out loans and pay them off after graduating.” Getting your kids to start making financial choices is the key here.

Strategy No. 3 — The fixed amount option

For this option, you specify a maximum you’ll contribute each year and leave it up to your child how to cover the rest. A good benchmark is the total cost of in-state tuition, room and board for where you live.

Let’s use my alma mater as an example. Penn State now costs from $29,440 to $32,440 for tuition, room and board per year for in-state residents. You agree to cover that amount per year, and if your kids decide to attend a more expensive school, they cover the difference. My family has selected this option because it maximizes the involvement of our kids in the decision-making process. They can:

• Choose to go to a school that costs close to what we’ll cover to ease their financial responsibility.
• Go to a more expensive school but realize their contribution will be higher.
• If they choose the second option, they understand they need to work and/or take out loans to cover the difference.

Strategy No. 4 — The 2 + 2 option

We have neighbors who take this approach. For each of their children, they have offered to pay two full years at any school. Their children cover the rest of their years in college.

As usual, when faced with difficult financial choices, people get creative. One of our neighbors’ daughters is attending a local community college for two years out of her own pocket, then plans to transfer to her dream school for the final two years when mom and dad are footing the bill.

Strategy No. 5 — The one-third option

With this strategy, consider saving one-third of the projected cost of school in advance, borrowing one-third of the money to pay in the future and having your kids cover the remaining one-third.

Let’s go back to the Penn State example and make the math easy. Suppose the four-year cost is projected to come in at $120,000. To execute this strategy, you’ll want to:

• Have $40,000 parked in the bank in savings.
• Borrow $40,000 to cover the middle third.
• Expect your kids to cover the rest through a combination of income and loans (say $20,000 from each.)

This definitely sends a message of “we’re in this together” since you’re willing to borrow an amount equal to the amount your kids need to cover.

Put limits on debt

All of these strategies are being used by millions of parents and students across the country to pay for college as a family. Whatever you decide, be sure to put limits on the amount of debt you’ll incur.

A good starting point for students is to limit debt to no more than 100% of their projected starting salary. And for parents, be sure you can continue to save 10% to 20% of your income for retirement before adding into your household finances the additional stress of paying back college loans.

Attending a dream school sounds glamorous, but being saddled with excessive debt for years if not decades to come is never a good choice. If that dream school will strain your ability to save for retirement or your child’s ability to start building a nest egg as a newly minted graduate, your prospective student is better off selecting a more affordable school and keeping the financial foundation of your family intact.

Dave Rowan is a certified financial planner and the founder of Rowan Financial. Learn more about Dave on NerdWallet’s Ask an Advisor.