Paying for college comes down to managing expectations, for parent and child

Washington-based financial adviser Lori Atwood's latest impossible mission is schooling clients on how to send their kids to college without draining their retirement savings or taking on major debt.

Atwood, 52, of Atwood Financial Planning in Washington told me last year of the “Northwest D.C. lifestyle” that has turned some of her clients into prisoners of their $250,000 to $500,000 incomes. Now she is trying to give her baby boomer and Gen X clients peace of mind.

“It's the same song as health care,” Atwood said. “The rich are fine. The poor can find aid. The middle is squeezed and left out.”

This column isn't about the kids staying out of debt. It's about taking care of the parents so they don't become impoverished making sure Timmy or Tina receive the best education Mom and Dad can buy.

A year of private college is averaging out at about $70,000 (that's after-tax money, mind you). That includes tuition, room and board, but everything else — books, clothes, travel, fun, iPhone, laptop — is extra. You can bet the number is at or soon will be at $100,000. For our purposes, we are not going to factor in financial aid because these households earn far more than the national median income of $61,372.

“Remember,” Atwood said, “the goal is a college education without financial ruin.”

Here are seven ways to get there:

1. Pick a school that will make your child money later.

I have plenty of friends who are paying a fortune to send their kids to good, private colleges. When they graduate, there's a good bet the kid — unless they have a computer engineering degree — will earn a salary that is a fraction of one year's tuition.

So choose well. Make sure your child is likely to finish college and chooses the school with the best return on investment.

There are studies on which schools give the biggest payoff for your buck, as defined by how much students earn in their post-college years. According to a recent CNBC study, Stanford, Princeton, University of Chicago, California Institute of Technology and Harvard offer graduates the best return on their tuition.

CNBC's top five public institutions are the University of Washington-Seattle, University of Washington-Bothell, Massachusetts Maritime Academy, University of Michigan and Georgia Tech.

I remember one manager in Silicon Valley telling me years ago that when he was sifting through resumes, he glanced only to see if the applicant went to one of the handful of elite schools. The rest didn't even get a look.

“If the kid can get into Harvard, I would agree that you pay for it,” Atwood said.

Atwood said her clients make decisions on whether they are going to sacrifice everything for their child to go to the school of their choice, even if it's a second-tier school. There are hundreds of those solid schools that lack the cache of the super-elite. (I went to one: Fordham University. I loved it and received a terrific education for about $5,000 a year.)

Consider an in-state public university instead, she said.

“I told them to get the child comfortable with their excellent state school,” she said. “Barring a special need, it's really not worth it unless the school will allow your child to earn significantly more by virtue of opportunities after graduation.”

2. When the child goes to college, the whole family goes to college.

That's because the entire family sacrifices, including siblings who may be so young they have no idea they are giving something up. Violin lessons? Not anymore.

The 10-year-old Honda with 100,000 miles will have to last a few more years. A visit to relatives elbows out the summer beach house rental. And can you really afford the swimming classes and foreign language immersion for the 4-year-old?

“Families have to understand that they will not be lifestyle neutral with a kid in college,” Atwood said. “The whole family goes to the school with him or her. Everyone makes sacrifices.”

Atwood said one client cut back on vacations and the other children's activities to fund the older sibling's Big Ten tuition.

“I recommended that they do this over taking out debt.”

3. This will not be painless.

Atwood calls families in the $100,000 to $350,000 annual income range “the cramped middle” when it comes to funding college.

Hold back your tears.

But unless your child is a track star or prodigy, you are going to do some heavy lifting if you don't want them graduating under a ton of debt.

“These households are getting squeezed,” Atwood said.

“Typically, a client household of mine making $230,000 will see around $12,000 in cash a month after taxes, retirement savings and depending on benefits,” she said. “They have a $3,500 a month mortgage and two kids in private school. Couple of cars. Lots of expenses. (They live in Northwest Washington, after all). Maybe they have child care if children are very young.”

The private college tuition requires $5,000 a month. But Atwood's math has the $230,000 household having only $1,300 per month that it can devote toward tuition. That leaves a $3,700 monthly gap that the family needs to fill, or about $44,000 per year.

If the parents borrow the $44,000 at a 5 percent interest rate for 10 years, that will cost just under $600 a month to service the loan. The cycle repeats for years two, three and four of college, adding ever more debt and eating into the $1,300 margin that had been earmarked for tuition, because they need to service the loans.

4. Don't over-promise.

“I had a client who promised both children, who were two years apart, that they would not have any loans and that they could go to any school they wanted,” Atwood said. “Both children chose private institutions.”

Atwood said that unless you already have $3,000 to $5,000 a month that you don't need, promising a free college education is a bad idea.

5. Save.

The nonsavers use the following expression when their back is to the wall: “We will figure it out.”

“That means the family hasn't sat down and done the math,” she said. “It's my least-favorite expression and usually means debt.”

Saving can avoid a lot of problems.

“Unless you have an extra $60,000 a year for tuition, save early and often and as much as you can,” Atwood said.

A tax-sheltered 529 Savings Plan allows you to save after-tax money in an account that compounds tax free until your son or daughter needs it for school. The D.C. College Savings Plan total assets cannot exceed $500,000 for the same beneficiary.

Atwood said few of her clients have maxed out the 529 plans to cover the entire college experience. “Usually, it helps take the edge off at best,” she said.

6. Take your ego out of it.

“Some parents feel it's a reflection on them if their kid has loans,” she said. “They hide behind ‘I'm prioritizing my child's education.' But really, they do not want to do the hard work of saying ‘no' or telling the child to borrow money, and they can slide into a financial mess.”

7. Make your child your partner.

In other words, motivate them.

Only about 41 percent of first-time, full-time college students earn a bachelor's degree in four years, according to a recent CNBC report. That raises the overall cost of the degree.

“Get the kid involved either by working or taking some loans,” Atwood said. “Having skin in the game keeps them in their seat at class, too.”