Choosing a College That's Financially Right

Families of high school seniors will have some serious discussion about money in the coming weeks.

For wealthy families, the discussion will revolve around allowances and cars. For lower income families, the discussion will revolve around filling out the dreaded FAFSA form -- the "free application for federal student aid." But for many middle class families, the discussion should revolve around which college the family can afford. And in many ways, that's the most difficult discussion of all.

That point was brought home to me recently in an email I received from the father of a high school senior. His child, he explained, is an excellent student and has applied to some top colleges to pursue his chosen career path. The family has saved some money, but not enough to pay for the outstanding colleges their son has chosen. And they have too much in the way of assets to qualify for need-based federal financial aid. So they're considering alternatives.

Among the possibilities: a home equity loan, on which the interest would be tax-deductible; a "PLUS" loan, which is made to parents of college students and isn't based on need; or a withdrawal from the parents' IRAs.

All have drawbacks. A home equity loan typically has a floating interest rate, and could quickly become very expensive. A PLUS loan is given directly to parents by private lenders, and there are no federal forms to fill out. But with most PLUS loans, repayment must start immediately. Borrowing or withdrawing from a retirement plan could severely affect the parents' own retirement, as well as cost penalties and interest.

And then I raised the real issue with the father -- an issue that many middle class parents simply ignore: What if you tell your child you simply can't afford the more expensive college?