How to model direct payment versus use of student loans for graduate/professional school educational expenses

I have children who will be entering graduate/professional school and for whom we may need to cover tuition, room, and board, depending on the level of assistance provided by the schools. How do I use ESPlanner to assess and compare the overall impact on family finances (i.e., for parents and children) of using existing parental and/or student assets to pay educational expenses versus taking out student loans, considering the various federal loan types and repayment options?


dan royer's picture

OK, good question. I may be able to develop a fuller response after a bit, but what you are doing is setting up one model where you just create a special expenditure(s) called "college costs" or something and enter all those costs as they would come out of your own economy (i.e. regular assets). If you had a 529 setup, that would be a little different. But using special expenditures as non-deductable (if I'm thinking right) expenditures. Then, in the other model you look at a particular loan and using the term of the loan (or an online amortization calculator) to find the stream of payback on that loan in annual terms and enter as special expenditures those annual payments (presumably starting in a future year) for the years it takes to pay back the loan. The interest on that loan will be implicit in your amount you pay back each year.

When you are modeling this using your own money, I wouldn't count the money that belongs to the student. In other words, say Jack has saved $2000 for this expense and is willing to ante up that much and you pay the other $20,000. So you'd enter your expenses as $20,000 not $22,000 since I presume that you don't have his $2K in hand now. In other words, I'd view his contribution as a way of lowering your cost.

I can have others look at this too. Perhaps there are other strategies. But is that what you were thinking?

That approach may work for scenarios where the parents take out the loans and assume responsibility for repayment. It would also be helpful to compare alternatives where the students take out the loans and are responsible for repayment (considering the various options, including a standard 10 year repayment period, income-based repayment and public service loan forgiveness), or where the students take out the loans and the parents provide assistance with repayment through gifting. Do separate files need to be set up for the students' households to compare the options? Is it conceptually appropriate to aggregate living standards across households?

dan royer's picture

Well, that was sort of where I was going with my thinking. Yes, the student's household economy is really something different from the parents--different taxes, different income, expenses, social security, etc. So supporting a child is no different from any other kind of special expenditure in that it's an expense on your economy and you can model the tax consequences (and interest costs in the case of a loan) on that expense. From the child's point of view with her own family profile, it's a similar situation except the impact is on her profile, not yours.

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