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Can you afford to pay for college?

By Penelope Wang, senior writer

(Money Magazine) -- At long last, your child's efforts have been rewarded -- a flock of college acceptances have arrived. But your joy is mixed with anxiety as you ask yourself a question echoed by parents across the country: How will we ever pull this off?

Your portfolio and house aren't worth what you thought they'd be by this point; and there's no such thing as job security these days. Meanwhile, any financial "aid" being offered is largely in the form of loans.

You don't want your child bearing an impossible burden, nor do you want your payments to threaten your other goals, like a comfortable retirement. So use these guidelines to help make sure that dream university doesn't turn into a financial nightmare for you or your kid.

Figure your contribution

When you compare grants awarded (a.k.a. free money) with the cost of that first-choice college, you're likely to see a big shortfall. You want to fill that as much as possible with cash vs. loans, so review your budget to see how much you can free up.

The wildcard is your job security. If it's shaky, consider what you could pull from assets if you're let go. But don't figure in retirement funds, or else you'll compromise your own future.

Cap your debt load

Students can borrow from $5,500 to $7,500 a year in federal Stafford loans, and parents can cover the rest with PLUS loans. But the recent rise in student-loan defaults gives evidence to the risks of taking on too much debt.

"I've always said students should avoid borrowing more than their expected starting salary," says Mark Kantrowitz of FinAid.org. With many 2009 grads unable to find work, however, he recommends being even more conservative. Other advisers suggest figuring out what the monthly repayments would be, then limiting your child's loans to no more than you could help with.

Generally, younger parents should aim to keep total debt payments (your kid's loans, PLUS loans, mortgage, and all other debts) under a third of monthly income. Those on the cusp of retirement ideally ought to stay under 10%, says Salem, N.Y., financial adviser Nancy Flint-Budde. So if you'll retire with a mortgage, reconsider whether you can afford to help at all.

Maximize the aid offer

Can't borrow enough by these metrics to close the gap? Ask the aid office for a second look.

If your situation has changed since you filed the FAFSA, the school may well increase its package, says Kal Chany, author of Paying for College.

Otherwise, your success depends upon how desirable your child is to the school. So you might let the office know if your child has a better offer from a rival institution. If the aid officers stick by their award, it may be wiser to opt for a less expensive school or have your child start at a public college, and then transfer in. That way, your kid can afford to follow her dreams -- which may include a pricey grad school.  To top of page

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