Creating Your College Compact in Five Easy Steps

Saving for college is one of those things that all parents worry about. Whether your kids are just born, heading to elementary school, in middle school, or (especially) in high school – you’ve likely seen all the headlines about how college is going to cost a ton by the time your kids head off to school. If you’re an avid reader of personal finance articles like I am, you’ve likely also read horror stories of parents sending their kids off to college and going broke paying full price for expensive out of state schools.

For the longest time, I couldn’t find any good articles on saving for college. Either the article would be all about how you have to do other things (pay off credit cards, car loans, save an emergency fund) first, or it would repeat that tired old saying about how you need to save for retirement before you save for your kids college. “Your kids can get loans for college, but you can’t get loans for retirement” (Guess what? That’s not necessarily true, if you make a high income. The government doesn’t give you money just because you don’t feel like saving). There was little, if any, advice on how to save for college once you had your other financial ducks in a row.

So years went by and I was unclear what I should be doing when it came to saving for college. I put away money regularly in a 529 for each child starting when they were born, but given the huge range of prices for college (anywhere from $10k-$60k per year depending on the article!) and the uncertainty of college inflation, I felt helpless to get more specific in my savings goal.

Last year I had a breakthrough in my college savings strategy that I want to share with you today. I call it the “College Compact.”

This idea was inspired by the Investment Policy Statement, which is another key to financial freedom. I was giving some serious thought to how I could get more specific with my college savings goals. My oldest son is going to enter high school next year, so college has become a short-term goal. Now that college was fast approaching, how could I figure out if I was on track-or not? I still had no idea what school he’s going to go to, or what college inflation would be like. I have a strong desire to help my kids with college so they can have a better start and struggle less than I did – I put myself through college entirely, starting with community college and ending with my MBA. But I have no desire to provide a blank check. So after giving this lots of thought, I developed the “College Compact”.

What’s the “College Compact”, your might ask? It’s a detailed, two-page long agreement with myself and my children on what I will – and what I won’t – pay for. It sets a clear goal for you to target, and clear expectations for your kids so there are no surprises when they apply for colleges.


Creating Your College Compact – Five Easy Steps

Now that I’ve given you an overview of what a “College Compact” is, let me walk you through how to create one. When you’re done with this exercise, you’ll have a clear agreement with your kids – and yourself – on what you’re going to fund.

  1. Pick a target school and decide what you’ll cover – This was one of the keys that was missing from my plan all these years. Instead of reading general advice and articles on the huge range of costs for college, you need to first pick a college that represents what you’re willing to pay for. I decided I was willing to cover 100% of tuition and room/board at our in-state flagship college. By picking a specific school, I can visit its website every year and see exactly what tuition/room/board costs. I can then compare this exact cost with my savings and see if I’m on track or not.

Your decision will likely be different than mine – and that’s fine. The point here is to pick a target school, and to pick a percentage you’re willing to cover. Perhaps it’s 50% of your alma mater, 75% of the cost of a specific private college, or 100% of tuition only (no room or board) at a local state school. Picking a specific target school lets you zero in on how much you really have to save. It also doesn’t mean you’re locking your child in to actually going to that school – what you’re doing is locking in what you’re willing to pay for.

What if there’s a gap between what you decide to fund and where your child decides to go? There are a lot of ways to fill that gap. Your child can work and earn money to make up the difference; they can get a scholarship or grant; or they can take out loans. Also, if you’re in a better financial situation a few years down the line, you might decide to increase what you’re willing to fund.

Pro tip – make sure to visit the detailed breakdown of costs offered by the bursar at your target school, and don’t rely on the general cost information. There are sometimes options to save money in the details, like selecting a less expensive meal plan.

2. Decide what you’ll pay for -and what you won’t – After you’ve picked a target school and a percentage you’re willing to fund, now you need to think about all the other costs your child is likely to incur in college. Books. Internships. Car insurance (if you let them keep a car). Cell phone bills. Dinners out with friends. Laundry. Travel to/from home (if they’re in an out of state college). Supplies. Room decorations. Clothing. There are a seemingly endless amount of other expenses that can go along with sending a child off to college, most of which can’t be covered by a 529 plan (books and computers can). You need to decide what of these you’re willing to pay for – and which ones your child will need to cover. You may also decide that you’ll provide a minimum amount towards an expense and your child needs to pick up anything over that amount.

The point here is to both be clear with your child on what you are and aren’t willing to pay for, and to make sure that you’ve thought ahead and set aside enough money to cover the things you’re willing to fund. You also don’t want to break the bank covering your child’s drunken exploitations and shopping sprees (believe it or not, I read an article where this happened to a father).

3. Outline expectations – Will you pay for your child to get any major in school, or are there specific ones you’re willing to fund? How many years of college will you pay for? Are you paying just for undergrad, or also graduate school? What grades does your child need to maintain? What are your expectations for their behavior? Are you planning to fund the most expensive meal plan, or the least expensive one? Do you expect them to buy used books, or rent them online? Will all room decorations come from Ikea, or second hand?

Spend some time thinking about all these things, and jot down what you’re willing to cover. Again, there are no right or wrong answers here. You need to decide what works for your family, with your income, and your values. If something is financially out of reach for you, make sure to be clear in your compact that you’re not covering it. The point here is to be realistic with yourself, and very clear with your kids, what the plan is for their college years.

4. Decide what will happen to the leftover money – Maybe your child is brilliant and will be offered a full-ride scholarship to an ivy league university. Or perhaps they score some grants that decrease the cost of school. It could be that your child ends up needing to spend time at community college and then goes to a state school, costing substantially less than what you were targeting. Or perhaps they don’t end up going to college. What to do then?

Think through these various scenarios and decide what you’re willing to do with any leftover money. Your child might mistakenly think that they money will be theirs to do what they want with it. But if you’re saving for college correctly, the money will be in 529 plans or in your name, meaning it’s still your money and you make the decisions on what happens to it.

What can you do with it? You could decide that anything extra goes to the next kid in line to help you meet your goal for them. After all, you’re funding “up to” the amounts you’re outlining in your compact-it doesn’t mean your child is entitled to the money. Other options are to use any excess to fund graduate school, or save it to fund college for their children. You also could decide to take the penalty (if it’s a 529) and use any excess to help your child fund a ROTH, a down payment on a house, or a wedding. Deciding ahead of time helps your child to know exactly what will happen if they spend less than you offer-and might incentivize them to spend less.

5. Write the letter – Using the decisions you’ve made above, write a brief letter to your children outlining your goal, your expectations, and the events that may make you need to change the goal. It only needs to be one or two pages long, and it will crystallize your own goals and expectations for college. This is something you’ll want to revisit every year – updating your target amounts, seeing if you’re on track to meet your goals, and adjusting your savings or the compact (or both) if you’re not on track.

Example College Compact

Below is an example of a one-page “College Compact” you can use to get started thinking about your own agreement:

Dear John,

Going to college is a great privilege. We, as your parents, are very proud of all that you’ve accomplished and we’re looking forward to helping you through college. College is a very expensive and time-consuming commitment, so we want to make sure we’re helping you in the right way. It’s also a very important goal for us, one we’ve been saving for since you were born. We have to fund college for three children, so it’s important that we have enough funds for all three of you to attend college. Here is our agreement with you on what we will pay for:

  • We will cover the equivalent of four years at 100% of tuition, room, and board for an undergraduate education at our states flagship university – UCONN. As of today, 2/20/2017:
    • Tuition is $7,033 per semester, or $14,066 per year
    • Room for the least expensive option is $6,660 per year
    • Board for the least expensive meal plan is $5.228 per year
      • Total: $25,954 per year
    • NOTE: We will only cover four years of college. Any additional years will need to be funded by you
  • We will also help you fund books purchased online, used, or rented through Amazon or another source. We will purchase you a Chromebook computer for use while you’re on campus. 
  • You will be expected to cover all other expenses associated with going to school – time with friends, car insurance, cell phone bill, decorating your room, etc. These costs can add up, so be sure to work and save money
  • You do not need to attend the flagship school – you go to a more expensive school, you can make up the difference through work, scholarships, grants, or loans
    • Be careful with student loans! Many people going to college find themselves graduating with way to many loans, and it’s a struggle for them to pay off the loans every month
    • Before you get a loan, we will sit down together and do the math to make sure you’re making a wise investment choice
  • We expect you to behave like a gentleman while at college. We reserve the right to revoke this agreement due to your behavior (such as suspensions, expulsions, drug use, etc.)
  • We expect you to maintain a minimum 3.0 average throughout your schooling years. If your grades drop below that point, you will need to fund school on your own until your grades come up
  • If you spend less than this agreement outlines, any excess amounts will be saved to fund your graduate school (masters, PHD, JD). If you decide not to go to graduate school, the excess will be used to help fund college for your children one day.
  • Although this is our goal right now, we know that life happens. In the event of a catastrophic event (disability, death, job loss, etc.) in our family, we may need to change our goal. If we do need to do this, we will let you know as soon as possible and work together through it 

We’re excited to help you with this journey into adulthood by funding your education, and we’re looking forward to working together as a family to make this happen. 

Love, your parents

Why A College Compact?

When your kids are small, it’s hard to imagine them one day heading off to college. The days drag on sometimes and it seems like your kids will never grow up. But it’s true what they say- you blink and suddenly they’re not a baby, or a toddler, but they’re heading off to high school. The days are long, but the years are short, as they say.

Yes, this baby turned into this teenager faster than I thought possible

Creating a “College Compact” helps you to set a very specific goal, and outline your expectations so you don’t get caught up in the excitement of college and spend on things that you wouldn’t ordinarily be willing to pay for. Also, it make sure your child knows what is expected of them, so there are no surprises for them or for you. Revisiting the compact each year lets you make adjustments if your financial situation changes for better (or for worse).

It also lets you have more meaningful, age-appropriate conversations with your kids on what your expectations are for college. My oldest son is only 13, but he already knows what we’re willing to help fund in a general sense. As he gets older and approaches college, we’ll share the college compact with him so he knows all the specifics. Since college will only be a few years away at that point, we’ll have a much better sense of what we can realistically pay for than we did back when he was born.

What does your college compact look like? Let me know in the comments, or drop me an e-mail (through the Contact option) with your compact and I just might feature it on the site!

Check out more about saving for college in my guide to college gifting, why sometimes the advice that you can get loans for retirement but not college is wrong, or my thoughts on the How America Pays for College study by Sallie Mae.

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22 thoughts on “Creating Your College Compact in Five Easy Steps”

  1. jumpstartfromscratch

    Students are constantly bombarded with ideas and pressure about working hard so that they can get into “good” colleges. They rarely hear anything about affording college. If communication lines have not been opened earlier than spring of senior year, then students believe they have earned the right to go to any college that accepts them. It is rough on parents, if they haven’t set expectations early.

    1. Great point-if you’re not having the conversations with your kids, they’re going to rely on the messages they get through the media and through school. I know how in my sons middle school they went on tours of two state private colleges, to show them what college is like. No mention of the cost of attending. So I looked it up and shared with my son how one cost $50k per year, and the other $60k. I used that as an opportunity to talk about college costs, what we were planning on, and how he could help make up the difference if he wanted to go somewhere more expensive (like living at home). It was a good teachable moment

      1. jumpstartfromscratch

        My son applied to 4 state schools and 1 private school that has a price tag of 57k. The crazy thing is that after merit awards and scholarships, the private school could end up the most affordable choice. It takes months to determine actual cost.

  2. I can see this being important. There is so much pressure these days to go to the best school regardless of price. And yet doing so can hurt your future far more then the benefits in terms of loans. In retrospect I lucked into a school with a better ROI. When I was in high school, a long time ago I know, I became enamored with going to an Ivy League. In retrospect I was barely able to afford to go to the great state school I attended. I didn’t go to the Ivy League school only because I was wait listed, but I suspect I’m better off now as a result. Then again, as I postulated in a post early on, I wonder if college will be completely different in the 14 or so years between now and when my kids attend. Online degrees indistinguishable from on site degrees are starting to take off. They cost way less then traditional degrees to boot.

    1. That would be great if it happens-my personal philosophy is to plan for the reality of today, but be willing to make adjustments in the future. Technology is changing everything, and you never know what the future will bring. That’s why I revisit my plan every year, so as things change I can plan accordingly.

  3. I loved this post!!! My son just turned one and we began to start investing in a 529 for him. I love the thought of explaining how much we’re willing to pay and let him decide. My parents did something similar, although they said if you want to go an in-state public school we’ll pay for it all. But you have to take community classes. If you go out of state you pay for the difference. I knew that I didn’t need to go out of state that badly 🙂

    1. Sounds like your parents did it right-they were clear with you on what they were willing to pay for and what was out of their reach. Everyone will make a different decision here, and that’s fine-the important part is to be clear and communicate. Luckily you have a while until you have to talk to your one year old about the topic!

  4. The College Compact is an excellent idea! I love the part about communicating your expectations. I also love that the Compact helps facilitate focused conversation which is so much better than discussing the topic generally.

    1. Thanks! That’s exactly why I thought of it-all the college articles I read were so vague and general I couldn’t set a specific goal. I also felt like much of what I read was either saying to never pay for anything, or was from people that just gave up and covered absolutely anything.

  5. Although we haven’t written out a formal compact, we have verbally discussed with our sons what we are willing to cover. Our target has always been to cover in-state tuition, room, and board for 4.5 years of undergraduate education. In Maryland, that comes out to around $95k. We’ve been contributing to 529 plans for a while, so we should be in good shape.

    We did encourage them to apply to a few out of state schools as well, to see if they would get any assistance. Given our income and the amount of money we have saved in our 529 plans, we aren’t counting on any need-based help.

    1. Good point that you shouldn’t restrict the colleges you apply to, even though the sticker price might be above your budget. As jumpstart pointed out earlier, sometimes private schools cost even less than public after grants. The only way to find out for sure is to apply and see what kind of offers you get

  6. This article is fantastic!! Thanks for sharing. My son just turned one and we have a 529 plan for him but we discuss frequently what we will do if he doesn’t want to go to college or, at the other end of the spectrum, if he wants to go to a very expensive school. I guess we are going to have to sit down to write his College Compact!

    1. Glad you liked the article! I also have a one year old, and have the same compact for him as my 13 year old. Of course the specific dollar amount will be different, and the college world may have changed, but the core concept will be the same. Thanks for reading!

  7. Well written! Having a specific plan written down is an excellent idea. It gives you a clear goal to shoot for. Also, if college is a long way down the road, then as the world changes with respect to higher education you can optimize your plan because you know exactly what the money is paying for (e.g. books all suddenly become free, or the price of laptops drop sharply) .

    1. Exactly! People have been talking about technology revolutionizing education since I finished my undergrad in 2003, and college has only gotten more expensive. I like to plan for the reality of today, but check in every year to react to changes in life or in the world.

  8. A coworker is going through the college application process with her daughter. Another cost to be aware of is college application fees. When I was applying it was about $50 each school. You may want to decide how much you are willing to pay towards that, so your child applies mindfully instead of ‘oh I’ll apply to 20 schools and hope I get in’.
    I know I’m sensitive to this as I get older every year and haven’t had kids yet, nor have my sister & brother. If the clause is ‘left over money goes to grandkids’, consider re-evaluating that as you all see what happens. Perhaps there is a charitable trust funding education that you & your child could agree on if the next generation isn’t in the cards. There are so many reasons but the societal pressure is enough without thinking your parents are disappointed. (I know mine aren’t and support me being ready ,not just having a kid because my friends are.)

    1. Great point! That’s exactly the reason that in my compact I gave three options for leftover money. I didn’t want to assume that my kids will have their own children-with three boys, they may make different choices (and that’s fine!). My three options were (1) they could use leftover money for grad school; (2) I would use it to fund a ROTH IRA for them; and (3) they could save it for their own children. I love your idea of offering to use it for a charitable educational trust! I’ll need to add that as a fourth option.

  9. This is an incredible idea and one that I wish my parents implemented with me! I think the open line of communication and understanding will really help a child make an informed decision and establish a clear set of goals. I also think it gives the ability to incentivise. For example, I regret staying home and going to my local university because I missed out on some life experiences that I could have gained if I would have left the nest. With the College Compact, a parent could offer some incentive to leaving the nest for college. I love it!

    1. Thanks-I’m glad you like the concept! I agree that you can use it to incentivize whatever is important to you and your family-whether that’s staying in state for school, living away from home, or other behavior. The part I think is key is that expectations are outlined up front, and are clear to everyone, so there are no surprises down the line

  10. Thank you so much for this!!! I’ve known that I needed to do something, but I didn’t know what. This gives a much clearer picture of where to start! I thank you sooo much! (I’m seriously going… Why didn’t I think of that?!)

  11. Hi, interesting post – good interesting 🙂
    I have 4 year old twins and am really thinking about how we provide for them, and even more importantly what we leave behind for them. I wrote about it here – Sorry for the blatant promotion but this is a topic that is really important to me.

    In regards to education, at this stage my wife and I have decided that if the kids want to go to college/university then they need to do it overseas and not in Australia. We want them to be responsible, self sufficient and live in an environment where they will/may be out of their comfort zone.

    And don’t even get me started on applying for colleges etc. I had to register my kids at birth with some private colleges. At birth!!!! How the heck do I know what my kids will be good at? It’s critical that the school suit the student, and being an expensive or highly regarded school doesn’t guarantee it’s the right school for my kids.

    At this stage my kids are too young to understand the concept of a Compact but I think it’s a great idea that can be applied to not just college.

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