Paying for college is a very hot topic in the financial press these days, with good reason. According to a recent Wall Street Journal article, “Degrees of Value” by Glen Reynolds on 1/3/2014 (Link to Wall Street Journal Story), college costs, since 1978, have risen at an annual rate of 7.45% while incomes have risen only about 3.8%. The article notes that while the average student debt is now $29,400 a recent study shows that only four in 10 graduates land a job that requires a college education.
These economic changes mean that parents and students need to look at a college degree through a more focused lens than ever before. A generation ago, conventional wisdom dictated that a motivated student should attend the best college to which they were accepted, borrowing if necessary to pay the cost. Now, planning and focusing on the return on that investment is more important than ever. Here are a few tips that should be helpful in that process:
- Don’t let the numbers cause paralysis – get started saving for college as soon as possible: If the parents’ of an 18 year old today saved $100 every month the starting the month their child was born, and managed to earn a 6% return on the funds, they would have saved just enough for one year of room and board at an in-state, four year college ($18,391 according to CollegeBoard.org).
- The truth is that very few families can budget for a savings plan that will allow them to save enough to pay for a four year degree. But don’t let the math cause inaction. Any amount saved now and allowed to grow means less that your student will have to borrow when the time comes. As with any savings plan, set it up to be a regular part of your budget and before long it will become automatic.
- Choose a Savings Plan and contribute diligently: Regardless of how long you have until your children are college – age, find room in your budget to contribute to a college savings plan and get started. There are many options out there, and all have various pros and cons. I’m a fan of 529 Savings Plans for their ease of use, flexibility, and tax advantages. If you are uncertain whether this plan is the best for your circumstances talk to a financial planner.
- Work with your student to make tuition count: In addition to the core traditional curriculum, many colleges offer a bewildering array of elective classes, and indeed most traditional colleges require that students take classes in a broad range of topics in the name of producing well-rounded students. There is a temptation to take the classes that sound either easy or fun to fulfill these requirements. I’m not against fun – but students must remember that they may be paying the same for “Elvish, The Language of Lord of the Rings” (YES – that’s a real class at the University of Wisconsin) as they are for Chemistry 102 or Biology 160, and should view it as part of their college investment. Look for electives that will be meaningful. Are you a business major in need of science credits? Look for a class that might allow insight into new technologies. Are you a science major in need of English credits? Look for a class that may provide background or history you can use in your field. If nothing else, look for electives that will allow you to network with students you might not otherwise meet or well-known professors whose acquaintance may help you down the road.
- Start exploring funding sources early, and be strategic with borrowing: As discussed above, borrowing for tuition will be a fact of life for most college – bound students. Reach out to various resources early, talking to the admissions department at any school your student has serious interest. Have your student begin researching private scholarship sources as early as their Sophomore year of high school. Many colleges now have financial calculator tools designed to calculate a ballpark estimate of the amount the family will need to contribute after determining what grants and need-based sources may be available. Use these to help determine what you will need to finance through savings, borrowing, and budgeting.
- Be prepared to fill out the FAFSA – the federal form for financial aid that most schools will use to evaluate your potential resources regardless of whether your family will qualify for government loans or grants. Much of the information is taken from the parents’ and student’s tax return for the year to prior to college admissions, and for some schools is due prior to the tax filing deadline in April, so be prepared to put your tax information together early, and communicate with the college admissions department if your circumstances will prevent you from supplying all the information prior to the filing deadline.
- Remember, there’s no such thing as a Retirement Loan: That’s an old financial planning cliché, but one worth repeating. Continue contributing to your retirement plan while saving for college and while you are paying tuition bills. Retirement savings must remain your number one long-term priority.
- Work with a Certified Financial Planner to find the right balance of budgeting, borrowing, and savings, and to coordinate college goals with retirement savings and other financial goals.
There are many excellent sources of information available for college planning. Here are a few:
- This site from the new Consumer Financial Protection Bureau offers good general guidelines for paying for college, along with a tool to compare school aid offers and repaying student debt: http://www.consumerfinance.gov/paying-for-college/
- This site explains how to interpret a college aid letter: http://www.kiplinger.com/tool/college/T042-S001-how-to-interpret-a-college-financial-aid-letter/index.php
- For an example of how to calculate the Expected Family Contribution, here’s a link to the University of Michigan’s online calculator. Many schools have these on their website, so look for one specific to your student’s interests: https://npc.collegeboard.org/student/app/umich/start/edit