On Tuesday's radio program, we discussed reducing the cost of college. Immediately, everyone wanted to talk about 529 plans and how crazy student loans are, but there are some less explored areas on the subject that deserve a lot more attention. To listen to the episode, visit Mississippi Public Broadcasting's Money Talks: Paying for College.
529 Savings Plans
When we talk about the cost of college, financial advisors will often talk about the importance of saving. This is natural for us to do, because it involves some pretty easily calculable things. You know how much you want to save (or you can guess), and you know the timeline (roughly...as long as you know how old your child is, then you have an idea of when they will go to college). 529 plans make it easy for us to say something like "if you save $100/month in the target date plan option, then you will likely have around $35,000 when your child starts school." If you just want to pre-pay tuition, Mississippi offers a nice pre-paid plan called MPACT that lets you lock in tuition prices at current rates for a single transparent price based on the age of the child, the number of credit hours and what type of education you want to pay for. (The price chart is here). These are easy and natural things for a financial advisor to talk about.
The other topic that comes up a lot, especially now, is student loans. Student loans are nearly unavoidable these days. We hear on the news about cases where people have student loan debt in the six figures and no great job prospects. There are a handful of payment choices to consider for repaying student loans and a few options to weigh, but these loans are a finite problem. You can deal with them. In general, income-based repayment plans are an excellent option. Be careful about taking out the loans, and be prompt with your payments.
If you need loans to pay for school, do not be afraid of them. If used well, this will be some of the best debt you take on in your life. For many people, a university education will have a high return on investment, and if you can borrow at fixed rates to fund that investment, all the better. Don't be afraid of the debt, just be very careful about the amount you use.
For what it's worth, I don't think student loans are the problem. It's the cost of college that's the problem. With that in mind, lets turn to the more interesting, more complicated third pillar of educational funding. This involves directly reducing the cost of college through finding the right college, getting a better offer and tinkering with your financial aid eligibility. I will generously call this "everything else".
With the average cost of college brushing up against $10,000 for an in-state public university, $24,000 for out of state or $33,000 for a private college, plus another $10,000 for room and board and a few thousand for other expenses, it's easy to see that this is a HUGE financial decision. Furthermore, it is a HUGE financial decision that is placed largely in the hands of a high school student who doesn't really understand all of the implications. Getting a discount on the sticker price can translate into big savings.
Set a Limit
Let's go ahead and get this out of the way: One way to reduce the cost of college is for the parent to just put their foot down. If you've looked at your budget, sized up your assets and have a solid grasp of what you can afford, just put an upper limit on what you're willing and able to spend and let that limit be the law. But beyond cutting off heads, let's look at what can be done to reduce the price you pay, both now and in the future!
There's a lot of talk about making sure you select a major that will land you a good paying job when you graduate. This is important, of course, and students should pay attention to this as they think about how the courses they choose to study in college will help to qualify them for their professions. But the classes and the major aren't the only items to consider. As a caller on the radio mentioned, it's more than just the academics--it's also the people and the network. If there's a specific company you want to work for, find out which schools that company has relationships with. Where do they recruit key personnel from? Some schools have reputations for sending graduates to work in specific industries. This is important and should not be ignored. Getting a return out of your college investment should be kept in mind as a key, if not a primary, goal.
A classic way of reducing the cost of college for most people is to attend a community college first. This will benefit MOST college bound high schoolers. Higher achieving students who have taken AP classes and Dual Enrollment classes may not have much left to get out of community college, but almost everyone else may see a clear benefit. Not only is community college tuition less expensive, but there are also initiatives underway to make it free! And scholarships based on ACT scores are pretty straightforward with most Mississippi community colleges. Savings can also come from living at home. It's a practical possibility since most community colleges have multiple convenient locations.
Community college may not be for everyone. As I mentioned, if you've already taken a lot of college courses or have credit through AP exams, you may see less benefit than others who have followed the standard high school requirements. Community college is an excellent choice for those not ready for full time university. Likewise, for students planning to continue on to a state university, completing general course requirements at a community college can be a great decision before heading to state.
Choose a School that Wants YOU
One huge way to reduce the price tag on college is to focus on the school itself. I don't mean just looking at which school has the lowest sticker price or has the best financial aid packages in general. Look for which school will give you the best offer. While many people grow up wanting to go to a specific school, or may think a specific school has the program that is just right for them, there are about 2,500 public and private four year institutions in America, and a few of them are looking for exactly what you have going for you. Instead of looking for what school you want, see if there are any schools out there that want YOU. Working with a professional admissions counselor can help identify those schools looking for your combination of academic successes and extracurricular skills. If you are an ideal candidate for a school, they will make you a better offer than you see advertised. Keep an open mind when applying to schools you may not have thought about attending before. You could be in for a treat!
If you can't find or afford a professional admissions counselor, there are some resources that can help you figure out who wants you the most. College Navigator is a resource managed by the National Center for Educational Statistics that can help you sort through schools. College Data (dot com) has a range of resources that can show you which colleges you are an ideal fit for and provides useful guides for the daunting application process.
Work Study vs. Co-Op
Work study programs are great, but you will have to assess for yourself if it makes sense for you to work full-time while in school. A better option may be co-op years or semesters. Co-op is particularly common in science and engineering courses. Essentially, the student takes a year or semester off to work in the industry. This gives you a paycheck, work experience and college credit as well as the possibility of tuition reimbursements or even a job offer! If you are considering a future in engineering or hard sciences, look for schools that have strong industry connections and advertise co-op options.
Scholarships, Leases, and Transcripts
Leaning more towards the financial side of things, students should definitely apply for scholarships! Local and regional scholarships are harder to find, but are typically much less competitive. Apply to local civic organizations, such as the Rotary Club, to find community organizations willing to support your college education. While they can be difficult to find, many websites aggregate scholarships from all over the country to help you cut through the mess. Check out this post for more resources.
Two considerations brought up by a parent who called in are absolutely worth considering. If you are applying to a program that is not offered in your state, the Southern Regional Education Board has a Common Market throughout 15 Southeastern states that gives you in-state tuition if your state does not offer the program you want. Since out-of-state tuition can tack on $10,000 or more to your education bill, this can be a huge savings.
The second point brought up is that if your student is in private housing (renting an apartment while they are in school) the lease probably runs for the full calendar year, not just the academic year. This means you are paying rent over the summer too! Her suggestion was to turn this into money spent wisely. Instead of moving home and taking it easy all summer, encourage your student to get a job in town or take summer courses at the university or a nearby community college. Summer school is a good way to knock out some classes to make sure that you graduate on time. So, if you're paying for a full year apartment lease, you may as well get some value out of it!
As a teacher who called into the show mentioned, EVERYTHING you do in high school matters. Your high school transcript is a clean slate for incoming freshmen, so get them focused on the bigger goal of finding and funding a college education by 9th grade at the latest! Older siblings or family friends in college may be an excellent resource for your high schooler to use as an example to begin to truly understand the importance of their academic achievements.
This may also be a useful tactic in the debt conversation. You can sit down with your teenager and explain what debt is and how they might end up with $100,000 worth of debt or more. Of course, it may still seem a little abstract to them. So, again, if you have a family friend or older sibling who can explain to them what it means to carry that debt, your teen may get the picture more clearly and have a little more respect for the total cost of college - regardless of who is paying for it. This goes back to just putting your foot down on the total cost as well. If you explain to your child that you simply cannot afford the school they want to go to, work with them to find a lower cost option.
Going to college is one of the biggest financial decisions that you can make, and much of it is in the hands of a high school student that, however smart, probably doesn't truly appreciate the ramifications of the decision. Most financial advisors will focus on the savings aspect of college, because that part of college planning is comfortable and easy. We also focus on existing debt burdens since they're unavoidable. The middle area of reducing the sticker price is complex and tends to happen very quickly. A lot of research and preparation must go into it to make sure you are getting the best deal. But with the cost of four years of university education ranging from $80,000 to $200,000, getting a discount on the front end can be immensely valuable.
Since we are on the topic, here are some ways that you can play around on the edges with your income and assets to make sure that you get the student aid that you need. These are the basic good sense ways to organize your finances in the years before sending a child to college.
The best owner for a 529 savings plan is the parent. This is important for legal reasons of ownership so that the parent retains control in the event the situation changes. As an asset of the parents, it does count as income on the FAFSA form, but the withdrawals of the 529 do not. If it were an asset of grandparents or someone other than the parent or the student, withdrawals would count as income of the student, drastically reducing the amount of financial aid they'd be eligible for.
The FAFSA form takes an earlier year's tax information now. The earlier availability is nice (October), but it means you have to start shifting income and assets around even earlier. If you are planing on maxing out IRAs and 401(k)s to reduce your FAFSA exposure, do it a few years in advance.
If your child has investment savings of their own, spend those down a few years before the FAFSA comes up. Money in UGMA/UTMA accounts must be spent on the child, but it's a pretty flexible area of spending. You want to get your child's assets down to a minimal level as they count about 20% against financial aid.
Having grandparents or other family members chip in for school costs is nice but can come at a steep price. As in the above example of a 529 plan being owned by a grandparent, you want to make sure that the gift does not count as income of the student. If it will count, you may want them to delay making the gift until the last two years of college. This way, it won't affect the FAFSA while the student is still in school. Alternatively, you could hold the money until after college and use it to pay down loans quickly.
This has been a fairly long post, so I will try to break some of these points down with more detail and clarity later. In the meantime, feel free to reach out to us with any questions you may have about this exciting and expensive time of life!