If you’ve been reading my recent articles you may sense a theme (or an obsession) with figuring out the costs and benefits of going to college. There are clearly benefits of going to college, but it is a ‘big money decision’ and should only be made with the appropriate level of due diligence.
While the decision about which school is the “best fit” is somewhat subjective, the cost of obtaining a diploma and how to pay for it should be viewed more objectively. Regardless of the school chosen, it is important that you do whatever possible to help your child reduce the amount of debt they will carry with them after graduating. In my book, Following Your Money, I explain how most Millennials are struggling to generate the same relative levels of Pride Money (net wealth) as prior generations due to large amounts of student debt. This debt load has also resulted in more young adults living at home for longer periods of time, per Pew Research Center. By helping your child lower the cost of attending college and directing them to schools and programs that ensure optimal payback you will be putting them in the best position to “leave the nest” and achieve financial independence.
To complete your college due diligence, I recommend answering the following three questions:
- Which colleges are we interested in attending?
- How much will it cost?
- How are we going to pay for it?
#1 – Which colleges are we interested in attending?
The important word here is “we” as this should be a joint decision. Even if your child is covering the entire cost (hopefully with inheritance, and not debt) you should help them make a thoughtful decision. There are many factors to consider in selecting a college, such as location, admissions requirements, and programs of study. In addition to these criteria you should also consider the projected financial value of attending that school. To help with this assessment, I created the College Efficiency Score using data from the US Department of Education.
While the primary focus of this article is getting a bachelor’s degree at a 4-year college/university, that may not be the right choice for your child. Getting a 2-year associates degree at a local community college may be a better route for your child, or using community college as a bridge to getting a bachelor’s degree at a 4-year school. If you are considering this option, make sure you plan ahead by confirming which credits are transferable. Here are some useful tips on managing the transfer process from the The College Board.
Interestingly, there is also a new option from a start-up called MissionU. MissionU offers students a way to skip college, get into the job market more quickly, and only pay for the education/training if they land a job making at least $50,000/year. Great idea, right? Before you get too excited about this option, it is currently only offered to people that live within 50 miles of the program’s city, which presently is only San Francisco, CA.
#2 – How much will it cost?
There are a few different ways to look at this but I’m going to provide two points of view, both related to funding a traditional 4-year bachelor’s degree. The first way is for people who recently became parents and want to estimate how much they need to save over the next 17 years. The second way is for parents who have a child that is in process of choosing a college and now need a better estimate of costs over next 4 years.
For the parents with young kids who want to get a head start on saving for college, put down your camera and start researching 529 plans. This will be your primary savings vehicle for your child’s college. How much do you need to put into that 529 plan? Well, if your goal is to cover the full cost and your annual household income is $100K, then you will need to save about $750 per month for a private university, or about $500 for in-state public university, based on savingforcollege.com.
For parents that are still helping their child decide which college to attend, use the exhibit below as a guide for compiling the numbers for each school you are considering. When planning your costs over 4 years remember to include the inflation rate. I used 4% annual inflation for private universities and 3% for public universities, based on historical data from the The College Board. An annual inflation rate of 4% can add an additional $10,000 over 4 years to a college costing $40,000 when your child started. To provide some depressing context, these rates are significantly higher than the general US inflation rate, and higher than the average increase in personal income. Include the College Efficiency Score (CES), if you want to compare the estimated financial value of each school. Use this analysis to prioritize your choices based on cost versus budget (savings), and relative financial value.
#3 – How are we going to pay for it?
If you’re just starting out, open a 529 plan and start saving. To bolster savings, consider having gifts directed to your child’s 529 plan, but check to make sure your plan accepts third-party contributions. If your child is closer to starting college, hopefully you already mapped this all out 17 years ago and now have a sizable 529 plan available to cover most or all of the costs (smiley face emoji). Unfortunately that is not the case for most people. A study from Fidelity Investments found that parents with kids ages 14-18 only have an average of $52,300 saved for higher education. This is a good amount if your child is attending an in-state public university and living at home, but is a long way from covering all college-related costs if your child wants to attend a private university and/or live on campus for 4 years.
Even if you do have a good amount saved in a 529 plan, here are some additional ways to lower your out-of-pocket costs:
- Fill out the Free Application for Federal Student Aid (FAFSA) form to apply for needs-based grants.
- Negotiate your merit aid award. If you rank high academically based on the college’s acceptance numbers (GPA, standard test scores), then call school to negotiate the merit offered if the school is your first choice. Some schools are willing to match the awards offered by other schools.
- Apply for other scholarships before and during college. There are multiple sites on the internet, including Fastweb and Unigo that can help you find scholarships. Also check with the school’s financial aid office.
- Work during college. Take a job working for the school or nearby to supplement income and pay for expenses like books and supplies.
Hope you found this information helpful. Any other thoughts on how to answer these questions are welcome and appreciated, so please leave a reply or shoot me a note.