Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Tuesday, October 25, 2016

Reducing the Cost of College

On the radio this morning (will post a link when it goes up) we discussed receding the cost of college.  Immediately everyone wanted to talk about 529 plans and how crazy student loans were, but there is a less explored area that deserves a lot more attention.

live and worldwide this morning
at Mississippi Public Broadcasting

Let's get this out of the way: When people talk about the cost of college, financial advisors will often talk about the importance of saving. This is natural for a financial advisor to do because it involves some pretty easily calculable things. You know how much you want to save (or can guess) and you know the timeline (roughly, as long as you know how old your child is, you have an idea 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 now 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 almost unavoidable these days. Student loans are in the news. Everyone talks about the cases where people have six digits of student loan debt and no great prospects. For a financial advisor, if you have clients with student loans, you have to deal with them. There are a few options for dealing with them and a few considerations you have to make with student loans, but they are a finite problem. You can deal with them. In general, income based repayment plans are an excellent options. Be careful about getting the loans, and be prompt with your repayments.

If you need loans to pay for school, do not be afraid of them. If used well, this will rank amongst the best debt you take 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 is worth, I do not think student loans are the problem, it is the cost of college that is 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 is 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 does not really understand all of the implications. Getting a discount on the sticker price can translate to big savings.

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 have looked at your budget and assets enough and have a good grasp of what you can afford, just put an upper limit on it and let that be the law. But beyond cutting off heads, lets look at what can be done to reduce that price you pay, now and in the future!

There is a lot of talk about making sure that you are getting in to a major that will get you a good paying job when you leave. This is important, of course, and everyone should pay attention to this as they think about what they want to study and be. As a caller on the radio mentioned, it is more than just the academics, but it is the people, it is the network. If there is a specific company you want to work for, study what schools that company has relationships with. Where do they recruit key personnel from?Other schools will have reputations for sending student 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 primary, goal.

A classic way of reducing college cost for most people is to look at going to 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 most everyone else may. Not only is Community College tuition cheaper, but there are initiates underway to make it free! Scholarships based on ACT scores are pretty straightforward with most Mississippi Community Colleges as well. Lastly, living at home is a practical possibility as most community colleges have multiple convenient locations.

Community College may not be for everyone. Like I mentioned, if you have already taken a lot of college courses, or have credit through AP exams, you may get less benefit than others who have followed the standard high school requirements. Community College is a great step for those not ready for full time university, however. If you are planning on going to a state university, Community College can be a great step before climbing that ladder.

One huge way to reduce the price of college is focusing on the school itself. I don't mean just looking at what school has the lowest sticker price or what school has the best financial aid packages in general, but what 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. 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 schools looking for your combination of academic successes and extracurricular skills. The if you are an ideal candidate for a school, they will make you a better offer. Keep an open mind when applying to schools you had not thought about before, you could be in for a treat!

If you cannot 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 great resources that can show you what colleges you are an ideal fit for as well as useful guides for the daunting application process.

Work study programs are great, but you will have to assess for yourself if it makes sense for you to work while in school full time. 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 industry. This gives you a paycheck, work experience, college credit as well as the possibility of tuition reimbursements or even a job offer! If you are thinking about engineering or hard sciences, look for schools that have strong industry connections and advertise co-op options.

Leaning more towards the financial side of things, students should of course apply for scholarships! Local and regional scholarships are typically much less competitive, but are harder to find. Apply to local civic organizations, such as the Rotary Club, to find local organizations willing to support your dream. While they can be hard to find, many websites aggregate scholarships from all over the country and can 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. Seeing as out of state tuition can tack on $10,000 or more to your education, this can be a huge savings.

The other point made was that if your student is in private housing, just renting an apartment while they are in school, their lease probably goes for the full calendar year, not just the academic year. This means you are paying rent over the summer too! Her suggestion was to make this money spent wisely. Instead of moving home and doing nothing all summer, encourage your student to get a job in town or even summer school at the university or a local community college. This is a good way to knock out some classes to make sure that you graduate on time. If you are paying for the 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 9th graders, so get them focused on the bigger goal of a a college education starting then, at the latest! If they have older siblings or family friends in college, they may be an excellent recourse of them to start to truly understand the importance of their academic achievements right now.

This may also be a useful tactic in the debt conversation. You can sit down and explain to your high school aged child what debt is, and how they might end up with $100,000 worth of debt or more, but it may still seem a little abstract to them. Again, if you have a family friend or older sibling who can explain to them what it means to carry that debt, they may get the picture a little clearer and have a little more respect for the total cost of college  - regardless 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, 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 their decision. Most financial advisors will focus on the savings aspect of college because that is comfortable and easy. We also focus on existing debt burdens as they are unavoidable. The middle area of reducing the sticker price is complex and happens 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.

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 mean time, feel free to reach out to us with any questions you may have about this exciting and expensive time of life!

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 prioritize your finances in the years before sending a child to college.

Financial tips:

  • Best owner for a 529 is the parent. This is important for legal reasons of ownership so that the parent retains control if the situation changes. Additionally, as an asset of the parents, it does count on the FAFSA form, but withdrawals of it do not. If it were an asset of grandparents or someone other than a parent or the student, withdrawals would count as income of the student, drastically reducing the amount of financial aid they were eligible for.
  • The FAFSA form takes an earlier year's tax information now. The earlier availability is nice, 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 savings of investments 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 that is a very flexible definition. 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.