How To Actually Pay For College
In today’s modern times it has become more of an expectation than an aspiration that a young person will attend college. Our society is steadily evolving to where the road to opportunity almost certainly travels through a 4-year college or university. As young adults reach the point in their lives where they must choose where they will attend college, the inevitable question of “how will we pay for it?” rings louder than all others. Unfortunately, as the popularity (or seeming necessity) of a college education grows, so does the average cost of attendance. Although tuition and fee costs vary, sometimes greatly, from school to school, we find that in the greater New England area the cost of tuition is markedly higher than nearly all of the rest of the country. Despite the fact that the costs of the more prestigious private universities have risen to almost surreal numbers, many of them still turn thousands of applicants away. The reality is that if someone wants to go to a good college, they could be facing a financially-crippling bottom line.
In the practice of financial planning, college education is one of the pillars of discussion for people with children. Many families have had the good fortune to have a comfortable income and means to raise their children. This however does not help them when the time comes to send their children to college. A strong income and accumulated assets essentially disqualify a family from receiving any financial aid from most institutions. This is a predicament many students and parents find themselves in when applying for college. If you find yourself in this situation, we employ a strategy which is illustrated below. In our example we will use the extreme situation that your child is going to the most expensive school. All of our college planning begins with the belief that “If your child gets into Princeton, they are going, and they aren’t getting financial aid.” This allows you to plan for the worst and work backwards. And let me say again, if your child gets into Princeton (or another prestigious institution that could provide them a significant advantage later in life) they will go as the opportunity is too good and rare to pass up. The tuition for Princeton University for 2018 is estimated $68,000 per year (Princeton.edu). Ouch.
The technique we use is what I like to call the “Jurassic Park” technique where the large and powerful T-Rex can be “taken down” by numerous smaller predators provided they are organized and persistent. Paying for college is no different. You simply must find out where all of the “Velociraptors” are and put them into action. Although college costs seem daunting, adhere to the credo that “every little bit helps.” The trick is to leave no stone unturned and you may find that what seems impossible will could actually be possible. Below is a hypothetical situation where we will count backwards from the tuition and board cost of Princeton (est. $68,000 per year). Below are the places where the money to pay for school will come from.
- The student’s money. Although we find that many parents overlook this, this is the first place a university looks when assessing the need for financial aid. Any money that is in the student’s name is assumed by the institution will be used for college expenses. In many cases, the prospective students will be tasked with providing their own “living” money while the college tuition is paid from other sources. We’ll estimate our student will provide $3,000 per year ($68,000-$3,000 = $65,000)
- Money saved by parents. This is the most obvious. This includes monies that are in designated college savings accounts (529s, Coverdale Education Funds, etc.). This also includes any monies that are outside of retirement accounts such as cash, and after-tax investments. Let’s assume that in our example the family has saved judiciously and has a total of $80,000 set aside for college tuition. This equates to $20,000 per year. ($65,000 - $20,000 = $45,000)
- “Manufactured” money. One of my favorite sources of college costs. This is the money that a family will actually create by adjusting their budget while their child is in college. This could be anything from reducing other investment commitments (although not always recommended) to changing their cable TV package or going camping instead of flying to Europe. In our example we will say the family can generate $10,000 per year. ($45,000 - $10,000 = $35,000).
- Scholarships. These aren’t the athletic “full ride” scholarships (although if you are in that situation you are quite fortunate). Instead these are the small grants and scholarships which require some work on the student’s part. There are numerous opportunities offered by schools, community centers, civic groups or fraternal organizations that students can apply for. They will add up. We will count $2,000 per year ($35,000 - $2,000 = $33,000).
- Work study. Often school offer work study programs or employment while on campus. These could be things like being a resident assistant or work for a department. For our example we will count $3,000 per year. ($33,000 - $3,000 = $30,000).
- Home equity. Now this is where things become serious. We will only advise a client to use their home equity if they are running out of options. It is not ideal however it often is a large possible source of funds at this stage in people’s lives. The equity is ideally used in a line of credit form rather than a cash-out refinance. The issue is that beginning in 2018 one can no longer deduct the interest paid on a home equity line of credit (HELOC) which makes this option even less attractive. Although we don’t like to use it, it definitely takes the edge off, yet we use it very judiciously. Our example we will designate $8,000 per year. ($30,000 - $8,000 = $22,000).
- 401k loan or use of IRA monies. Sometimes the equity line is not available so a family may have to resort to using retirement assets. The good news is that retirement assets can be accessed without penalty (however taxes may apply) so long as they are used for higher education expense. We will rarely advise to use both an equity line and retirement assets unless absolutely needed. In our example we will NOT use retirement assets so the balance remains. (Still at $22,000).
- Student Loans: The last stop on this train is the student loan. This is what is eventually used to make up the final remainder of the bill. Although in our example a student will incur nearly $90,000 in undergraduate debt, if it is for an Ivy League school it could be worth the investment. ($22,000 - $22,000 = $0). In many other cases of universities that cost the same amount, one may feel it is not worth going into that deep of debt (which I would agree). It is at this point that the evaluation of schools that are less expensive becomes critical.
The decision of where to go to college involves much more than simply comparing cost.Courses offering, location, size, history all play roles in making this extremely important decision.We advise our clients that if your child wants to go to college, they can do it and they may be able to afford more than they originally thought.The best advice I can give is to do your research when beginning the college search and save when you can.You may be pleasantly surprised what the possibilities are.
John P. Drohan, Jr., Main Effort Financial
770 Washington Street Suite 6 Holliston, MA 01746
p. 508.893.9990
e. jdrohan@maineffort.com
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Securities and Investment Advisory Services offered through Sage Point Financial, Inc. FINRA/SIPC. Main Effort Financial, Inc. is a separate entity from Sage Point Financial, Inc.