Rethinking College Planning

Paying the bill for higher education

Our youngest child graduates from college this June. When we make the last payment this spring, my husband and I will have put three children through one public and two private colleges. I won’t even mention how much the costs totaled – more than most parents want to hear. We’re lucky; we are done. Some friends and a number of my clients are facing future tuitions. What has looked like a big bill to us could be dwarfed by college costs which expand annually at more than the rate of inflation – 2.4% above inflation for private colleges; 5.2% above inflation for public colleges over the last decade (College Board). At what point does a parent say, “This college is just too expensive?” Many factors go into choosing a college: programs, prestige, proximity, peers (to represent just one letter of the alphabet) and pricing often gets pushed down the list of priorities. I have talked to many clients who say, “We’ll just make it work,” regardless of the price tag. Parents are well intentioned. They want the best for their children, and a college degree is a proven ticket to higher employment rates and better salaries for many graduates. But do parents really understand future college costs? I often find that parents are unrealistic about financial aid. They believe that colleges will take into account their existing debt and give them a break on their financial aid. (Not true.) They also believe that there is a magic number (formally known as “The Expected Family Contribution”) that guarantees them a certain amount of assistance. Colleges aren’t required to give a student any aid. The schools try to be fair – spreading around the limited financial resources as best as possible –but the assistance pool is only so large, and it is hardly ever enough to meet the needs families believe they deserve. In addition, most aid is not merit based (scholarships that don’t have to be paid back). Much of financial aid comprises student loans and work study. The loans are amounts the students or parents will eventually cover, not the colleges. Parents can also be unrealistic about their college savings. They dutifully open up a 529 plan (a tax-advantaged college savings vehicle offered in all states) and plop down $200 a month into the plan for their child. When added onto mortgage, car and credit card payments, the $200 debit feels like a meaningful payment. But if they save $2400 a year from the time the child is born until college enrollment, the parents will cover approximately one year of tuition, room and board that currently costs $28,000 (the $28,000 is a planning number and is not meant to represent averages for four year private colleges, four year public colleges nor any particular college). And then you have to add in the emotionality factor. The student is of ten seeking “best fit,” while the parents want “best reputation” or vice versa. Neither is thinking as much about expenses as they should. So how do you avoid that disappointment, or conversely, sidestep the pitfalls of taking on too much debt if you opt to “make it work?” Ideally, you start with financial planning early on, when the kids are young. Determine how much of college you plan to pay for: Out of income, out of savings, with gifts and from loans. Then: • Target the savings for each child or collectively for your children and start funding 529 plans when the kids are young. • Look at your own career path. What percentage of college costs do you expect to fund out of current income? • Don’t be afraid to ask the grandparents if they will be willing to help out. • Have a frank discussion on student loans; not all couples agree on whether loans are good or bad and at what level. Decide on an amount that works for both parents. • Set expectations with your children early. “There are limits to how much we will be willing to pay.” • Establish an affordability factor for each college on the application list and make it a priority. • Don’t neglect your own retirement planning. You want to make sure you are not going to have to ask your kids for loans in your old age. There are many good colleges that your child can thrive at, some less expensive than others. When the college acceptances roll in this spring, make sure fit, program and affordability are all part of the enrollment decision.