As we continue to roll through Spring, and the end of another school year is closely upon us, it's time to start thinking about what's on the horizon. For parents of school age children we are one year closer to the day where our children will have to decide their educational future and we will have to decide if and how to support them in that endeavor. For most families, planning and paying for college is one of the most complex and emotionally fraught financial decisions they will ever make. The numbers can feel staggering and get even more overwhelming when considered alongside other financial goals: saving for retirement, housing costs, insurance, and hopefully enjoying a decent quality of life along the way.
Before we get into the 5 steps to help you plan for college, here are our quick thoughts on why taking on the college funding challenge is likely worth it to your child's economic future.
Is a college degree still worth it?
According to the most recent Bureau of Labor Statistics data there are approximately two job openings for every unemployed person in the US. This demand for workers presents an opportunity for kids to jump into the workforce right out of high school but foregoing college to do so may have a longer term impact on their ability to maintain employment and lifetime earning potential. Those with a college degree or greater are almost twice as likely to be employed compared to those with no college education at all and as you can see from the chart below they have been better able to maintain employment during economic downturns.
Not only do college degrees continue to offer workers a higher degree of job security, they also provide an opportunity to earn higher wages throughout ones career. On average, those with a bachelor's degree earn almost 90% more per year than than their peers with just a high school diploma and those that went on to earn a professional degree (MBA, JD, MD, etc) on average make nearly 3x as much as individuals without any college education (source: BLS.GOV)
Periods of unemployment can wipe out hard earned savings and lead to the accumulation of debt that can be very hard to shake. Further, the more one can earn the more likely they are to save for their own future. Life is about probabilities and a college education can help increase the probability of financial independence and freedom. It's a goal worth having!
5 Steps to Take Control of College Planning
1. Don’t wait to start saving for college
New parents, stop me if you heard this one at some point during your pregnancy from a parent, grandparent, aunt or uncle: "Better start saving for college now!" and for those girl dad and mom's out the added "Better start saving for the wedding!". I hate to say it but they are kind of right - at least for college. As a father of three girls I am all in favor of old traditions dying hard regarding weddings.
For most parents, especially younger parents, saving for future college expenses presents is a huge challenge. After all, we all have finite amount of income and there are a lot of current expenses and saving priorities competing for a spot in our budget. Carving out some of today’s dollars to fund education costs that are 10, 15, 18 years down the road can often fall in the “task for another day” bucket on our to-do list. The sobering fact is that today, the average total annual tuition for a public university is more than $22,000 and almost $51,000 for a private college. If we project those figures 18 years out using the historical 6% inflation figure, it could cost more than a quarter of a million dollars for public college and well over $500,000 to attend a private university for kids being born today.
So, what to do? If you have decided that education and college will be a priority for your child’s future and want to help/cover those costs, then you will want to to start saving early and often. Below is guide for new savers and those that have some savings in place already. This general guide shouldn't replace a plan customized to your specific situation but it can give you some perspective on when trying to build a budget. For many saving to these suggested amounts might be unattainable and that is OK, in most cases it's better to do something rather than nothing. Just by saving $100 a month (assuming a 6% annual return) starting at a child’s birth, you can accumulate almost $40,000 by the time the child reaches college age.
2. Know the different college savings vehicles
Once you commit to allocating a portion of your budget to college savings you will want to choose the type of account to save to and then invest properly for your time horizon. Historically, Coverdell Education Savings Accounts and Custodial Accounts (UTMA/UGMA) were the main methods used to tuck away college funds but over the last couple decades 529 Education Plans have zoomed to the front as the most common way families save for college. 529 college savings plans are investment accounts that are granted favorable tax treatment by the IRS to encourage savings. Money invested in a 529 savings program will grow tax-deferred and investment gains become tax-free if withdrawals are used to pay for qualified education expenses. Depending on the state you live in you may be able to deduct all or a portion on your contributions from state income taxes (529 By State).
3. Understand FAFSA and financial aid eligibility
In a perfect world, income and savings would be more than enough to cover the cost of college however, even those earning very high incomes will struggle to , paying 100% of the cost out-of-pocket. This is especially true when multiple kids are in the picture. Enter FAFSA.....
FAFSA stands for Free Application for Federal Student Aid and it is used to calculate a family’s EFC (Expected Family Contribution) toward college expenses. FAFSA evaluates a student’s financial state and determines which are eligible for financial aid based on the income, assets and size of the student’s family. All high school seniors applying to college and students currently enrolled in college should complete the FAFSA, on an annual basis, while they are in school even if they will not qualify for need-based assistance. The purpose of the FAFSA process is to determine an applicant’s Expected Family Contribution (EFC) during each of their college years. The details of EFC are beyond the scope of this article but you can read more here.
In addition to FAFSA, certain schools around the country (roughly 400 in total, mostly private universities) ask for a CSS/Financial Aid Profile to be completed. The CSS form looks at additional components of a family’s income/assets to determine aid eligibility and is often able to grant assistance to those with higher income and asset levels than the federal program.
4. Apply for grants & scholarships
As your student works through the application process, we highly encourage that they research and understand the grants and scholarships they might be eligible for. According to the Department of Labor’s free scholarship finder tool, there are more than 8,000 types of grants and scholarships that are awarded to thousands of students across the country on an annual basis. While they tend to make up a small piece of average college student’s tuition payment-pie (as seen in the visual below), opting not to filter through the grant and scholarship database is essentially turning down free money. In 2020, nearly 50% of college students received some form of a needs-based grant while 58% of students earned a merit-based scholarship. There is a lot of tuition money out there for the taking, please challenge your student to search for it.
5. Consider federal student loan opportunities to fill any gaps
We’d love for the statistics to show that more families have been able to save enough to fully fund college but the unfortunate reality is that student loan balances have exploded in recent decades. The relentlessly rising costs of tuition have put a strain on many family budgets and left new graduates with a cloud of debt hanging over their heads as soon as they walk across the stage. As of 2019, parental debt from college loans had increased by 38% in just 4 years and the average college graduate leaves school with nearly $30,000 in student loan debt (source: JPMorgan)
Today, borrowing for college is just part of the deal for most American families so it’s important to know what loan options are available. The U.S. Department of Education’s www.studentaid.gov is loaded with helpful explainers including the various federal loan programs available to students and their families. There are also nonfederal student loans made available by lenders like banks, credit unions and even schools and you’ll want to understand them but you’re best-off pursuing federal loan opportunities first because they are more flexible and can benefit from government oversight (writing those words felt weird) such as the payment moratorium instituted during the pandemic and currently President Biden is exploring ways to approve forgiveness of up to $10,000 through an executive order.
Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.