| 07 April 2010
There was a time when numbers like $140,000 or even $60,000 were used by young adults in reference to purchasing their first home. Today this type of investment will barely even cover the cost of a four year college education. According to the College Board, the average annual comprehensive cost at a four year public college rose 5.9% last year to $15,213. A private four year college education now averages $35,636 a year (up 4.3%).
To put these numbers in perspective jump into a magic time machine and set the dial back to 1980. Disco is dying, the misery index is through the roof and filling a car with gas may have meant waiting in lines similar to auditions for American Idol. However, using constant 2009 dollars, tuition and fees at a public four year college was only $2,094 dollars a year and at private four year colleges it was $9,419. In other words, students are now paying approximately three times as much for college tuition and fees (in constant 2009 dollars) than many of us paid 25 to 30 years ago. To add even more pain many would argue that the value of a bachelor's degree for today's students has diminished and graduate and professional degrees are becoming the new standard.
The days of students simply paying their own way through college via entry-level jobs and summer savings are fading quickly. Planning and preparing for college is now a family affair and like any other budgeting process paying for college will likely involve a combination of lower purchasing costs (college choice, time to completion) and increased revenues (income, savings, financial aid). Recognizing these challenges early and placing them in the proper perspective will make the college planning process easier. Here a few tips (among many)....
1. Start Saving Now!: 529's and Coverdell Educational Savings accounts are excellent college savings tools and if structured correctly will have a negligible impact on future financial aid eligibility. If the student currently has an UGMA or UTMA account and if there is any possibility for financial aid consider moving these funds to a 529 account where the student is both the owner and beneficiary.
2. Set Reasonable Expectations: Is a college that costs $50,000 a year really worth the price? Could a public college at a fraction of the price still provide a rigorous educational experience along with comparable future career and income opportunities? The answers to these questions obviously vary; however, it is important to have the conversation about college choice and cost with the student early in the college selection process. In addition, there are now enhanced resources available to help families place a dollar value on a college degree from an elite college as compared to a less expensive regional private college or public university. One of the leaders in this area is Human Capital Score (www.people2capital.com). For a small fee they will calculate future income potential based on individual student attributes, college choice and major. In addition, remember that the primary reason that public colleges are less expensive than private colleges is that your tax dollars are subsidizing approximately 50% of the tuition. If that was not the case the comprehensive cost of the University of Minnesota would be over $27,000 a year instead of about $18,000. Put that money back to work for you and use the savings to help the student fund graduate, law or medical school after the bachelor's degree
3. File the Free Application for Federal Student Aid (FAFSA) Even if You Don't Think You Will Be Eligible for Financial Aid: Even if you know you will not qualify for financial aid the FAFSA is often needed to determine eligibility for unsubsidized federal loans, institutional work-study and appeals of aid awards (even if aid is initially denied). It also serves as an insurance policy that allows financial aid officials to exercise professional judgment in case sudden changes in the family financial situation (death, loss of income, etc...) impact your ability to pay. (Note: Most elite private colleges also require the CSS Profile form).
4. Gift Appreciated Assets to the Student While They Are In College: Gifting stock directly allows the student to realize a lower capital gains rate than the parent at liquidation and may allow the student to meet the support test to claim the dependent exemption for tax filing purposes (the student is still dependent under the FAFSA definition). Allowing the student to take the tax exemption (especially if the parent income is too high to be eligible to claim it) also allows the student to potentially claim educational tax credits otherwise restricted by income eligibility.
5. "Appeal" the Financial Aid Offer (or Non-Offer): For all of its pretensions, purchasing a college education is similar to other types of commodities; however, the best bargaining chip is the student. Less than 3% of students in the U.S. score a 2100 or higher on the SAT (max. 2400). The ACT composite equivalent to a 2100 SAT is a score of 31 or higher (36 max. score). Combine high test scores with excellent grades, a solid college preparatory transcript and a willingness to add to the social fabric of a college campus and all of these things combined equal "Leverage". Colleges now fund more gift aid or tuition discounts ($24 billion) than the federal government ($18 billion).
6. Enlist Other Willing Family Members: Grandparents, aunts, uncles, brothers and sisters can all help in the college funding process by opening 529 accounts and listing the student as a beneficiary. 529 assets owned by these family members are not included in the asset section of the FAFSA application and the owners maintain total control of the funds and the chosen beneficiary. Extended family members can also make direct payments of tuition and fees to colleges on behalf of the student without impacting IRS gift limits.
7. Borrowing Is Not All Bad: All students, regardless of family income, are eligible to borrow under the Federal Unsubsidized Stafford loan program. The rate is fixed at 6.80% and repayment of principal and interest does not begin until after the student has graduated. Student loans make the student partially responsible for their education expenses and are a better alternative to part-time jobs if it allows the student to study more, get good grades and graduate on-time. Parents may also want to consider the Parent Loan for Undergraduate Students (PLUS...7.9% fixed). Home equity loans or lines can also be good financing alternatives since they can provide tax benefits and also reduce the equity of the primary residence on the CSS Profile form (supplemental financial aid form required by many elite colleges).
Increasingly the task of paying for college requires a strong tripartite relationship between parents, students and a willing college or university partner. Take control of the process by saving, setting expectations and gaining a firm understanding of your power and leverage
Daniel Smith is the founder of DBS Collegiate, LLC. He holds an M.A. in Higher Education Policy and Administration from the University of Minnesota and is a former college admissions and financial aid officer. Questions or comments can be sent to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .