April 2009 Archives
Saving and Paying for College.
"What do you want to be when you grow up?" is a question commonly posed by adults to youngsters. They do not expect to hear the sad, dejected response of, "An unemployed college graduate with twenty thousand dollars in student loan debt!" But in fact, the expected response of, "a doctor, a lawyer, a teacher, or a nurse" implies the attainment of a college degree. While not all career fields mandate a four-year degree, most do require advanced education beyond high school. And those years of education come at a cost.
Over the past 25 years, tuition inflation has far outpaced the rising prices of gasoline and healthcare. According to a special report by CNN's Penelope Wang, tuition rates grew four times faster than overall inflation. The Center for Economic and Policy Research reported that in 2004, 2/3 of public college seniors graduated with an average debt load of $17,600.
College is expensive. How expensive? A recent check for out-of-state tuition at Penn State's University Park campus reveals a cost for 4 years of around $100,000. In-state tuition for the same four years runs about $54,000. The $46,000 difference in cost is "financial aid" subsidized by Pennsylvania taxpayers for Pennsylvania residents attending a school in their home state. Despite this "break" many families are hard-pressed to finance the education of one student, much less his or her siblings.
When thinking about saving and paying for college, there are a lot of options. The earlier you get started planning and saving, the better prepared you will be when it comes time to move Junior into his freshman dorm room. First, be realistic about what you will be able to set aside for college, taking into account all your other financial obligations. Avoid reducing contributions to your retirement plan in order to save for college. While lenders can make college affordable to your student, it's unlikely when you are of an advanced age you will find lenders to assist you in financing your retirement!
Generally, you have four college funding options (excluding those rare sports scholarships!) Savings, grants, scholarships and loans.
U.S. Savings Bonds are a great way to start saving. Carefully read and follow the rules regarding tax exemption of interest on bonds used to pay for education. Bonds are a safe, secure way to grow a college fund with interest tax-deferred for up to thirty years. You have choices between EE and I bonds and if titled correctly, do not affect your student's eligibility for other types of financial aid. Check the website www.savingsbonds.gov. Pennsylvania's Section 529 plan www.nowu529.com/ provides another great way to save for college.
Grants are funds provided to assist with college bills and do not need to be repaid. Generally, they are only available to individuals of meager means. Scholarships are often available within your community as well as from education institutions. Various applications must be completed and eligibility requirements met to access these funds that do not need to be repaid.
Despite your best efforts of saving and taking advantage of other forms of funding, most families find themselves having to borrow money to pay for college. Because there is a limit on how much students can borrow, parents often bear the burden of borrowing to make up the deficit. Some families who, with the best of intentions, borrowed to help their oldest child have found their financial situation prevented them from assisting younger siblings. Finding yourself in this situation creates not only financial but emotional turmoil as well.
Regardless of the age of your scholar, start the conversation today about your expectations of their future and how to finance it. College is expensive and might be financially out of reach. That doesn't mean dreams of attending college are dashed. It does mean additional homework is necessary to assure that the expenses incurred will pay for themselves in the long run. In the business world it's called return on investment or ROI. Is it worth it to go deep in debt to attend a well-recognized institution? Or would your student do just as well at a less-pricey, less prestigious school? Does their career interest even require a four-year degree or would other types of education qualify them for entry into their chosen career field? If your college graduate can't immediately get a job upon graduation and start repaying loans, wouldn't you rather they owe $20,000 instead of $50,000?
Recently I talked with a young woman who, along with her husband, graduated from a well-known out of state college and were starting careers and grad school. Planning to eventually start a family, they have been looking to buy a home. She shared their frustration that while they have excellent credit, no local banks would give them a mortgage. Further into the discussion she revealed that together they owe over $100,000 on their students loans. It appears they already have the mortgage, but it's not financing a house! The decision to incur that amount of debt so early in their working lives may hobble them financially for at least the next decade. By developing and following a family college financing plan, you can avoid this type of situation and launch your student successfully with minimal debt.