An old axiom states that nothing is certain except death and taxes. But now we have to add the skyrocketing costs of a college education.
According to the most recent College Board Annual Survey of Colleges, the sticker price of a college education keeps rising, faster than the price of groceries, health care and almost everything else in the basket of goods used to determine the Consumer Price Index (CPI). In the last 10 years, in-state tuition and fees at public four-year colleges increased 5.6% annually on top of a CPI growth of 2%. The average estimated total expenses for a current public in-state four-year student are an astounding $81,356.
If you were blessed with the birth of a child recently, you will need to save $430 monthly to pay for in-state college tuition, fees, room and board. Double this rate to cover the full costs at the average private institution. And this doesn’t even include money for a cell phone, pizza, room decor or other stuff that college students deem “necessities.”
Students are graduating with larger debt loads than they were 10 years ago. Public four-year college borrowers graduate with an average of $19,800 in debt; their nonprofit private college counterparts graduate owing $26,100.
Most students don’t pay full price for college. In 2009-10, undergraduate students received an average of $12,894 in financial aid, split almost equally between loans and grants. Grants are the most attractive because students are not saddled with a repayment plan after college. Federal grants make up 26% of total aid. Institutional college grants account for 17%, state grants for 6% and private and employer grants (scholarships) for 4%.
Students are graduating with larger debt loads than they were 10 years ago. Public four-year college borrowers graduate with an average of $19,800 in debt; their nonprofit private college counterparts graduate owing $26,100. This private college debt is 17% more than it was 10 years earlier, even after accounting for inflation. In addition, a growing percentage of all college debt is unsubsidized and begins accruing interest immediately.
Our experience suggests not all college degrees are created equal. In May, the New York Times profiled a recent graduate of New York University who majored in women’s and religious studies. With more than $100,000 in debt, she is struggling to repay her loans, meet her living expenses and regretting her selection of an expensive private school.
Students will have to make more astute education choices. Today’s global marketplace places more value on hard skills such as engineering, computer technology, teaching and finance. Technical degrees and certificate programs will become commonplace. A liberal arts education will likely diminish in popularity and become more focused at the elite institutions. More students are likely to begin their education at lower cost community colleges and complete a four-year degree at schools that specialize in their concentration.
Parents may feel overwhelmed about the amount they need to save for college. But college education is one of the two lifetime investments for which we approve borrowing money (the other is a home mortgage). Students should plan to graduate with a debt load no higher than half of what they can reasonably expect from their first year’s salary. For example, those with a starting salary of $40,000 should keep their debt at or below $20,000. Thus graduates can dedicate 10% of their annual salary to school debt and pay it off in five years.
New parents should immediately begin saving $430 a month for college. Alternatively, a onetime $50,000 investment should cover tuition, fees, room and board at an in-state college 18 years from now.
Giving a child the gift of a college education and a debt-free start to adulthood is one choice. Other parents believe their children should participate in financing their college education and can apply the 50/50 savings approach. Parents commit to saving half of the money needed, and their children commit to the other half. Students participate by working hard in high school, applying for scholarships, taking summer jobs, seeking out work study opportunities and accepting reasonable loan levels.
The support of grandparents can help tremendously. The vast majority of the college accounts that we manage are owned and funded by grandparents. Instead of buying the latest gadgets for their grandchildren, they make annual contributions to a college savings account. If the grandparents own the account, it has the added advantage of not being included as a resource on the student’s financial aid forms.
The 529 plans are still the most cost-efficient way to save for college expenses. If the grandparents are Virginia residents, they are entitled to a $4,000 state tax deduction, which saves them $230 each year per account. Or they could each open one account for their grandchild and double the savings. This money grows tax deferred and is tax free when withdrawn, akin to a Roth IRA. The 529 plans have the additional benefit of an upfront state tax deduction.
Virginia has the largest 529 plan in the country, perennially ranked in the top five across the country. VEST, the Virginia Education Savings Trust, is marketed directly to the public. Another plan, CollegeAmerica, is offered through financial advisors. It has different share classes, some of which have loads that make them unattractive. But no-load shares are available through fee-only financial advisors. CollegeAmerica allows advisors to create their own asset allocation mix from a few dozen different funds.
We do not recommend prepaid college tuition plans. At best, they match college inflation, and if used at an out-of-state institution, returns are based on money market rates, which are abysmally low right now.
The plethora of decisions can be intimidating. The nonprofit NAPFA Consumer Education Foundation is offering a helpful presentation titled “Advantages of College 529 Plans for You and Your Grandchildren” at the Charlottesville Senior Center at 1180 Pepsi Place on Thursday, November 18, from 5:30 to 6:30 p.m. with a question-and-answer session to follow. The talk is free and open to the public. Bring your questions!
Photo by William Stitt on Unsplash