College cost conundrum
With four years of college tuition rivaling the cost of a house, and so many college graduates struggling to find a job, it’s no wonder there’s a growing chorus questioning whether college is worth the ever-rising cost.
Well, let’s just put those nagging voices to rest.
According to a Georgetown University study quoted in a recent paper by Wells Fargo’s economists, college graduates still earn 74 percent more over their lifetime than their pals with only high school diplomas. If they go on to earn a professional degree they’ll make a whopping 180 percent more, on average.
So how can parents best prepare for college costs when tuition increases have been outpacing inflation for nearly three decades and show few signs of easing up?
1. Start saving early. Nearly half of parents with children ages five and under already have something saved for college, up from about a quarter of parents in 2007, according to new research from Fidelity Investments. This is striking because the majority of those families have scraped together savings despite still paying their own student loans and covering day care or preschool tuition.
We fall into this statistic, and save just $150 a month for our three kids. It’s not even close to the more than $1,000 per month the calculators mockingly claim we should save to cover just part of state college tuition for our progeny. But we know the magic of compound interest, and plan to save more once our youngest is in grade school.
2. Don’t put school in the stock market’s hand. If it wasn’t clear to you after the stock market’s wild ride in 2008–2009, it should be after this August: The stock market is volatile, and is no place for your short term money. By short-term, I mean cash you’ll need to access in three to five years. Many families use 529 college savings plans for education savings, and can select a range of investment options from all stocks to all cash. A very popular option is one where the investment mix of stocks, bonds, and cash is tied to when your child will enter college.
It’s a great way to diversify without worry, but be sure you know how much of your kid’s tuition money is tied up in stocks. The amount varies depending on which state 529 plan you choose. For more on 529 plans, visit savingforcollege.com.
3. Have a heart-to-heart about college costs. For most families, the days of picking a school first and worrying about paying for it later are history. Laura Kuntz, a Bloomington-based financial adviser, suggests that parents and their college-bound child sit down and establish expectations of who is going to pay for what, what type of school is on the table, and how any shortfall will be met. “Clarity is very empowering for young people,” she explains.
4. Fill out the FAFSA. This financial aid document opens the door to federal loans and grant money. Yet despite the annual pleas from financial aid officers, many families fail to fill it out, assuming they wouldn’t qualify for any help. The good news is that the number of families who filled out the form increased from 72 percent in 2010 to 80 percent this year, according to student lender Sallie Mae. This resulted in an increase of grant money that helped families pay less out of pocket. Curious about how much aid you might qualify for? Check out the FAFSA4Caster tool at fafsa.ed.gov.
5. Put a limit on borrowing. College consultant Carol Stack routinely gets questions from parents about how much debt is okay to take on for a college degree. So Stack, a former admissions director at both Macalester and Augsburg and co-author of The Financial Aid Handbook: Getting the Education You Want for the Price You Can Afford came up with $8,000 per year, or $32,000 for a four-year degree. She considered several variables, such as the $31,000 four-year federal student loan limit and the approximately $33,000 average starting salary for a liberal arts graduate, to come up with her guideline. She says students who are pursuing a higher paying career can take out more, so long as their total debt doesn’t exceed their expected first year’s starting salary. Check out thefinancialaidhandbook.com for more of Stack’s down-to-earth advice.
Kara McGuire is a personal finance writer and a St. Paul mother
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