College Funding: A Critical Part Of A Complete Financial Plan
As winter snowstorms give way to spring break trips and pool parties, another annual rite of passage is developing behind the scenes. That evolution is not birds chirping or spring flowers blooming as the weather begins to warm. As I’m a financial advisor who specializes in working with families of college-bound children, the transition to which I pay close attention is the transition of students from high school to college.
We have a tremendous opportunity to help families plan appropriately for this financial commitment. When choosing a higher education path, most experts agree that the most important aspect of the decision process is finding a school that is the right fit.
From my perspective, the most important aspect is financial fit. Can the family afford the cost of the college being considered, and if they choose the school, what is the financial impact of that choice?
A family must demonstrate financial need to qualify for need-based aid programs at the federal, state and institutional levels. But beyond that, there are no guidelines as to how financially prudent choosing one college over another may be.
According to The College Board’s Trends in College Pricing and Student Aid study, in 2021, the cost of attendance at an in-state public university was $27,330 a year. For elite private schools, the price can exceed $80,000 per year! This means that the cost of college for two children could fall between roughly $220,000 and $640,000. However, there are two big assumptions in this equation. First, that the cost of college doesn’t increase over the years: and second, that the student graduates on time. Unfortunately, statistics tell us a different story. According to the National Center for Education Statistics, the average student takes nearly six years to graduate, and college costs have increased by 3.2% per year over the past 30 years. And some families have more than two children!
To add insult to injury, student loan debt has grown to over $1.6 trillion, making it the second-largest line item on the collective American debt balance sheet, with average debt of $28,400 per borrower. Consider the impact on a young person graduating from college with $28,400 of student loan debt.
If they are to repay that loan over 10 years at an interest rate of 5%, that’s a monthly payment of $300. If the young person had instead been able to invest that money and could earn the same 5% on their investments, at the end of 10 years they would have $46,775. Simply by holding that sum, making no additional contributions and earning 5% per year to age 67, they would have $258,012 at retirement.
We offer five tips for advisors to help families navigate the college funding maze.
1. Begin early. Although many families may not be ready to swing by your office and set up their college savings strategy on the way home from the delivery room, the earlier you can encourage families to start planning, the better.
2. Be flexible. Section 529 plans have emerged as a college funding tool of choice, but they have advantages and disadvantages. Additionally, trying to project the cost of your child’s college education 18 years from now is virtually impossible. The key now is to save the money and figure out the specifics later.
3. Educate and enlighten. An out-of-state or private school may have better weather or a more competitive basketball team, but is the juice worth the squeeze in terms of cost differential? If the same major is available in a family’s home state, might that be a more attractive option? If not, consider tuition reciprocity programs such as the Academic Common Market, Midwest Student Exchange, New England Regional Student Program or the Western Undergraduate Exchange.
4. Find merit or need-based scholarships. We encourage students to start searching for scholarships early. Most students wait until the second semester of their senior year of high school, when there may be fewer available options, or they may not be particularly motivated due to a classic case of “senioritis.” Several years ago, we had a student who won a national science fair and qualified for a $25,000 scholarship as a sixth grader!
5. Negotiate. If a student is highly qualified based on merit or if a family is eligible for need-based aid, we always encourage them to negotiate with the schools to get their best offer. Encourage families to use offers from peer institutions or to explain any extenuating circumstances to influence top-choice schools to provide their best possible offer. The schools may not budge, but it never hurts to ask!
Next to choosing who to marry, selecting what college to attend is perhaps one of the most significant decisions of a person’s life. Perhaps that’s why Gallup suggests that college funding is the top financial fear of most American families. By helping address these concerns, we can add tremendous value for a family and create resources that can be used for other purposes in the future.
Brock Jolly, CFP, CLU, ChFC, CLTC, CASL, CFBS, RICP, CEPA, is a financial advisor with Veritas Financial and the founder of The College Funding Coach. He currently serves as NAIFA’s national treasurer. He may be contacted at [email protected].
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