Hi everyone! Welcome back to Melissa Making Cents!
As a Certified Financial Planner™ and College Funding and Student Loan Advisor, in Dallas Texas, it shouldn't surprise you that one of my favorite topics is shopping. Shopping for colleges that is! It's an exciting time for most students and their families. There are so many choices to make, and each school can create a different learning experience. Many families are not quite sure where to start the process, and as a result most families start with the school visits. But there is a lot of planning that goes into the selecting the perfect school for your child.
I’m going to start off this post by stating the obvious: college is expensive. The cost of tuition, books, fees, and room and board can easily amount to thousands (or tens of thousands) of dollars per year. Sometimes families will qualify for financial aid, or students will receive merit-based scholarships to help defray the cost. But more often than not, students must take out loans to pay for college. Earlier this year, student loan debt in the U.S. reached a record $1.6 trillion--that’s trillion with a T!
So why invest in a college education if it’s so expensive? Well, a college degree is just that--an investment. Recent research from the College Board found that individuals with bachelor's degrees will earn $400,000 more in their lifetimes compared to those with just a high school education. In order to increase the return on investment for a bachelor’s degree, it helps to reduce the cost of college at the outset. But how?
By beginning to plan for college early in a student’s high school career, it could be possible to limit the amount of student loan debt a student must borrow. Comprehensive planning helps with everything from shopping for schools in your budget, to making a plan to graduate on time (or even early!). Here are a few steps you can take today to plan for tomorrow.
Find Your Family’s Expected Contribution and Create Your College Funding Plan
Knowledge is power, especially when it comes to college finances. To start, I recommend signing up for a free account with College Aid Pro, which enables families to calculate their expected contribution. But let me warn you! The number you have in your head for your Expected Family Contribution is often very different from what the government calculates! More than a few choice words have been mumbled when the results pop up. (I promise I won't tell if it happens with you)
The chart below will give you a good idea of the information you will need to gather to begin your college funding plan with your College Aid Pro Account. Filling out this form now with information about income, 529 savings, and other funding resources can give families an idea of how much the student might have to take out in loans. Going through this exercise with your student will also begin the conversation on what it affordable and what is not.
As a general rule of thumb, students should not take out loans that amount to more than their expected first-year salary after graduation. This will be determined by factors like intended career path, location, etc. The result of your expected contribution and the student’s maximum loan debt will determine your maximum budget when shopping for schools.
"Sticker Price" and "Net Cost" of Colleges Are Often Not the Same
When looking at “sticker price,” private universities tend to cost more than public universities. But "sticker price" is often irrelevant. If you’re paying out-of-state tuition for a public university, the cost can be comparable with private institutions. However private institutions tend to have higher endowments, and are able to provide more aid to students that would like to attend their school. Public universities may not have the same deep pockets, and are limited in the amount of aid that they can provide to families. When shopping for colleges, it's important to consider the "net cost" of the school.
Net cost of the school's tuition is calculated by subtracting any financial aid awarded (not including student loans or work study) from the cost of attending the university. Generally you could multiply the net cost number by four, and get a good idea of the tuition amount due for four year of education. Compare this net cost with the college funding plan we created above. How would attending this university affect your family's financial future?
As an FYI: There might be special circumstances of you have multiple children in school at the same time! Creating that free College Aid Pro account can show you how your other students will factor into your college funding plans.
There Can Be A Lot of Value With A Public In-State University
For families that may not qualify for need based financial aid, nor do they have a lot of resources saved to pay for college, a public in-state university can provide a lot of value. Public universities within your state can be thousands of dollars cheaper per semester. In some cases the class sizes are also smaller which could provide a more individualized education. Every U.S. state has at least one public university, and most of them have several campuses to choose from. A lot of public universities have strong national reputations too, so you wouldn’t be sacrificing quality for price.
Save on Room and Board
If the student attends a college close to their hometown, they could consider living at home rather than paying for room and board. Some universities will even offer specific financial aid for commuters as an incentive. If living at home isn’t an option, compare the cost of living at different colleges. Living arrangements in New York City or Los Angeles will be much more expensive than smaller cities or rural areas!
Reduce the Amount of Time at a Four-Year Institution
There are two major ways to lessen the amount of money spent at a four-year college. The first is to graduate early. Explore colleges that offer students the opportunity to take more classes per semester (or even over the summer) in order to graduate in three years rather than four. Furthermore, if your student is still early enough in high school, encourage them to take AP classes. Many colleges will offer credit for AP test scores of 4 or 5, and these might replace 101-level classes or serve as electives. If your student takes one AP exam per year and earns a 5, they could accumulate 12 or more credits by the time they set foot on their college campus! That’s almost the equivalent of a full semester!
Another option to consider is to complete the first two years at a community college and then transfer to a four-year university. Since the first two years are often spent on pre-requisite classes, community college can be an attractive, cost-effective option. This is especially useful if students aren’t sure of their intended career path yet and want time to explore different types of classes.
Apply to Several Schools, Especially Those With Merit Aid
I find it's good practice to shop for colleges that will fit into your budget. If you know that your student is a good candidate for merit based awards, then you can narrow down your search to schools that could provide the best chances for merit based financial aid. The free College Aid Pro account can help you search for schools throughout the country based on the amount of financial aid you could receive.
By applying to several schools, a student can increase their chances of getting a financial aid package that meets their needs. Some schools have larger endowments and can therefore be more generous with institutional aid. Others might have scholarship programs that the student would qualify for. Finally, having several acceptance letters (and aid packages) in hand could be helpful in negotiating for more aid.
If Loans Are Needed, Try to Stick With Federal Loans
Student loans fall into two main categories: federal loans (provided by the government) and private loans (provided by banks). Subsidized federal loans are offered in need-based financial aid, and these have no interest accruals while the student is in school. For non-subsidized federal loans and private loans, students will accrue interest while they are in school. To apply for federal loans, the family would need to fill out the Free Application for Federal Student Aid.
To better understand the structure of student loans and other ways to save on college, a family can also work with A CERTIFIED FINANCIAL PLANNER™. I believe that it’s never too early to start comprehensive college planning, and I create personalized action plans to help my clients navigate the college search (and financial aid) process. If you are just getting started with college planning and need some concrete direction, please call, email, or click this link to schedule an appointment.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox
CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor in Dallas Texas.
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