The College Funding Dilemma

With the cost of a college degree exceeding $60,000 and in many cases approaching $100,000 or more for a bachelor’s degree at an in-state public university, how will you pay for it?  You can beg, borrow and probably steal (though not recommended) but having a plan in place may prove to be a better way.

Right now, the cost of college continues to increase. Depending on the school and region of the country, you’re probably going to continue to see costs escalate an average of 4% to 6% per year for the near-term.  While there’s much talk about a paradigm shift toward alternatives to the traditional brick-and-mortar college experience, the reality is that most parents will be dealing with this challenge for the foreseeable future.

Most parents are woefully under-prepared for the cost of sending their kids to college.  Although participation rates for 529 savings plans have increased, the amounts saved are on average equal to about one year of college costs.

So, what can parents do about this?

There are a number of options for any family regardless of income or assets.  But it all starts with having a plan and doing your research.  You wouldn’t just randomly choose a house or a car, would you?  Well, maybe you would, but you’d probably have better results getting help through any unfamiliar and confusing process.  And navigating the college selection, application and funding process certainly qualifies as just one of those mysterious areas where people may have better results with competent help.

The College Funding Dilemma

Two-thirds of students graduate with education-related debt that averages near $30,000.  About 10% have loans in excess of $50,000.  This doesn’t count the debt that is assumed by parents through private loans, PLUS loans or refinanced mortgages and Home Equity Lines of Credit. This doesn’t count the funds borrowed from 401k plans or the opportunity costs resulting from not funding retirement accounts.  This doesn’t even count the impact of those who attend but never graduate from college but are saddled with the loans.

This all adds up to missed opportunities for the parents and the students.  There’s the missed opportunity that comes from not going to the college one desires because of financial concerns.  There’s the missed opportunity from not obtaining the maximum financial relief you may be entitled to.  There’s the burden and missed opportunity created from taking on unneeded debt or paying unnecessary taxes.  And of course, there’s the missed opportunity resulting from the family friction that may develop when you fight about money with your spouse or child.

Choosing a college is as emotional a topic as almost anything else having to deal with money.  Parents may tend to make outsized promises or sacrifices for their kids because they want to do “right” by their kids.  Parents don’t want to disappoint their kids who may have their hearts set on a specific school.  And there’s the “prestige” factor that comes with getting into an elite school.

Schools understand that this is an emotional decision.  And they play to that to tear at the heart strings of their prospective students.  And make no mistake:  A financial aid officer’s job is not to help you but to get you to pay the school.  They aren’t there to help you decide which loan is better or whether you or your student can even afford to take on that debt.  They are focused on getting paying customers.

College as a Business Decision

That may seem crass but it is the reality.  Going to college – any college – is a business decision.  Colleges run their campuses like a business. And you should run your own household like one.

Before you invest your money – the stuff you’ve saved or that you and your student will earn – you need to understand the tradeoffs and the dollars involved.

Getting a college degree is still a good investment for many.  But there are many professions that pay very well that don’t necessarily require a college degree. There are plenty of business opportunities and franchises available for the same money you may commit for tuition. And not everyone needs a college degree to obtain knowledge.  Simply check out the various Massive Online Course (MOOC) platforms like Khan Academy and others that are out there.

Not everyone does well in every academic setting.  And going to a large urban school may not work for a child who needs smaller class sizes or a more suburban or rural setting.

First Step: Having the Talk

As parents we all sort of dread all the various “talks” that come up.  What’s more stressful than talking about the birds and the bees?  Try talking about money. Most families tend to avoid substantive discussions about money matters which can set up kids for false expectations and disappointment.

So the first step to tackling the college funding dilemma for a particular family should begin with a conversation focused on values.  What do you expect from your student?  Do you have any performance expectations in return for your financial help? Do you expect them to contribute to paying for school?  Do you have a budget in mind or are you just going to ‘wing it’? Do you expect them to have any loans?  Is college even right for them or is this something being forced on them? What kind of campus setting will work for them?

College and Major Selection

You would expect that when you talk with a finance guy about college funding or anything else to do with money that it’s all about the numbers.  And when it comes to college funding there certainly are all sorts of numbers.  There are financial aid formulas.  There are calculators for figuring out savings and investment programs.

But the most important part of the college funding process is centered on college selection.  This is the uncounted but important eighth factor in the Expected Family Contribution (or EFC).

If you can find the right school for the right reason, you’ll have a very motivated student.  If you find the right school, you may find that your student actually completes his four-year degree on time and under-budget compared to the majority who take up to six years to walk down that graduation aisle. If you find the right school, you may find that your student qualifies for more aid or tuition breaks because he has the ‘right stuff’ for a particular school. If you find the right school and the right major, you’ll probably have a student who is better prepared to start a career … and leave the nest.

If you find the right school for the right reason, you’ll probably spend less and have more for your own nest egg.

If you want to find that right school, you really ought to start with a plan.