Being Smart: College and Higher Education
You can count on one thing---the price of higher education is always rising. Unlike inflation or gas or the price of eggs, the cost of tuition, room, board and books will beat out its previous high year after year.
First we’ll tackle how to estimate the future cost of college or postsecondary schooling for your kids, then we’ll consider some ways to save for the future. If you’re one of the many faced with paying those bills NOW, we’ll serve up some ideas on paying for school in the present. Finally, we will talk a little about student loans and servicing the debt.
What will it Cost?
The chart below shows the average annual cost for Public and Private Universities in the US for the 2017-2018 school year:
Tuition generally tends to increase about 8 percent per year, which means that the cost of college doubles every nine years. Do you have a nine year old? Basically multiply the numbers above by two to estimate what college costs will be in 2024 when your baby graduates from High School.
Some financial folks advise that we should save money for our retirement BEFORE we save for our child’s education because the child will be able to get financial assistance (READ INCUR THEIR OWN DEBT) as they enter college.
We disagree: we encourage parents to save toward BOTH retirement and their child’s education. Saving for an education and involving your children in that process encourages lifelong money muscle building and the important lessons of creating an abundant future.
Some Ways To Save For College:
Use a college-savings calculator to estimate how much you’ll need to save for your child’s college.
Here are a few long-term ideas that are tax effective to help get the most bang from your savings:
529 Plans – Vary by state - http://www.irs.gov/uac/529-Plans:-Questions-and-Answers
UGMA/UTMA Accounts – These are custodial accounts or trusts for a minor where the custodian (very often a parent) donates money or stock or other property irrevocably (no backsies) to the trust. The donor limit each year is $14,000 and you can set up an account to automatically invest a set amount each month into a fund, dividend paying stock or other savings instrument. Taxes on income are filed under the child’s social security number.
Roth IRA – Contributions are made with after tax dollars. You are allowed to make withdrawals on the contributions (not earnings) from Roth IRA accounts prior to age 59 1/2 without incurring a 10 percent penalty as long as the money is used for higher education expenses. (In 2017, you could contribute $5,500 to a Roth IRA if you are under age 50, or $6,500 if over age 50.)
Muni Bonds – Tax free – avoid kiddie tax - munis are considered less risky than stocks over the long term, and the tax-equivalent return of munis can range from five percent to six percent depending on your tax bracket and the state you reside in. You can buy the highest-rated muni bonds with principal coming due exactly in each year when needed to pay for college. So if your child is three years old and you invest $5,000 a year for 15 years in individual muni bonds and earn a compounded interest of 4% you'd accumulate about $100,000 for college.
Of course, many of us were not able to save over time and SURPRISE have a child who is about to enter college (or already there).
Here are some immediately executable ways to help PAY for college:
Apply for Financial Aid – (if you have a 529 plan or an UGMA/UTMA, that will affect what you are eligible for) -- “Free Application for Federal Student Aid” (FAFSA) is the starting point for all students and parents. The FAFSA4caster can help you understand your options when paying for college and you can see estimates for eligibility. There a plenty of tools to help you get started.
Apply for Grants – Pell grants, SMART grants – Visit the U.S. Dept of Education website.
Apply for Scholarships – TONS are out there, here’s a good starting point from the U.S. Dept of Education.
Consider College Abroad – Usually less expensive.
Live at Home – As an alternative to boarding.
One thing to keep in mind if finances are tight is that attending a local college for the first two years is a feasible and much more cost effective option. Those credits are usually transferable if and when you choose to transfer to a university. Also be careful when choosing your major, after all, the assumption is that this will be your career. Some people have fulfilling careers no matter what the degree, but college is an INVESTMENT --it’s important to know if you will get your money’s worth and see a positive ROI (return on investment!).
Unfortunately, according to a CareerBuilder study, nearly half (47 percent) of college-educated workers said their first job was outside their field. About one-third (31 percent) of college-educated American workers age 35 and older are never employed within their degree field. According to government statistics 500,000 college graduates are working a minimum wage job.
Paying Off Student Debt
As of 2017, the Consumer Financial Protection Bureau stated the combined total of outstanding federal and private student loan debt now exceeds $1.4 trillion – the vast majority of which are federal loans. More than 40 percent of student loan borrowers leave school owing $20,000 or more.
For those who are coming out of school with a load of debt there are options for you:
- There are several repayment options available: standard, extended, graduated, income-driven and income sensitive.
- There are options for deferment and forbearance, forgiveness, cancellation, and even discharge in some cases.
The key is to understanding your options sooner rather than later. Ignorance is not bliss when it comes to student debt
(or any debt).
If you do not make your payments you risk going into default, which can have serious consequences.
The following link below has a breadth of information about loans and repayment that can save you lots of time and MONEY: https://studentaid.ed.gov/repay-loans
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