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How to Get a College Education Without Mortgaging Your Future

College Costs Rising
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A recent article discussing why college is so expensive had me thinking as to the true reasons. With two young children and many clients impacted by rising college costs, I decided to look into this more and see why higher education is so expensive, whether college is truly necessary for most, and ways education expenses can be reduced.

It is no secret that a dollar today is worth more than a dollar tomorrow. This is inflation, and it has been relatively stable over the previous 20 years. However, college tuition and textbooks have severely outpaced overall inflation during this timeframe.

How To Get A College Education Without Mortgaging Your Future

Further exacerbating this issue is the lack of wage growth. According to Pew Research, “Despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago.”

Average Wages 1964-2018

How To Get A College Education Without Mortgaging Your Future

Furthermore, they found that when wage gains existed, they belonged predominantly to the highest-paid workers, leaving the middle and poor class behind.

Rising college costs is a troubling issue, with some surprising details. Many factors contribute to the growing cost of higher education. The government bears some responsibility as does increasing demand for higher education and students’ desires for more services and amenities.

After covering the whys of college education, readers will learn strategies to pay for college without bankrupting the family.

How Did College Get So Expensive?

There is a very compelling reason why college costs have risen that no one is talking about. This has to do with the correlation between greater access to financial aid and higher college tuition. In fact, Grey Gordon and Aaron Hedlund in their chapter, “Accounting for the Rise in College Tuition,” in the book Education, Skills, and Technical Change: Implications for Future U.S. GDP Growth (2019) found that:

“Expanded student loan borrowing limits are the largest driving force for the increase in tuition, followed by the rise in the college premium.” – Gordon and Hedlund

How can this be?

Imagine that you want to buy a car and have only $3,000 and no access to debt. Therefore, you could only purchase a car that costs $3,000.

However, let’s assume that access to debt increases (e.g., borrowing costs decline, subsidies increase, credit score requirements fall, etc.). If you could borrow $17,000, then you could afford to buy a $20,000 car.

If lenders offer you a $27,000 loan, then you could afford to buy a $30,000 car.

The point behind this example is to highlight how the price of the car increased as the amount of debt increased. A similar scenario involving government-backed student loans has impacted college costs. The more a student can borrow, the greater the amount of college tuition he/she is willing to pay.

Government Subsidized Loans and Increased Demand

Until the federal government enacted the Higher Education Act of 1965, student loans didn’t exist. This legislation permitted the government to guarantee student loans that were made by private lenders to students.

Later, in 1978, the Middle-Income Student Assistance Act made all undergraduate students eligible for government-subsidized loans, regardless of income.

While the intentions of college funding legislation were laudable, unintended negative consequences arose.

Concurrent with new college financing options and government guarantees of student loans was the growing belief that a college degree was the only route to a successful life. (More on this topic later.) As demand for a college education increased, colleges expanded their curricula to include a vast array of programs beyond the typical humanities, math, and sciences. Simultaneously, more private universities emerged to fulfill the growing demand for higher education.

As Economics 101 teaches, rising demand puts upward pressure on prices, so college costs rise, to a price informed by “what the market will bear.” But keep in mind that college is becoming a very inelastic demand, meaning that there really aren’t too many substitutes for higher education. Like the car-buying example above, the college price tag rose to incorporate the amount of funding a student could borrow.

As demand increased, more students financed their college educations with federally guaranteed loans. Although the government discontinued subsidizing private loans in 2010, they still subsidize federal student loans.

In 1980 there were 3,231 higher education institutions in the U.S. while in 2016 that number grew to 4,360.

The National Center for Education Statistics reports that U.S. colleges expect 19.9 million students in the fall of 2019. This is roughly 4.6 million more than in the fall of 2000.

But, increased demand and greater loan availability aren’t the only drivers of rising college costs.

Exploding Student Services and More

Increasing demand and subsidized Federal loans are a few reasons for rising college costs. But, there’s more.

State funding for higher education is declining. As state funding falls, the deficit must be made up somewhere else, like in higher tuition.

Growing Student Services is another factor contributing to higher college costs.

Student services such as personal and career counseling, healthcare, advocacy, residential life programs and staff, and academic support are rising. The number of non-teaching personnel on college campus’ is exploding. This new wing of higher education administration includes managers making six-figure salaries plus benefits.

In sum, college costs are inelastic, when prices increase, the number of consumers remains approximately the same (or continues to increase) and doesn’t decline. Plus, there’s no indication that college costs will be lessening soon.

It seems as though there’s little reason for college costs to taper off.

So, is college really necessary?

The Value of a College Education – Is College Important Anymore?

In conjunction with rising college costs is a movement that questions the value of a college education. Accompanying the questions about the validity of college are coding schools and other skills-based training for a quick entrance into technology jobs.

Trade schools have always been an alternative as plumbing, welding, and electrical work can’t be outsourced.

I concede that everyone doesn’t need to go to college. Yet, it’s difficult to argue with the facts.

Higher incomes coincide with higher education levels, according to a recent Georgetown University study, while certain majors lead to significantly higher lifetime earnings.

In aggregate, college graduates earn $1,000,000 more than high school graduates over their lifetimes.

Another study, by the Pew Research Center, found a $17,500 median yearly income gap between high school and college graduates.

How To Get A College Education Without Mortgaging Your Future

So, the answer is yes, a college degree is still important. Or maybe it’s that a high school diploma has become devalued. Either way, most will benefit from a college education.

Despite the rising college costs, it’s possible to get a college degree without incurring tremendous financial hardship.

How to Fund a College Education Without Going Broke

While the government may have contributed to the costs of higher education, they’ve also created solutions to the problem. The 529 Account is one such solution. Lower cost two-year community colleges are another government-sponsored institution to lower the total cost of college. While state colleges and universities may seem to be a low-cost college option, that may not always be the case.

Now we’re going to spell out strategies to fund a college education without breaking the bank.

Be Proactive – Start Saving for College Early

Start planning early for college. The earlier you begin, the more time your money can grow and compound for the future.

A qualified financial planner can help to map out your college planning strategy. GET STARTED now to begin planning for your future.

Here are six ways to start saving for college:

  1. Mutual or exchange-traded funds in a taxable brokerage account.

Saving for retirement is important, but so is opening a brokerage account outside of a 401(k) or IRA. Fund this account with low fee mutual or exchange-traded funds earmarked for future college costs.

Low fee funds are tax-efficient, and a diversified portfolio of stock and bond funds is likely to appreciate over the next 10 or 15 years, as college approaches.

  1. 529 Plan

“A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.”

A 529 plan can be established by anyone – parents, grandparents, non-relatives – for a designated beneficiary. The plan assets belong to the plan holder, not the beneficiary, and can be used to pay for all college-related expenses.

The earnings from 529 plan assets are exempt from federal income taxes, as long as the withdrawals are used for qualified educational expenses. Additionally, more than 30 states offer tax deductions or credits for 529 plan contributions.

529 plans fall into two camps: savings plans and prepaid tuition plans. Most states offer 529 plans, although individuals can invest in any 529 plan, even those outside their state of residence.

It’s important for parents to understand that the value of their 529 plan is included in their family assets on the FAFSA fund and may impact their child’s eligibility for aid.

  1. Custodial accounts in a UGMA/UTMA account.

Custodial accounts are created for the benefit of a minor, and the funds can be spent on anything. There’s no cap on the amount one can invest and its value is excluded from the donor’s estate.

It’s important to understand that these accounts are included in the minor’s assets on the FAFSA form, so over-funding should be avoided if a parent expects the student to be eligible for financial aid.

  1. Qualified U.S. Savings Bonds

Although these government-issued savings vehicles pay lower interest rates than other fixed-income investments, their income is federally tax-deferred and state tax-free. When used to fund higher education, Series EE and I bonds, purchased after 1989, also avoid federal income taxes.

A drawback of I bonds, or inflation bonds, is that one is restricted to purchasing a maximum of $10,000 per year, plus an additional $5,000 with the owner’s tax refund.

  1. Roth IRA

The investments held within a Roth IRA grow tax deferred and can be withdrawn tax free as well. This is a dicey use of Roth IRA funds, because it’s important for the parent not to shortchange his or her retirement, to pay for Junior’s college expenses.

But, the proceeds from a Roth IRA account can be withdrawn to pay for qualified higher education expenses at any time, without the typical 10% early withdrawal penalty (for withdrawals made before age 59 ½).

The maximum annual contribution into a Roth IRA is $6,000, and $7,000 for those over age 50. This account can be funded with most types of investments.

  1. Coverdell ESA account

The Coverdell Educations Savings Account is a parental asset that allows both tax-free growth and tax-free withdrawals from the account if used for qualified education expenses. This account also allows for a variety of investment instruments.

The predominant disadvantage of a Coverdell is that the maximum contribution per beneficiary is $2,000 annually. All contributions must be made before the beneficiary turns age 18 and must be used before they turn 30.

Ways to Lower the Cost of College

It’s never too early to think about ways to lower future college costs. Niche interest and achievement areas can create scholarship opportunities for students, as colleges and universities desire diverse student bodies. Here are nine ideas to lower the cost of college.

  1. Scholarships – Niche and Athletic

There are countless websites devoted to hacking the college scholarship pursuit. Start early to find out the types of scholarships available. High school athletes in less popular sports such as tennis, rugby, fencing, or rowing may be eligible for scholarships.

Some unusual college scholarships include the $10,000 David Letterman Telecommunications Scholarship, $1,000 Prom Guide’s Cutest Couple Contest, Collegiate Investors Competition Scholarship, $30,000 Doodle 4 Google Scholarship and many more.

  1. Start at a Community College

I saved a lot by starting at a public community college and completing my undergraduate degree at USC. For the 2018-2019 school year, the average tuition for a public two-year college is $3,570 while private four-year college tuition approximates $35,676.

By taking the basic requirements at a two-year community college and living at home, families slash tens of thousands of dollars off of the total college bill.

  1. Live at Home While Attending College

Room and board are expensive. By living at home, at least for a few years, students can slash total college spending. Whether the student opts for a two or four-year college out of high school, living at home can reduce total college costs, save time and stress.

When living at home, the student postpones the added stressors of living on their own for a while.

  1. Work Part-time While Going to College

With historically low unemployment rates, there’s no reason for a student not to work while attending college. Whether it’s an on-campus job, online gig, a paid internship, or a couple of hours working at the mall each week, the benefits of part-time work go beyond the extra income.

The student learns to balance multiple responsibilities while earning money for books, supplies and tuition.

  1. Evaluate Offers Based on Cost

While it might appear that public colleges and universities are always cheaper, this may not be the case. Don’t write off private institutions. With financial aid packages, including special grants and scholarships, private institutions can sometimes end up costing less than the expense of a public university. This was the primary reason why I chose to go to USC vs. a California state university.

The sticker price of a college is rarely the price that the majority of students pay.

  1. Students Should Borrow Before Parents

This gives the student ownership in their college funding and need-based loans eliminate interest charges while the student is in school. Also, the interest rate for student federal loans currently is 4.5 percent, significantly lower than the 7 percent rate for Federal Direct Plus loans, granted to parents who pay for their student’s college.

  1. Stick to Federal Student Loans and Avoid Private Loans

With annual borrowing limits from $5,500 for freshmen to $7,500 for junior and seniors, this protects the student from over-borrowing.

Make it a point to keep loan amounts low. It’s important for families to make borrowing a last priority and to keep amounts as low as possible.

  1. Complete the FAFSA and Other Aid Forms

Don’t assume your child won’t qualify for aid. Families with more than one child may be surprised at their eligibility. Also, in order to qualify for federal student loans, students must complete the FAFSA form, regardless of income level.

It’s also good to have a FAFSA on hand, should the family’s income level unexpectedly change.

  1. Consider Online Learning

Online university opportunities are exploding as college costs increase. Many prominent colleges and universities offer courses online for a lower price than traditional in vivo classes. This enables students to get a comparable college education for a lower price.

A mix of both on-campus and online learning can reduce total college costs.

Thwart the High Costs of College Wrap Up

With early planning, families can contribute support to their college-age children, without sacrificing their own retirement.

Make a family commitment early to work together to make college affordable.

Start when the child is young to implement college planning strategies.

Don’t get scared by the ballooning costs of college. Teach children the importance of education. Don’t forget to model living within one’s means.

A sensible lifestyle now goes a long way towards thoughtful spending and smart college cost planning.

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