What will you pay for college? Probably more than you think

Zemanta Related Posts ThumbnailI recently used the College Board’s “estimated family contribution” calculator to see how much we’ll be expected to pay when our (currently pre-teen) daughter heads off to college.

The answer? Roughly half our annual incomes. Each year.

No colleges actually charge the amount we’d theoretically be expected to pay. So our out-of-pocket costs would be somewhat less. But the exercise drives home how important it is to run these numbers, early and often, if you want a college education for your kids that doesn’t bankrupt you, and them.

Because I know how the formulas work, I was able to tweak some numbers to lower our EFC. Moving more money into retirement accounts and using savings to pay down the mortgage helped a lot with the federal formula, and helped some with the institutional formula (which, unlike the federal, counts home equity). We still wouldn’t get any need-based help from most colleges but could get some breaks if our daughter gets into one of the most-expensive elite schools. (The total cost of the average public college is $20,000 to $25,000; $40,000 for privates and $60,000 for elites.)

If we didn’t have a fat college savings account, we likely would steer our daughter toward public schools or privates willing to offer merit scholarships to reduce the total cost. It’s much better to start a college search knowing what you can afford than to have to tell your kid, dream school acceptance letter in her hand, that you can’t send her there. Or worse, that you will–and then never be able to retire.

For more about how financial aid formulas work, read my Reuters column this week: “A guide to figuring out the real cost of college.”

 

Monday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: How to protect yourself from credit card breaches. Also in the news: The best ways to pay for college, how to avoid year-round tax scams, and what happens to your debt after you die.

Shelter yourself from payment card breaches
How to protect both your finances and your identity while shopping.

The Best Ways to Pay for Your Child’s College Education
How to combat the rising cost of a college education.

Tax-related scams don’t hit just during tax season
Beware of these year-round scams targeting your taxes.

Who Will Inherit Your Debt When You Die?
One thing you don’t want to leave behind.

Why These 4 Personal Finance Myths Perpetuate Money Problems
Monday mythbusting.

“England is sinking. Scotland is rising.”

DSC04008The narrator of the museum documentary we were watching in Edinburgh was referring to the geology of the United Kingdom, not its economy or politics.

Yet the phrase resonated somehow. Since devolution, when the Scottish Parliament was established after nearly 300 years of British rule, the Scots have definitely taken their own way.

One thing travel can do is help you better understand the world, and I understood Scotland a bit better after learning some of its history this summer. Its union with England was mostly supported by wealthy landowners, merchants and investors who wanted access to England’s colonies. The common people were not so enthralled. After that came the Highland Clearances, when tenant farmers were booted off their traditional holdings so that wealthy landowners could raise sheep instead. The evictions came with little notice and left a lot of suffering in their wake.

So maybe it’s not surprising that many Scots are suspicious of any system–political, social or economic–that favors the rich at the expense of regular people.

While England slashed public benefits after the financial crisis, Scotland restored tuition-free college education for its residents and added free long-term care for its elderly. (Actually, in-home care is free. Care in nursing homes is means-tested.)

As a result, Scotland is moving closer to the European model, where long-term care is at least in part funded by the government in many countries and where college education at public universities is free or very low cost.

These outlays might surprise people who believe the stereotype that Scots are tight with their money, but a Scotsman explained to me that what his people really like is good value for their money.

Renewable energy is a big thing in Scotland, too. The Scots surpassed their goal of 31% by 2011 and its 2020 target has been boosted from 50% to 100%. Again, that’s more like Northern Europe than the rest of the U.K.

Now Scotland is on the brink of deciding whether it wants to be independent. The U.K.’s prime minister, David Cameron, has promised Scotland more control if it stays with the union. So either way, it looks like Scotland may continue to rise.

 

How not to drown in student loan debt

DrowningI recently talked to yet another recent grad who owes six figures for an undergraduate degree. The ease with which young people can drown themselves in debt makes me furious.

And a lot of young people are having trouble paying this debt. The exact number of struggling borrowers is a bit of a mystery, as I wrote in this week’s Reuters’ column, “Confusing data flummoxes fixing of student loan defaults.” But it’s safe to say a sizable portion of borrowers is having trouble paying down their education debt.

A college education, or at least some post-graduate education, will be a virtual necessity if you want to remain in the middle class in the 21st century. But believing that any investment in any education will pay off is naïve. The thing is, the colleges know better, or at least their financial aid staffs should. But their vested interest in selling educations typically means they don’t step in or even offer warnings as their teenage and twenty-something students pile on ridiculous amounts of debt.

Here’s what I wish every college student and every parent knew:

1. You should stick to federal student loans. These loans have fixed rates, tons of consumer protections and most importantly, limits on how much you can borrow. You typically can only borrow $5,500 for your freshmen year. You typically can’t borrow more than $31,000 for an undergraduate education. That makes it virtually impossible to take on too much debt as long as you get the degree. Can’t afford the education you want with just federal loans? Then you need to look for cheaper schools.

2. Steer clear of private student loans. Honestly, these loans should have warning stickers plastered all over them, like cigarette packs. The rates are typically variable, there are few options if you can’t afford the payments and you can borrow far more than you could ever repay. They should only be considered if the total amount you’ll borrow in both federal and private loans is no more than you expect to make your first year out of school.

3. Mom and Dad should not risk their retirement. Federal parent PLUS loans have some of the advantages of federal student loans. The rates are fixed and there are some repayment options (parents can choose extended, graduated or income-contingent payments, but not income-based or “Pay as You Earn,” the most helpful payment plans for overburdened debtors). But unlike federal student loans, there aren’t reasonable limits on what you can borrow. Parents’ ability to repay isn’t taken into account, and they can borrow up to the full amount of their child’s education. That’s a recipe for disaster. Parents should consider borrowing for college only if they’re able to comfortably repay the debt AND continue saving adequately for their own retirements.

4. You should get through school as fast as possible. If Mom and Dad are paying the bill in cash, then you can afford to party, pack your schedule with electives and switch majors 10 times. If your future self is paying the bill via loans, then you need to get your act together. Get help—find a mentor or advisor who cares about you enough to set you on the right path. The place to look is among your school’s best teachers. Ask around, because these teachers get talked about; take their classes; ask for their help.

 

Give a money-smart graduation gift

Zemanta Related Posts ThumbnailCash is by far the most popular graduation gift. Among those who gave a grad gift, 56.7% gave cash and 32.1% offered gift cards, according to last year’s National Retail Federation survey. But what if you want to give something a little more creative, a little more personal, and something that will help your grad get the right financial start?

I asked college consultants, personal finance experts and some recent graduates for ideas that would be both welcomed by the recipient and not too hard on the wallet. People on average spent $49 on graduation gifts last year, which won’t exactly buy a round-the-world trip…or even a decent e-reader. But that amount can buy things like experiences (which contribute more to happiness than stuff), a cooking class, a pretty good carry-on bag (the better to avoid checked bag fees) and several other ideas. For more, read my Reuters column this week, “Financially smart gifts for the new grad.”

Money rules of thumb: College savings edition

Zemanta Related Posts ThumbnailA college degree today is what a high school diploma was 60 years ago, a college consultant told me. Meaning: the bare minimum for staying in the middle class.

There will be exceptions, of course, but your kid is unlikely to be one of them. So here, in my ongoing “rules of thumb” series (previous editions include retirement and cars), are a few guidelines about saving for college:

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Save yourself first. No one’s going to lend you money for retirement, so that has to remain your top priority–hard as that is for parents to hear. Think of it this way: by saving for yourself first, you’re reducing the odds that you’ll have to move in with your kid in old age. Trust me, she’ll appreciate that someday.

But save something. Even if it’s just $25 or $50 a month to start, putting something away for college helps solidify it as a goal–and anything you can save will reduce your child’s future debt load (since most financial aid is actually loans, not grants or scholarships).

Use a good 529 plan. Money saved in 529s is tax free when used for college education costs, and most of these state-run plans are pretty good these days, thanks to better investment options and lower fees. Morningstar runs an annual list of the best and worst plans.

The more you make, the more you’re expected to save. Federal financial aid formulas aren’t adjusted for regional differences in cost of living. There’s no exception made for families that have experienced hard financial times in the past. The higher your income, the more the formula expects you will have saved…to the point where someone with an income over $100,000 could be expected to fork over a third of it for college costs. There are ways to reduce college costs, but knowing the reality of financial aid formulas will help you to understand the maxim that “if you CAN save for college, you probably SHOULD.”

 

Does your kid need expensive SAT prep?

iStock_000014485809SmallBack when dinosaurs roamed the earth, I bought a fat paperback test prep book to help me study for the SAT (which, back then, was still known as the Scholarship Aptitude Test). I didn’t buy the book until after I’d already taking the SAT the first time. After studying, I took the test again–and did worse.

Not that I suffered for this experiment. I scored high enough to become a National Merit Scholar, which meant big bucks for college.

I recently asked a friend my age who was also a National Merit Scholar how he prepared for the test. He vaguely remembered being taught a few test-taking strategies in school. But that’s it.

The world’s changed in the past few decades. College is a lot more expensive and elite schools are a lot more competitive. High scores give kids an edge not just for admission but for all-important merit scholarships. Which is why SAT test prep is pretty much a given among upper-income parents. Even less affluent parents are spending hundreds or even thousands of dollars trying to boost their kids’ scores, as I write in my Reuters column this week, “Resist the urge to go overboard with test prep.” Not investing in test prep feels like a gamble that could leave your kid trampled in the dust.

These parents aren’t foolish or deluded. Scores matter, and most teenagers could use some help. My column mentions some free resources, and I highly recommend reading Debbie Stier’s book, “The Perfect Score Project: Uncovering the Secrets of the SAT.” Even if you can’t afford private tutors, you can do a lot to help your get your child ready for the test.

Beware college financial aid letters

If you want to see what’s wrong with many financial aid letters today, check out the one that Georgia Institute of Technology has so helpfully posted on its Web site under the rather ironic headline “Understanding the Letter.

Screenshot 2014-04-08 09.24.21The school does a few things right. Not all colleges include the total cost of attendance on their financial aid letters, and many don’t include the “expected family contribution”–what the family is expected to pay according to the Free Application for Federal Student Aid or FAFSA. Subtracting the expected family contribution from the total cost results in the family’s need. In this case, the need is $31,787.

The total award figure of $41,690 seems dazzlingly generous compared to the family’s need. It’s not.

Like many schools, GIT lumps together gift aid (scholarships and grants) with loans and work study.

In this case, the gift aid is just $8,242, which includes a $2,000 scholarship the student won on his own.

The vast majority of the “aid”–$27,548–are parent PLUS loans. PLUS loans are designed to help the family pay its expected contribution, which in this case is $11,903. PLUS loans don’t reduce the family’s $31,787 need.

This award that seems so generous actually meets a quarter of the family’s actual need with gift aid. When work study and the student’s loans are included, the percentage of need met is only about half.

Too many financial aid letters are even more obscure, as I write in this week’s Reuters column, “Don’t get fooled by financial aid letters.” Some don’t include any cost information, while others list partial information. Some don’t spell out what’s a loan and what’s not. Fewer than half of schools use the federal “Shopping Sheet,” which was designed to help stop misleading financial aid letters and allow families to compare aid offers. You can find the sheet here, and using it to parse letters like this can really help you understand how generous–or not–a college is actually being.

Get all the (college) credit you deserve

Zemanta Related Posts ThumbnailOne way to save money on college, families are frequently told, is to start at a two-year school and then transfer to a four-year institution.

The problem with such advice is that a lot of students never make it to the four-year college.

Even when researchers control for family background, achievement and ambition, those who start at two-year schools are far less likely to complete a bachelors degree.

One of the reasons may be that credits earned in community college often don’t transfer to the four-year school. Students who aren’t savvy about the transfer process may not realize how picky four-year institutions can be.

That’s leading a lot of otherwise capable students to drop out, according to two researchers from the City University of New York who reviewed 13,000 students’ records. My Reuters column this week, “For students who transfer, lost credits can doom college hopes,” has details about their study.

Community college students are more likely to be first generation, which means they can’t turn to their parents for advice about navigating the college transfer process. They’re trying to figure this out on their own, often without much help from the schools.

Some states have tried to ease the way by creating pathways between community college and their public four-year institutions. These pathways guarantee admission and credit if the students take recommended courses and maintain a minimum grade point average.

But students have to know such pathways exist and how to follow them. In states where these pathways haven’t been created, students must try to determine which courses are most likely to transfer and which aren’t.

To do that, kids need help. College consultant Todd Weaver recommends that community college students make a point of getting to know their academic adviser. The advisors’ caseloads may be huge–hundreds of students–but seeing them once every four to six weeks can help create the kind of relationship these students need to get specific advice on navigating this complicated process, Weaver said.

At the macro level, the researchers believe more needs to be done to smooth the transfer process. Most new jobs in the 21st century will require a four-year degree, and a more educated population is necessary if we want to compete in the global economy and have a viable middle class.

Given what’s at stake, students need all the help they can get.

 

 

A free guide to filling out the FAFSA–get it now!

Zemanta Related Posts ThumbnailExciting news: One of the most-respected experts in financial aid has written a book about filling out the Free Application for Federal Student Aid (FAFSA)–and right now you can get it as a free PDF download.

Mark Kantrowitz, who helmed FinAid.org for years and is now publisher of Edvisors, has this to say about the book he co-authored with David Levy, who has 30 years’ experience as a university financial aid director:

The book is packed with 250 pages of insights and advice about filing the Free Application for Federal Student Aid (FAFSA), along with a step-by-step guide to completing the application form. There are tips about increasing eligibility for need-based aid, avoiding the most common errors and appealing for more student aid. I have attached a tip sheet about Filing the FAFSA that is based on the book.

If you have a kid heading off to college, this book is a must read. To get the book, register (also for free) at the Edvisors site. The book is also available to buy on Amazon in paperback for $24.95. The Kindle version is $8.95.