Education Funding - There's More to the (Authentic) Discussion Than Meets the Eye

Chances are, you or someone you know is saving for college, has a student applying to college, is in college, or is paying student loans from college. Some of us get to check off more than one of those items!  We hope this article provides some perspective on this significant and complex part of most of our financial lives.

You don’t have to look far to see headlines regarding skyrocketing costs of education and student debt. Over the past 10 years, the amount of borrowing has increased 78% under the unsubsidized Stafford Loan program, 26% under the Parent PLUS Loan program, and a whopping 262% under the Grad PLUS Loan program. And it’s easy to see why.

Happen to live in Texas? Expect to pay up to ~$27,000 per year of undergraduate study at UT Austin or Texas A&M (including room and board). Want to go to a private college or ivy league? That can easily come out to $60,000 per year and up. What are we doing to our kids? What are we doing to ourselves

While we frequently remind our clients that there are multiple ways to pay for college, and few ways to fund retirement, there is a brand-new option on the college financing front! Move to New York. Starting this fall, undergraduate students who attend a State University of New York will be eligible for the Excelsior Scholarship if their families earn no more than $100,000 a year. The income cap will lift to $110,000 next year and will reach $125,000 in 2019. Those eligible will pay nothing for tuition, but they will still be on the hook for the cost of fees and room and board if they live on campus. Other private universities are beginning to consider such programs as well.

If long, cold winters in upstate New York aren’t calling your name though, what can you and your student do? 

If your student is young, a 529 plan is a terrific choice to begin to build tax-deferred and tax-free savings. If they are about to attend college, whether college savings exist or not, the choices you and your student make will have a lasting impact - likely for both of you. As parents of two sophomores and a soon to be freshman in college, we have felt the peer-pressure among the kids and parents alike. Expectations abound, perhaps honest conversations about realistic choices have not yet been had, and talking about where your kids are going to go to college can feel like talking about what kind of car you drive or where you live. 

Sophomore and junior high school years are perfect times to re-center, think openly about the options on the table, and decide what’s not only best for your family now, but also 20 years from now. Here are some thoughts that might spur conversation:

  • Military assisted college route through one of the academies or ROTC; three of our principals took this route knowing that their parents were not in a position to be able to afford tuition and their desire to want to avoid debt.
  • Community college: Starting at a community college is more popular than you might think. Of the students who graduated with a bachelor’s degree from U.S. institutions in 2016, 49% had attended a community college, and two-thirds of those did so for three or more terms, according to National Student Clearinghouse data. As to whether it makes sense, “it depends a lot on what a student’s goals are following the bachelor’s degree,” says Melinda Salaman, director of strategic research at higher-education consulting firm EAB. It’s important to research career outcomes, including what your expected salary trajectory will be, before you decide what sort of degree to pursue and what sort of school to attend, she says. Just make sure your credits will transfer.
  • Scholarships (Academic or Sport): Ahhhh…for many, this is an emotional part of the overall equation. At Pauley Financial, we like to think of scholarships as an added benefit, not a plan. We’ve seen too many parents expecting that such a scholarship will be the, or at least part of the solution. This line of thinking gets dicey when the scholarship hope begins to drive the student’s focus in high school and cloud the decision-making process about a career. It can put undo pressure on the student, and it can quickly become a classic case of the tail wagging the dog. That said, scholarships or tuition waivers when approached with the big picture in mind, can be an enormous help. Encourage your student to apply enthusiastically.
  • Your student can work of course! Some skin in the game in support of their own future can have the benefit of their further appreciation of the opportunity that they have to even attend school. Higher education becomes a fortunate opportunity vs. a given.
  • An exploration of the cost of the education as compared to the expected career and commensurate earnings should be an important part of an honest discussion. Spending $250,000 for an undergraduate career that pays $45,000 per year is math that will not work out well, even more so if student loans are part of the equation. With the possible exception of the choice of a spouse, the choice of a career will have a larger effect on future income, wealth and control over lifestyle than most any other decision your student will make.
  • Planning on graduate school? Factor that into the total cost of education!
  • Wrestling with how much of your savings and earnings should go towards college? The development of a solid financial plan can help answer that question. Without a plan, it will be hard to assess if you can attain your financial freedom, reach your goals and not become a burden on your children later in life. One of our favorite lines is, “I’d be happy to pay for your college. Please make sure I have a room in your home during my retirement.” It’s funny how that line of thinking can shape their line of thinking.
  • Financial aid: this topic warrants several articles unto itself. Our recommendation is to apply.

We hope you enjoy the spring and the season of graduation upon us! If we can assist with decisions about education funding, please do not hesitate to reach out.