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Taking the Fear out of Paying for College

We keep on hearing about astronomical increases in college costs making it a tougher burden for children to go to school to achieve their dreams. We can point to annual increases of 5% to 8% and wonder how can college cost continue to increase more than inflation year after year? However, when we talk in percentages like this, it is easy to fear how anyone can afford college these days. We start wondering if college is starting to become out of reach for some. The basis of this article is to try to put things into perspective. College is a major investment, one that should not be taken lightly. However, when put into perspective, college is still a great bargain.

The average cost of 2006-2007 tuition and fees are $22,218 for private college and $5,836 for public college (not including room or board). Most people focus on the cost of private college because $22,218 is tough for a middle class family to pay for. However, the tuition cost is very dependent on where you go. For example, approximately 65 percent of students in a 4-year college pay less than $9,000 in tuition and fees thanks to the bargain of a public college education (this is before scholarships and other aid). What people worry about is the continue increase in the cost of public education which creates a sticker shock.

In people’s mind, a bargain 20-year ago can not still be a bargain today after the double digit increases. According to College Board, the average cost of college tuition increase by approximately 113% for private college and 143% for public tuition from 1985-86 academic year to 2005-06 assuming constant dollars (in other words, after reflecting for inflation). This sounds like a lot of money which is what we concentrate on. However at the same time, the amount of grants and other aid have also increased to help offset the costs. The average grant awarded increased by approximately 126% while the amount of federal loans increased by 155%. So while the cost of an education has gone up, so has the amount of assistance, thus offsetting some of the additional costs.

Due to the cost increases, everyone discusses how much of a burden college graduates are under with loans after they graduate. However, is it really? We can look at someone who has a $100,000 loan due to going to an Ivy League college or graduate school. However, the median loan for a college graduate (according to College Board) was $19,300 for a 4-year bachelor’s degree in 2003-04. Based on a 15-year loan at 7% interest, the monthly payment upon graduation is a mere $173. Now, if we are realistic and honest, is $173 a large amount to pay? For people are living paycheck to paycheck, this may seem like a lot of money until we look at it compared to some other statistic:

• This is less than a normal car payment even for an economy car

• This is almost equal to the money that college graduates will spend going out to eat with their co-workers ($6 a day X 22 days per month = $132)

• The average college graduate earns approximately $14,000 more a year than someone who has a high school diploma out of college (according to College Board)

• In 2005, the unemployment rate of college graduates was less than ½ the rate of high school graduate (per College Board – 5.4% for high school graduates versus 2.3% for college graduates)

And, the burden does not only have to be on the children. As parents, there is room in the budget for college as well.

• The cost of a public education, $5,836 (without room and board), is only slightly more than the cost of day care paid when our children were younger (currently it averages about $100 a week X 52 weeks = $5,200).

• For stay-at-home parents, the cost of a public education is less than a parent would earn going back to the workforce after raising their children ($8 per hour X 2,000 hours = $16,000 * (1 – 30% tax rate) = $11,200)

• The cost of raising a child to age 18 (including food, clothing, housing, transportation, etc.) for a middle class family is approximately $190,000 per U.S. Agricultural Department. What is the cost of a public education to finish our children’s development compared to the investment in hours and costs that we as parents already have put in?

Now, I am not advocating that parents need to pay for their child’s education. I paid most of my way through college (by working summer jobs and graduating in 3 years) while my wife got scholarships and took out loans for graduate school. What I am trying to point out is that there are options. When we break down large costs into parts where college can be partially paid for (or financed) by parents, by children and by taking out a loan or scholarship, it become much more manageable. For parents who do not want to pay for college; an alternative is to provide a loan with the money freed up from all the costs of raising a child.

From my perspective, a teenager paying for their college expenses is a way to teach children about the value of money. I became more aware of the value of money when I had to write my tuition checks and decided that what I was paying for college was not worth going back for my senior year (thus decided to graduate early). I wrote an article earlier about teaching the children about money. In it, I pointed out that some children have a rude awakening when they do graduate from college because they lived at home when their parents had some of their highest standards of living, yet have no idea what is like living on an entry level salary especially if their college was paid for and they only had to pay minimal expenses from their part-time earnings. This is probably has led to some teens having an increased in lifestyle than teens 20 years ago.

• In a small survey of 500 high school students at 11 schools, 25% of students who were aware of the new Apple iPhone (of which 85% of 500 students knew about it) where willing to pay $500 or more for one per Piper Jaffray (along with the monthly cell phone bill).

• Per Your Prom magazine (Conde Nast Bridal Group), the average cost per prom goers is $600 each (total of $4 billion spent nationally).

• The average teen spent $104 a week ($5,328 annually) in 2001 according to Teen Research Unlimited which is about the average cost of a public education.

• Now 11% of teens 18 to 19 have a new car and 47% have a used car. This is up from 1999 when 5% of teens had a new car and 12% had a use car according to Teen Research. With the average cost of operating and financing costing $7,800 (per AAA), you start to wonder what is more important (education or car)?

If teens took a little of their spending in high school and saved it for their upcoming college years, it would make it a little easier. However, most teens would prefer spending money on a car than a college. Per a Fidelity survey, if they were given $500 and asked how they will spend it, 58% would spend some or all of it on a large purchase, like a car, while only 47% would save some or all of it for college.

Lastly, preparing in high school for scholarships is very important. The average grant per full time student was $4,433 (more for private colleges and less for public colleges on average due to the differences in costs). In addition, parents typically receive $448 in tax benefits. Note, this is a large portion of the cost of college. Yet, because many students are fighting for the same scholarships, it will take some extra effort to be in position for this money. Yet, for 4 years of $4,000+ scholarships and grants, it is time well spent.

Trying to pay for college in one fell swoop is very costly. Yet, when we take a step back and see college in context of:

• Long-term benefits with high pay and lower unemployment

• Teen spending on other things such as cars and proms

• Costs of raising children

• Scholarships available

• Ability to repay loans after graduation

Then college becomes much more manageable than by just focusing on the tuition costs increasing significantly over the last two decades and fearing how children these days can afford it.

If everyone wants to go to an Ivy League college, it will be expensive. Yet, there are many reasonably priced public and private colleges. If we select a reasonable priced school and are able to save a little before college, to work during college, to get an average scholarship and get a reasonable loan then it becomes much more managable even for a private education. Imagine a college costing $20,000 a year for 4 years (note, this is significantly more than the average student pays when factoring in public education even with room and board). If we are able to split this into 4 components:

• Savings of $20,000 ($850 a year for 18 years if done since birth and invested at 3% real rate of return (net inflation) or $5,000 a year from part-time jobs in high school for 4 years. It is even easier if parents do a little and teens do a little)

• Scholarship of $5,000 a year for 4 years

• Work during the summer in an internship position where $5,000 is not that far fetch (maybe a little less for Freshman and Sophomore years) - if needed there are part-time weekend jobs during the school year

• Take out a loan for the remaining amount (keeping the balance and payback amount reasonable compared to your projected earnings after school).

I never meant to imply that paying for college would be easy. Yet, it is easier if we take it in portions and see that it is still a good investment in a teen’s future rather than focusing on the cost increases over the years and getting discouraged.

For other articles on teens paying for college, see
Is College Education Worth It?
Young & Broke?

2 Responses to “Taking the Fear out of Paying for College”

  1. Around the PF Blogosphere: May 1, 2007 | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing Says:

    […] Financial Awareness is taking the fear out of paying for college and says “when put into perspective, college is still a great […]

  2. plonkee Says:

    It seems that even in America - always cited over here in the UK as the most expensive place to go to University - its not that big a problem.

    And think of all the non-monetary benefits like improving your mind, meeting new people and ideas, if you live away from home you get learn to do your own laundry (the true mark of an adult IMO). What else are you going to do between the ages of 18 and 22 anyway?

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