7 things parents should consider about paying for college

Wealth Matters

David Lawrence, CFP, is a certified financial planner practitioner and Wealth Advisor at Willow Creek Wealth Management, 707-829-1146.

Wealth Matters is a monthly column by the firm’s advisers. Read past columns.

If applying to college is the most stressful thing a teenager has done in their lives, paying for college is a close equivalent for their parents.

The price of a college education has soared over the last 40 years. Since 1983, tuition prices have risen at a 5.8% rate [1], far ahead of inflation and more than twice as fast as medical costs.

The average sticker price (tuition and fees) for the top 20 universities in the U.S. News & World Report rankings today is $60,000 a year. Using this average, a four-year college education costs more than a house in many states. What can parents do? Well, knowledge is power. Here are seven things to consider when thinking about how you’re going to pay for college.

1. In-state public universities offer great value

Most people know this already, but it bears repeating. There is a big difference in cost between in-state public universities on one hand and private institutions and out-of-state public universities on the other.

If you live in California, it will cost you $14,226 a year [2] in tuition and fees to attend Berkeley. As an out-of-state resident, it will cost you $43,980 annually [2]. And it will cost you $57,948 a year [3] to go to Emory University, a private university in Atlanta, no matter where you live.

2. Consider community college

The average cost of tuition and fees at two-year community college is $3,860 a year. [1] As a result, choosing to attend two years of community college before transferring to a four-year university can lower the overall cost of college by 40%. [1]

And you can still end up as a Berkeley graduate.

3. Merit scholarships are common, but not generous

Most families do not end up paying those egregious sticker prices published in US News. Colleges want a full, balanced class and so all but the most selective use price discounting, or “merit scholarships” to “manage enrollment” i.e. offer just enough of a discount to entice an attractive student to attend. But don’t expect a generous contribution.

The 60% of families who won a merit scholarship in 2021–2022 received an average of $6,041 a year [4]. And even though we have all heard of a friend of a friend’s child who got a full ride, only 0.3% [1] of students receive enough grants and scholarships to cover all costs.

4. The odds are against winning a sports scholarship

Nearly 8 million children played high school sports in 2019. But only 495,000 of them ended up competing in college — and fewer still, just 150,000 — received scholarships. [5]

And, just like merit scholarships, average sports grants are small — between $6,500 a year and $8,300 for Division II schools [1]. Sadly, the full-ride athletic scholarship is “largely a myth perpetuated by coaches in youth leagues passed around by (hopeful) parents.” [5]

5. Financial aid may disappoint

Almost all colleges have financial aid programs designed to help families with the cost of attendance. About 55% of families received needs-based grants in 2021–2022 totaling, on average, $5,137 a year [1].

Now, this average hides an enormous range. Some colleges with small endowments cannot afford much in the way of financial aid. Others, like Princeton, advertised a sticker price of $56,010 in 2021–2022, but claimed that the average cost after receiving aid was around $16,5623.

While it is difficult to predict exactly, you can estimate what you might be asked to pay by going to studentaid.gov/aid-estimator.

Unfortunately, the bottom line is, be prepared to pay more than you think you should be paying.

6. Consider a 529 Plan

Many families sensibly open savings and investment accounts to help fund college expenses. Tragically, most open fully taxable accounts without realizing there is a much better option. 529 Plans are tax-advantaged investment accounts set up by states dedicated to the funding of education expenses.

Unlike other tax-advantaged savings plans, the terms of these plans are generous. Contribution limits are very high, there are no income or age restrictions, and withdrawals can take place at any time. Most importantly, earnings are exempt from federal and state tax. Think about starting a plan early (at birth?) to take advantage of the incredible power of compounding.

7. Don’t raid your retirement account

For every $25,000 you withdraw from your retirement account early, you could be giving up $80,178 in future value [1] — and that is not even counting the 10% tax penalty if you withdraw before age 59½.

So, while using existing savings seems like a better idea than taking out a student loan, it can end up costing dearly in future income foregone.

There’s probably no avoiding the stress of the college application process. But, armed with a 529 Plan, a clear understanding of the aid and scholarship landscape, and a willingness to consider home-grown options, parents should feel better prepared to foot the bill.

Sources: [1] JP Morgan, [2] College Factual, [3] U.S. News & World Report, [4] Sallie Mae, “How America Pays for College” and [5] “Who Gets in and Why” by Jeffrey Selingo

Wealth Matters

David Lawrence, CFP, is a certified financial planner practitioner and Wealth Advisor at Willow Creek Wealth Management, 707-829-1146.

Wealth Matters is a monthly column by the firm’s advisers. Read past columns.

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