This week we’re happy to have Nancy Berk as our guest poster — Nancy is a pro at college planning, and author of the book College Bound and Gagged: How to Help Your Kid Get into a Great College Without Losing Your Savings, Your Relationship, or Your Mind. Here, she addresses college expenses that aren’t often considered — preparation courses, campus visits, and application fees.
While many parents worry about the cost of their children’s college education, it’s not unusual for college admission anxiety to override financial sensibility even before a tuition bill surfaces. I highlighted plenty of these money drains in my book, and they’re everywhere. While this is just a small piece of the fiscal puzzle, college search and prep costs and school selection mistakes don’t help the college fund. If you’re the parent of a college-bound teen, consider these cost-cutting suggestions to save a chunk of change before dorm drop-off.
Analyze Your Family Situation. When it comes to the college admissions process, it’s easy for parents and teens to become starry-eyed and make emotional choices with bad economic repercussions.
Before the wish list gets drafted, communicate and explore family concerns and limitations including tuition, transportation costs, and special needs. Applying to a school that is incompatible with the budget isn’t a wise move. However, always investigate the financial aid and scholarship data of schools before ruling one out.
Identify Great College Prep Bargains. Never dive into a test prep spending spree, until your teen’s strengths and weaknesses are identified. Is preparation required? If so, what areas should be addressed (i.e., content vs. process)? Math deficits and test anxiety don’t typically involve the same approach. Save money on test prep by asking friends with college students for those unused or gently used SAT, AP, and ACT prep books, CDs, and flashcards. Online study and tutoring options like those offered by the College Board and InstaEdu can also be more cost-effective than “live” options.
Create A College Visit Strategic Plan. Before you gas up and head off for a little collegiate bonding, do some virtual legwork and tour online. Explore college-specific websites and comprehensive sites like CollegeProwler.com and Unigo.com. Then tour local colleges and universities in order to identify your teen’s general preferences (e.g., big school vs. small school). Narrow down the list or increase exposure to options by building college visits into other, already paid for family activities like vacations, business trips, reunions, weddings, and bar mitzvahs.
About Nancy: Nancy Berk, Ph.D. is a clinical psychologist, author, comic, professor and entertainment analyst. Her book College Bound and Gagged: How to Help Your Kid Get into a Great College Without Losing Your Savings, Your Relationship, or Your Mind can be seen in the feature film Admission starring Tina Fey. Nancy co-hosts The College-Bound Chronicles podcast with broadcaster Lian Dolan and writes about higher education and entertainment for sites including Parade Magazine, USA TODAY College and The Huffington Post. The host of the showbiz podcast Whine At 9, Nancy digs a little deeper as she chats with fascinating celebrities and industry insiders. Sometimes they even talk about college.
We’ve long cited a rule of thumb, on this blog and elsewhere, about the amount of money you should borrow for college. It comes from Mark Kantrowitz, the publisher of Edvisors, and it is this: Don’t borrow more for college than you expect to earn in your first year out of school.
The trouble with this rule is that it can be hard to do the math. How do you know what your future salary will be? Many students enter college unsure of their major, let alone their career path. But making an educated decision about where you go to school — which largely determines how much debt you’ll be taking on — means making some assumptions and running through a few scenarios.
Luckily, Junior Achievement USA and Pricewaterhouse Coopers have partnered to develop a (free) app that can help you run the calculations. It’s call JA Build Your Future, and using average cost of college figures from The College Board, and salary information from the Bureau of Labor statistics, it can tell you how your future plans stack up.
Here’s how it works, says Stephanie Bell, the director marketing and media relations at Junior Achievement USA: You start by entering your career, using a drop-down menu of many options. The app will tell you the median salary of that career, as well as the educational requirements and the potential for growth. Once you add your career to the calculator, you can select the level of education you plan to complete, where you plan to complete it — in state or out, public or private — and whether you want to include room and board. You then include payment options, including how much your parents will contribute, any amount you might receive from scholarships and grants, your own wages that you plan to contribute, and student loans. You can ask the calculator to auto-adjust student loans based on the other figures.
What you find, at the end of the exercise, is what percentage of your future monthly salary could end up going to student loans. The calculator will then evaluate the information you plugged in and return an ROI (return on investment) score of between one and five.
In the example I ran, in which I was planning to be a public relations specialist (which, according to JA Build Your Future, has a median salary of $57,550), if I were to attend a public, in-state college for a bachelor’s degree, my four-year total costs, including room and board, would be $71,440. With a few contributions from my parents and scholarships, I could bring my borrowing down to around $10,000 per year, making my student loan payments about 9% of my future monthly salary. The calculator gave my hypothetical scenario a ROI score of four, the second highest. A one would mean my eventual student loan payments would take up 21% or more of my future salary; two is equal to 16 to 20%; three is 11 to 15%; four is 6 to 10% and five — the best possible outcome — means the app predicts your student loan payments will take up between 0 and 5% of your future monthly salary.
Bell suggests using the calculator early — once your student is a high school senior, it’s largely too late. “When you’re having conversations about what your kids want to do when they grow up, they can have this information at their fingertips and that will help them make decisions as they progress through middle and high school.” Should you encourage your kids to give up a life-long dream if the calculator spits out a 1? No. But you might encourage them to spend two years at a community college to lower costs, or aggressively apply to scholarships, or set their sights on an in-state school rather than a pricey private option. “Once you get around a three, you might want to rethink some of your options,” says Bell. “Anything that says your loan payments are 10% of your monthly income or less is probably going to be okay, but families should make these decisions based on their own circumstances and how much debt they feel comfortable taking on.”
It’s no secret that the cost of college is getting pricier and pricier; near-daily headlines about the increased burden of student loan debt and skyrocketing tuition clutter our news feeds and invade dinnertime conversations. What is more of a mystery to most Americans is what to do about this cost: recent surveys reveal that just 17 percent of families used a 529 plan to pay for college in 2013, and less than one-third even know what a 529 plan is. However, a growing number of people believe these tax-advantaged investment accounts — offered by each state and specifically designated for higher education costs — should not just be less of a secret, but open to the kind of crowdfunding that helps pay for things like Hollywood movies and new technology ventures.
“Don’t shortchange what $50 to $60 per month from a handful of people can do [for your college savings],” said Marcos Cordero, founder of Gradsave.com. It’s a site that lets friends and relatives make contributions to a child’s college savings account. “If you save $100 per month, it’s $42,000 when the kid is 18. A grandma to put in $25, an uncle to put in $50, [plus] your own $100, that makes a big difference.”
Cordero founded Gradsave in January of 2012, after being asked to be a godfather and realizing that there was no easy way to donate to his new goddaughter’s fledgling college savings account. Through Gradsave, he’s trying to simplify the process: after choosing a 529 plan, parents can go to Gradsave, create a profile, and link it to that 529 plan. Then, they can share the link with their friends and relatives, and all the interested donors need to do is follow the link. They don’t need the newborn’s social security number or any sensitive information, and there is no fee to contribute money to a child’s account — in the interest of building his user base, Cordero said Gradsave went fee-free about a month ago.
Gradsave is not the only site of its kind; sites like FiPath, GiveCollege, Gift of College and SallieMae’s Ugift program all allow interested friends and relatives to donate to a child’s college savings plan on either a one-time or recurring basis. Some, however, come with a fee, so it’s important to read the fine print on each site to determine which one is right for you.
“Know the cost,” cautioned Mike Fitzgerald, chair of the College Savings Plan Network. “What are they taking out for their services?”
Fitzgerald said that if using a third-party crowdfunding service like GiveCollege (which does have a fee depending on the size of the gift) gives you pause, there’s nothing wrong with contributing to a newborn’s college savings account the old-fashioned way.
“Contact the 529 plan itself,” he said. “It will be the identity protected, and it will be no cost. I know of no state that charges anything for it.”
Regardless of the means of distribution — old fashioned checks, contacting the 529 plan itself, or using an online college registry like Gradsave — what Cordero and Fitzgerald both agree on is the importance of letting friends and relatives help save for the cost of college, and that if you have a newborn (or even not so newborn), to not be shy about asking for college savings donations rather than teddy bears and onesies.
“Parents should be completely comfortable in letting their friends and family know that there is a college savings register for their kids. People gave savings bonds [years ago]… it’s always been there,” Cordero said. “It takes a village to raise a child. Now, it takes a village from a financial perspective.”
I work full-time and am married with three children. In 2010, my husband lost his job — we ended up losing our house and were in a crunch to pay off $45,000 in credit card debt, not to mention two cars and PLUS loans. When all this happened, I went to the first credit card company and worked out a payment plan for the next year. However, the other card companies weren’t as easy to deal with. So I went through the National Foundation for Credit Counseling for help in consolidating our credit card debt. Now I am paying for that one credit card and have an account to pay off the others through a credit counselor.
My question: I took a loan out against my 401(k) to pay off those cards and some college expenses that my youngest daughter will have (after her student loans and scholarship, she needed about $9,000 for tuition). The credit card debt now totals $24,000. Did it make sense to take the loan and be done with the debt? I am repaying the loan over three years.
Hi Annette, here’s the deal with 401(k) loans: On the upside, you pay them back, with interest, to yourself, so looking only at the math, they are a better deal than other borrowing scenarios.
The rub is that if you lose your job — as your husband did, so you know this can happen, and often suddenly — you are in many cases required to pay that money back inside of two months. Otherwise, it is treated as a distribution and you are taxed and penalized as such. So it’s risky. You are also taking money out of the market, which could mean selling investments and locking in losses if you do this at the wrong time. And recent research suggests that if you borrow once, you’re more likely to do it again. All of these things make 401(k) loans a last-resort option.
But you already did it, and the good news is you’re paying it back to yourself, not a creditor. It also likely has a lower interest rate than your debt, although I don’t know what interest rate was negotiated by the credit counselor — it may be very good. In any case, just make sure you continue paying it and your credit card debt off and hang on to that job. And note: In general, I don’t recommend borrowing from or shortchanging your retirement to pay for college expenses. There is financial aid available that your children can tap if necessary, but you are not going to find financial aid resources to fund your retirement.
This week we’re excited to welcome Susan Beacham, an expert on kids and money. I know many of you are helping your kids pack up and go off to college. I was in the same boat last year, and if you can take a few minutes away from the packing frenzy to talk about money, you’ll thank yourself later — I promise.
Heading off to college for the first time launches kids into a new way of living. Money will be an integral part of that new life and having the “money” talk before they leave will go a long way toward helping them navigate this critical resource. Now is the time to sit down and talk about a plan for spending, emergencies, health care away from home and the pros and cons of earning money while at school.
Start the money conversation with a review of the basic needs every college student confronts:
- Eating. Many parents buy a meal plan that covers all three meals for their student. Most students will not eat three meals at the college cafeterias. Especially breakfast. So, reconsider your plans and only buy what will be used. Then, budget for the “off campus” expenses like coffee, lunch between classes when they are not close to the cafeteria and dinner out when they cannot eat one more cafeteria dinner.
- Social. You may not like it, but your kids will want to try out the social scene – and that likely includes the bars in their college town. Underage students are often allowed into a bar if they pay a “cover” of anywhere from $3-$5. Greek organizations are also popular and sometimes a huge cost surprise to students and their families. If your student rushes, make sure they consider the cost of belonging. Also, aside from the hard dues, there are many fundraising costs for special events that kids are asked to pay for. Make this cost more real by giving your child the responsibility to pay. If your student is paying, then they will reign in the cost of the extras and may even opt-out of a badly run organization when it is their money at stake.
- Health. Many schools have a pharmacy on campus where they can transfer their prescriptions. Make sure students check the price of prescriptions at school vs. at home. Fill scripts at the least expensive location.
- Books, school supplies. Lease vs. buy. Word from college students is that many professors do not use the books they initially assign. One hedge against spending money for books you never use is to check out leasing programs. Compare and contrast and see which comes up less expensive.
- Clothes, gifts. College towns have great shops and your student will want to shop there. Sometimes, it is the only game in town for students who are far afield from any other place to buy what they need. Local shops have prices that can be steep so make sure you plan ahead for this cost in your final budget.
After you talk through all of the above, sit down with pencil and paper and create a budget. It does not have to be an excel spreadsheet to start, just a simple, written document that helps you and your student understand and consider the possible expenses that may arise while they are living away from home. Then, talk about reasonable estimates for those costs. Create from that estimate a suggested monthly “draw” that they can withdraw for themselves each month to cover expenses. Set up a time each month to talk about the budget to review and revise.
Kids will seek out ways to make themselves more comfortable while away from home and many of these comforts cost money. Talk about boundaries in advance and your student will avoid common traps and your own budget will not suffer the consequences of their mistakes.
About Susan: Susan Beacham is CEO of Money Savvy Generation (msgen.com) and creator of the award-winning Money Savvy Pig – a 21st century bank that teaches kids about money choice. Susan is an award-winning education entrepreneur and nationally recognized kids and money expert. She is also the author of the award-winning children’s book series, The Money Savvy Club Kids Club books, and creator of the innovative iPhone App for kids, Savings Spree. Follow Susan’s advice on her blog at susanbeacham.com
I wanted to ask your thoughts on finding the right 529 plan. Aside from hiring an actual financial planner, are there any resources that you would recommend as starting points in our search (websites, etc.)? There are so many options that finding the plan that best fits our needs seems daunting.
The best resource for this is Savingforcollege.com, which has information about fees, plan ratings, and comparison tools. You’ll find everything you ever wanted to know – and then some – on that site.
The first step is to look at the plan or plans offered in your state, particularly if you get a tax credit for contributing there. Check out how well your state’s plan performs — the site has 2013 performance rankings listed here, broken down by the last year, the last three years, five years and ten years.
You also want to look at investment options, because you want a menu of investments in line with your goals. If, for instance, you’re risk adverse, or your child is older (and you’ll need this money soon), you want options that allow you to tone down the risk, like a CD. Your best bet? Finding a plan with age-based options, which will work much like a target date retirement fund — when the child is young, your investments are fairly aggressive. As he or she ages, they automatically rebalance to be more conservative and lessen your risk.
Finally, expenses. Fees eat up your earnings, so they matter a great deal. In DC, for instance, a plan might cost you over $2,400 on a $10,000 investment over ten years. Louisiana, on the other hand, has one of the lowest-fee plans, with a cost of only $591 over that same time period with that same investment. For more on fees, check out Savingforcollege.com’s fee study here.
If you plan to work with a fee-only financial planner, he or she can help you with this. You can also enroll yourself — the process is fairly simple. There are also broker-sold plans, which come with fees and sales charges. I would avoid these if possible, because these costs will cut into your return.
My wife and I will be a first-time grandparents in six months. We’re very excited, as you can imagine. It is our desire to start a college fund for our grandchild. If it is within our means we would like, over the years, to grow the account so that the entire college education will be paid for. What recommendations do you have regarding investment vehicles and amounts to save so that we will have enough in 18 years?
What a nice gesture. You probably want to look at a 529 plan, which is offered by every state and gives you a tax-advantaged way to save: money in the account grows tax-deferred, and distributions are tax-free if they are used to pay for the beneficiary’s college expenses. In addition, you may get a state tax break for participating in your own state’s plan — though you don’t have to contribute in state, if you find that your state’s plan doesn’t cut it, performance-wise.
That said, you have to be careful as a grandparent because this kind of plan can impact their financial aid eligibility. The plan itself when owned by a grandparent isn’t considered an asset, but when the child is the beneficiary and a distribution is made to pay for college, that distribution can count against him or her when the FAFSA is filed the following year. Note that this is NOT the case with 529 plans that are owned by the parent.
To solve that issue, perhaps your best bet, if you’re willing to do this, is to have the parents open up a 529 plan and then simply contribute to it each year. You will, of course, lose control over the money, so that has to be a risk you are willing to take. As far as how much to save, SavingForCollege.com has a “the world’s simplest college calculator” which you can use to get a ballpark. They also have information on each state’s plan, so you can compare performances and ratings across the board.
One final note: No matter what number a calculator spits back, I want to urge you to save what you can while keeping your own retirement needs front and center. Your grandchild will appreciate this money, of course, but there are also loans available for college expenses — no one is going to lend you money for retirement.
This morning on Today, we took your questions — and you had some good ones! What’s the best way to teach kids about money? How does closing a credit card affect a credit score? To get the answers to these questions and more, check out the video clip below.
We now have 2 kids in college. Both had college funds, but thanks to the stock market, they ended up small. Both are receiving some merit scholarship help, but we are, like many parents, in that middle ground where we make too much to qualify for help, but not enough to really afford it. Any tips for keeping our parent loan amounts from getting too out of control?
Hi Judy — unfortunately, this happened to a lot of families who weren’t in age-based allocations within their 529 plans. A 40% reduction in 2008 if you were in all stock could’ve wiped out all of the gains to date, and some people reacted by pulling out their money, locking in losses.
We also hear about your scenario a lot — people who have too much money to qualify for aid, but too little to afford college. But the reality is that the poor pay a greater share of their total family income toward college than middle income families, and middle income families pay a greater share than higher income families. So this idea is actually a myth.
That said, if you have specific financial circumstances that make footing your expected tuition contribution difficult — job loss, salary reduction, special needs child, caring for elderly parent — you should bring them up to the school because it may merit an adjustment in financial aid. Talking to the school is always the first step. Scholarships are also a great option — I know you mentioned your children have a few merit scholarships, but I’m sure they haven’t come close to maxing out what is out there. Your children can continue to search for scholarships even after they’ve started school. Academic advisors and department heads are good sources of information, as are websites like fastweb.com and The College Board’s Scholarship Search.
As for how much money a parent should borrow, there are a few rules of thumb. I don’t want to see you borrow for all of your children combined more than you can afford to repay in 10 years or by retirement, whichever comes first. Total amount borrowed should be less than annual income, and if you want to retire in less than ten years, it should be significantly less. Your children should be borrowing student loans as well, looking into federal options first because they carry lower interest rates and better terms.
The world of college financing is often one big game of good news, bad news. Good news: you got into your dream school! Bad news: the financial aid package isn’t what you hoped. Good news: Congress doesn’t want student loan rates to get too high! Bad news: they don’t agree on how to keep rates low.
Recently, there was another entry in the good news, bad news game, courtesy of two new studies on college savings strategies. First up, the good news: according to a recent survey by the College Savings Foundation, more high school students indicated a willingness to save for college and work part time to avoid student loan debt. Specifically, 53 percent of students surveyed said they have already gotten a job to earn money for college, and 77 percent said they’ve already saved $1,000. That could be two semesters’ worth of books!
“It may speak to we’re doing a better job of preparing kids about what’s the best fit and what they need to do to be contributing,” said Roger Michaud, chair of the College Savings Foundation. “I think it’s great that they have a pool set aside. It could be that a number of high schoolers have more than that. $5,000 is probably three four years of books.”
The survey also found that 93 percent of high schoolers say they’re going to continue to work during college. While they didn’t indicate how many hours they plan on working, Michaud noted that working at the expense of taking a full course load could lead to a fifth or sixth year of paying tuition — which is hardly ideal.
“The last thing you’d want to do is extend your college years from two-to-four to five or six,” he said. “If you could work enough to help chip in for books and CDs and what have you, and then you get some aid, that might reduce the amount of debt you’re taking on. Parents and students should realize that if you’re going to extend your stay to college in a fifth year or sixth year, you gotta put pen to paper [and see if it makes financial sense].”
As for the bad news: while high schoolers seem to be on top of the college savings game, a different survey – this one from financial services firm Edward Jones – found that their parents have some catching up to do. Specifically, just 31 percent of adults say they know what 529 plans are. (In case you’re among the 69 percent scratching their heads: a 529 plan is a savings plan that lets you save and invest money for educational purposes, and is often tax-advantaged. Think IRA, but for college.)
“It is shocking,” said Greg Dosmann, college savings expert at Edward Jones. “We’ve got a lot of work to do to educate people on how to save for their children.”
Dosmann attributes part of this knowledge gap to a self-fulfilling prophecy: those who used 529 plans to pay for college saw the benefits — they’re flexible, tax-advantaged, and grandparents, aunts and uncles can help contribute to the stockpile — and are more likely to open accounts for own kids and even grandkids.
For parents daunted by the prospect of saving tens of thousands of dollars for college, Dosmann has a few tips to make the process easier. “As soon as the child is done with daycare, take the daycare expense and put it in a 529 plan. It’s money already being spent, it’s already budgeted for,” he said.
For grandparents and other relatives who might want to encourage saving, Dosmann recommends creating a system similar to that of a 401(k) with a match. “Grandparents will go to the parents of the child and say, ‘We’ll match up to a certain percentage per month if you put that amount in as well,” he said. “That’s why we like to say, ‘it takes a family.’”