In my last entry on The Blog, Getting Schooled: 6 Steps to Better College Prep, I talked about helping your child maximize his or her chances of gaining college acceptance. Today, I'll discuss how you can help yourself (and your child) prepare for and manage the cost of college.
As I contemplated this post, I realized there was any number of things I could talk about when it comes to the broad topic of paying for college. I could go on for pages about financial aid, loan options, 529s and other saving vehicles — and I will touch on these down the road. For now, I decided to focus on one simple piece of advice that I think tends to get overlooked: The undeniable importance of saving.
A recent study by Sallie Mae found that half of American families with children under 18 are saving for college, but half are not. The reasons why are probably as varied as the people using them. But my experience working with financial advisors and individual investors tells me that parents hear estimates on the cost of college, which can be as high as $300,000 for a four-year education, and paralysis sets in.
Uneasy thoughts of I'll never save enough lead to the easiest of actions — which is inaction, or not saving at all. And that's a mistake, for two key reasons: 1) That $300,000 sticker price is not necessarily reality and 2) any savings is better than no savings and can make a huge difference in your bottom-line expense.
Let's look at each of these important components of college affordability:
Sticker Price and a Grain of Salt
While almost always overwhelming, college costs are almost never completely transparent. And that can make it difficult to determine affordability. Know that few people pay the published sticker price for a given school. Your costs could be defrayed by merit aid (free money) in the form of grants, gifts and scholarships, and/or by financial aid.
On average, 65% of college costs are covered by parents' and students' financial res (income, savings, loans); 35% is covered by other means, including grants and scholarships, according to Sallie Mae. While 35% may or may not represent your experience, it does illustrate that there is attractive discount potential.
Savings Change the Equation
Now, savings are kind of a big deal … and that's an understatement. In fact, by our calculations, every $1 you set aside for college today can equate to over $2.50 you won't need to pay back on a loan in the future.*
More savings can translate into more options for your child both heading into college and on the way out. Why? When you have monies set aside, your child can choose from a larger set of schools. Seemingly out-of-reach options (based on sticker) suddenly become more affordable. This example shows what a difference the combination of merit aid and savings can make.
The benefits of saving are further illustrated when you consider the ramifications of the alternative: hefty loans. To be sure, the burden of debt is not only financial. The impact post-graduation can be far-reaching and long-lasting. Studies show that students left with large loan payments often compromise in their career choices (choosing pay over passion), opt not to pursue graduate degrees, can't afford a car or home, delay marriage and children, and sometimes resort to bankruptcy. In our example, savings was able to reduce the monthly debt payment to $388, a much more manageable proposition for a recent college graduate.
The Bottom Line
What do I hope you'll take away from all of this? A couple of things (at least):
First and foremost, know that every single dollar saved for college really does count. It means more choices in the school selection process, and can lead to a better financial position, more vocational options and overall increased life satisfaction for your child post-graduation. And remember, the numbers don't lie: In the example above, $1 of savings reduced the debt payment by a whopping $2.51.
Second, don't fall victim to sticker shock. Do the work to understand the real price of a given school so that you can make a real decision. Most schools provide a net price calculator that allows you to project your cost based on information you provide and the average aid awarded by that school. It gives you an idea of what people in similar situations have experienced at that institution. You may be surprised to find that expensive schools you thought out of reach come with more generous financial and merit aid and, ultimately, may be more affordable than those with a lower starting price.
Once you have a handle on a school's true cost, you are able to plan accordingly and develop a program to save what you can and minimize and manage any debt. You can also take satisfaction in knowing you have expanded your child's options exponentially.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock's U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age.
* Combination of unsubsidized Stafford loan and private loan. Stafford loan based on 25 years at 4.9%; private loan at 25 years and 9%.
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