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Solving the College Conundrum
As a parent, you may be a little scared, and you're probably more than a little confused. Perhaps you have a newborn napping in her crib or a high school sophomore wrestling with math homework at the kitchen table or both. Whatever the case, you're starting to think about college for your offspring. And among all the factors that go into deciding which college is best, one concern leads the list: How will you pay for it?
Good question. Families grappling with that college conundrum are facing a world turned upside down. In the mid-1970s the cost of a year at Harvard barely broke the $5,000 barrier. The big problem during those years was squeezing into a school with the rest of the baby boom. Since then consumer prices and the median income of American families with college-age children have tripled-but the cost of college has risen more than fivefold. For the privilege of enrolling in the 1995-96 class, freshmen at Harvard had to pony up an awesome $27,575. Twenty years ago the Harvard bill amounted to less than one-third of median family income; today it gobbles up more than half.
You don't have to think Ivy League to confront such punishing figures. The average family can now come up with only about 30 percent of typical public college costs. The rest has to be obtained through loans and grants from the government, the institutions, or private sources. The average total cost of a year at college, both public and private, has nearly doubled during each of the past two decades. Including tuition, room, board, and mandatory fees, it's now about $6,824 at a state schooland $17,630 at a private college, says the College Board, a national nonprofit educational association. A sample undergraduate annual budget, including the above costs plus books, transportation, and personal expenses, according to the College Board, jacks the necessary amounts to $9,285 and $19,762 for public and private four-year colleges respectively.
While inflation in the last decade has averaged 3.7 percent, the annual rate of increase in college expenses has been about 7 percent-higher than the rate for all other goods and services. One mildly positive note: Annual increases have eased off lately to the 6 percent range-but they still outpace inflation by a wide margin, and experts predict they are unlikely to drop much more.
What's ahead: more pain. Expect a continuing onslaught of congressional proposals to limit direct federal loans and subsidies, prune grants and scholarships, trim work-study programs, and raise interest rates on future loans to parents to underwrite their kids' schooling. "It's a safe bet that Uncle Sam's largesse will diminish in years to come," says Kevin Keeley, executive director of the National Association of College Admission Counselors. "Students will cope by postponing college and working for a year or two, starting out as commuter students, and cutting costs in other ways. The struggle will teach them something about financial responsibility-but it will also infringe on the university experience."
The states, for their part, have been tightening the fiscal reins since 1992-93, when the first overall dollar cuts were imposed. "Competing priorities ranging from Medicare to prisons are taking a greater share of government budgets," says Barmak Nassirian, an analyst with the American Association of State Colleges and Universities in Washington, D.C.
Yes, we're living in an age of austerity. But don't fling up your hands yet. There are lots more wiggle room than most parents realize. Consider this: Only one out of four of those Harvard freshmen is paying the full tab. The rest are getting through on a patchwork of grants, loans, merit scholarships, and summer earnings, plus gifts from grandparents and doting uncles. Nationwide, loans have grown from being the exception to being the norm: more than 50 percent of students graduating from four-year colleges are in debt, according to the American Council on Education.
Your family may indeed have to borrow, postpone the boat, the new car, the Caribbean cruise. But the chances are excellent that you and your high schooler, with help from his or her college of choice, can piece together a financial lifeboat to carry him or her to that golden bachelor's degree. Brains count, but persistence and ingenuity count most.
As a first step though, families that can save for their children's college education should do so. Kathleen Brouder, director of the Information Services of the College Scholarship Service, the financial arm of the College Board, describes college as a "shared responsibility," where the government, the school, families, and students must play their part. "Parents should weigh the value of a college education for their children and plan ahead," Brouder advises. "Prudent saving and some sacrifices along the way will pay off for children in the long run."
A common misperception is that it's unwise to save for college because it will disqualify you in the competition for financial aid. It's true that much of the available aid is need based, and people with assets have a greater capacity to pay than those with similar incomes but no financial reserves. Many assets, however, including 401(k)s and other retirement accounts, have no effect on the amount of federal aid for which your child will qualify, and others have only a small impact. Uncle Sam ignores any assets for families with incomes below $50,000. Ultimately you aren't severely penalized for thrift: an extra $1,000 of savings will increase the contribution you are expected to make by a maximum of $56.
Having the savings, however, will clearly make college much easier for you and your youngster. The funds may even help your John or Jane win admission, as more colleges, particularly private schools, are taking into account a student's ability to pay when deciding whom to admit. A 1995 survey by the National Association of College Admission Counselors found that 26 percent of schools consider the ability to pay when they are making admissions decisions. Financial need can definitely be a strike against a student when the school is filling the last few slots in an entering class.
In drawing up a college game plan, be prepared to rethink your ideas about borrowing. A 1995 study by the Education Resources Institute, "College Debt and the American Family," reports that borrowing to pay for college has soared in recent years, with federal loan programs disbursing more in the last four years than in their first 20. In 1984 students and parents borrowed $7.9 billion for higher education. By the end of 1994 that figure had grown to $23.1 billion, with more than half of that increase coming in the past two years. The report predicts that total borrowing will increase to almost $50 billion by the year 2000, from $24 billion in 1995. One reason: The cost of public and private colleges (for tuition, fees, and room and board) has been outstripping the growth in disposable personal income by two or three percentage points year in, year out.
Don't let these numbers scare you away, however, for there's a positive payoff ahead. "The earnings premium for people with higher skills and education has increased dramatically since the late 1970s," says Isabel Sawhill, senior fellow at the Urban Institute in Washington, D.C. According to the U.S. Census Bureau, in 1993 the median income for a college graduate was $27,470, about 90 percent higher than for a worker with only a high school diploma. Twenty years ago the difference was only 50 percent. Today's median for someone with a master's: $35,848 with a doctorate: $47,970.
"Because college graduates have dramatically higher earnings, borrowing for college is more like borrowing to start a promising company than like taking out a vacation loan," says Raymond Loewe, president of College Money, a financial- planning firm in Marlton, NJ. Indeed, the average new car costs about as much as the average year at a private college-and many people replace those wheels every few years. Not true with college: four years and it's typically over. "You don't need to shell out forever," Loewe points out. "It's a short-term problem."
In some cases, he advises, it's better to borrow temporarily than to invade financial assets. If you can earn 9 percent on your investments and borrow at a lower rate, let your money continue to grow. When senior year comes around, use your profits to pay off the loans.
Fortunately, higher education is unlike medical care (that other potential budget buster) in that it follows a predictable schedule and lasts for a limited period-which makes it easy to plan for. This book will help you and your child tilt the affordability odds in your favor, whether you have two months, two years, or two decades before the first tuition bill arrives. In the next two chapters we'll propose a raft of ideas about laying the groundwork-the financial twists and turns of zeroing in on which kind of college might provide the right education for your child and give good value as well. In Chapters 4 and 5 you'll learn how to build your college fund, using sophisticated strategies that will work whether your child is six or 16. Starting in Chapter 6, you'll get keys to help you unlock the financial aid coffers. It's a system that can be maddeningly complex, yet surprisingly generous to those who master its intricacies. Finally we'll show you how to borrow wisely, if that's necessary to bridge the gap.
"The Endpaper" finishes with candid advice from parents who have been through the process, on how to limit emotional and financial costs. They speak out on subjects ranging from socks (no kidding) to stocks. The appendix names 100 colleges that have proven over the years that you can get a topilight education without paying killer prices.
For now, drop the idea that price is the key determinant. Start thinking about what education means to you and your child and what kind of college will provide it. Rest easy: you're not searching for a needle in a haystack. Don't feel you must unearth the one right school from the 2,149 four-year colleges out there. For most youngsters there are dozens of good choices. When you and your child set the basic parameters, so you have a vision of what you're aiming for, the following chapters will show you how to get there with minimal financial pain.