6 Steps to Dealing with Higher Education Costs
At the start of the fall semester 2022, it is estimated 16 million undergraduate students are enrolled in colleges and universities across the country. While many parents and grandparents began planning for this stage by saving for college when their children were still young, increases in tuition gradually outpaced income, forcing many families to rely on loans. students to pay the bill. According to a recent report, 48 million Americans have student loan debt totaling nearly $1.75 trillion. While this includes private loans, the vast majority, held by 45 million, is federal student loan debt. The New York Federal Reserve reports that student loan debt is the only form of consumer debt that has increased since consumer debt peaked in 2008. Student loan balances have eclipsed both car loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.
As student loan debt continues to rise, the public debate over student loan forgiveness continues. Critics of full or partial student debt forgiveness believe it would disproportionately benefit wealthier families and individuals, while proponents believe the burden of student loans is much more nuanced. While questions remain about the appropriate level of federal involvement in debt cancellation, both sides of the debate view student loan programs as a wise investment in America’s workers and essential to maintaining the country’s competitive edge. . The US Bureau of Labor Statistics supports this argument, reporting that workers with a bachelor’s degree earn more than 1.5 times the amount of workers with only a high school diploma, while those with a doctorate or professional degree earn more than double. Consequently, the competition for the best paying jobs leads many students to incur large debts related to their studies. While avoiding student debt altogether would be the ideal solution, it is simply not feasible for many students and their families.
Although many colleges and universities froze tuition during the pandemic, many related expenses, such as housing, meals, and on-campus transportation, continued to rise with inflation. According to college council, the average tuition and fees for full-time undergraduate students for the 2021-22 academic year was $10,740 for four-year public schools in the state, or $170 more than in 2020-21 (1.6% before adjusting for inflation). Four-year public out-of-state costs were $27,560, $410 higher than 2020-21 (1.5% before adjusting for inflation) and average for private nonprofit institutions four-year was $38,070, $800 more than in 2020-21 (2.1% before adjusting for inflation). These are daunting numbers for anyone looking to pay for higher education in today’s environment. However, there are steps parents, grandparents and students can take to help reduce the burden of these costs at every stage of the planning process. We have described six of these steps below.
1. Plan early. Ideally, you want to start saving for a child’s education costs as soon as possible. One of the best ways to do this is with a 529 college savings plan. All fifty states and the District of Columbia sponsor at least one type of these popular tax-advantaged savings plans that offer federal tax benefits. and, in many cases, states. Account earnings grow tax-free, saving you even more money for college. Best of all, contributions and earnings remain tax-free when used to pay for eligible educational expenses.
2. Take college-level courses in high school. A great way to help offset tuition long before a student even enters college is to encourage them to take Advanced Placement (AP) classes in high school. At the end of the AP course, students have the option of taking an exam to receive credit for the equivalent beginner-level college courses. Many high schools also offer a GPA boost to students who successfully complete AP courses, which can help them qualify for merit-based scholarships or other forms of financial aid.
3. Research grants. While every parent would love to see their child receive a four-year academic or athletic scholarship to their dream college or university, for most that is simply not realistic. In fact, recently Data indicates that only about 1.5% of students receive full scholarships each year. However, about 58% of families can take advantage of some type of scholarship, from private scholarships to federal Pell grants, which provided financial aid to 7.5 million students in 2020. Overall, it is estimated that scholarships and grants help pay about 19% of tuition fees.
4. Do not rule out financial assistance. Federal Student Aid, an office of the United States Department of Education, is the largest provider of financial aid for college in the United States. Any student attending an eligible school can submit the Free Application for Federal Student Aid, or FAFSA. To be eligible for financial aid, students will need to verify their citizenship, enrollment status, and financial need, among other things. eligibility terms. While many applicants receive some form of aid, such as grants, scholarships, or work-study programs, most are not eligible for all types. In addition, failure to meet some of the needs-based requirements may result in total loss of aid eligibility. To make sure you don’t leave money on the table, seek the help of your financial or tax advisor to complete your FAFSA form to help you determine your eligibility for assistance.
5. Consider community college. What if you or your student still feel underprepared to meet the costs of higher education? For many students, attending a local community college during first or second year may be an option. Community colleges can offer significant cost savings over traditional public or private four-year institutions. For example, tuition for district students at public two-year colleges for the 2021-22 academic year ranged from $1,430 in California and $1,950 in New Mexico to $8,600 in Vermont, according to the college council.
6. Assess the need for student loans. If you need extra help paying college fees after applying for grants, scholarships, or other forms of assistance, student loans may be a good option. The key is to only borrow what you need and can reasonably repay once you are working. There are two main types of student loans, federal and private. To get a federal loan, you will need to complete the FAFSA. Federal loans are preferred because you don’t need a credit history to qualify, and they offer income-based repayment plans and a discount that private loans don’t. If you’ve exhausted all other options, you may want to consider a private loan.
If you are a parent considering taking out a loan to help pay for a child’s education, be sure to speak with your financial advisor first. Your advisor can help you determine the best course of action for you and your family, based on your personal financial needs and goals. You want to make sure that prioritizing education costs doesn’t jeopardize your future or delay your retirement. Remember that an adult child can borrow money to finance their education, but you cannot borrow money to pay for your life in retirement.
There are also many options available to grandparents looking to help fund a grandchild’s education that can overlap in the areas of tax and estate planning. Whatever your goals or planning stage, an independent wealth management advisor can help you find ways to balance those goals and priorities in all aspects of your financial life.
To learn more about educational planning, download our free checklist, Financial Milestones for College Planning.