by Lee Rogers
A lagging economy and skyrocketing university costs leave many Americans asking, “Is college the right choice for me?” To know the answer, you will need to understand the costs and benefits of a university degree and learn more about planning and saving for college.
The decision about whether or not to attend college is a serious one with lifelong implications. Changes in the U.S. economy, a decade of lost growth, and a revolution in technology are challenging attitudes about a traditional college education. While college used to be the default option for most high school graduates, a growing number of polls indicate that college is no longer the slam-dunk it used to be.
The high costs associated with getting a degree and the opportunity cost of spending four or more years in college, weighed against a weak job market, leave an increasing number of young Americans asking: is college still worth it?
Student debt has skyrocketed and there is growing concern that a college degree is getting out of reach for many middle-class Americans who find themselves in the financial aid gap: Too wealthy to qualify for tuition assistance or federal financial aid, but not affluent enough to shoulder the full cost of a university. Unfortunately, growing college costs may make some families think that college is no longer a value proposition for them. Since 1982, college tuition costs alone have increased by more than 700 percent, far outpacing increases in earnings for college graduates.
The economic case for college is simple: College graduates make more money. In fact, graduates with only an undergraduate degree make more than $1 million more over the course of their lifetimes than Americans with just a high school diploma. Attaining a doctoral or professional degree can bump lifetime earnings into the $4 million and $5 million range. The majority of American high schoolers go straight to college, believing that a college degree will open the doors to high earning potential.
While university can be a seminal experience for many young people, college isn’t for everyone. There’s no arguing with the fact that getting a degree can cost a significant amount of money and take a lot of time out of life. Some college graduates will be paying back their student loans for many years and may feel as though the value of their education wasn’t worth the time and expense.
Others believe that college may take time away from developing other skills, like entrepreneurship or technical skills not acquired in college. Some students do not do well in college and drop out, compounding the issue of cost and time lost. College dropouts may acquire significant amounts of student loan debt while failing to benefit from the full value of a college degree.
Ultimately, the decision about attending college is a deeply personal one that should be discussed well in advance of application time. If college lies in the future for you or someone you love, it’s important to plan for college as soon as possible.
There are many ways to save for college; here are a few:
STUDENT LOANS
• Student loans are by far the most common way to pay for college. The chief benefit of loans is that students and their families don’t have to plan ahead for university expenses. Student loans typically rely on the student’s ability to find a well-paying job and pay back the loan. The obvious disadvantage is the relying too much on student loans will mean a heavy debt burden once the student graduates.
• Stafford loans are the most common form of government student loans and are awarded to college students who file the Free Application for Federal Student Aid (FAFSA.) They come in two forms: subsidized and unsubsidized. While both types are fixed-rate loans, subsidized loans have the benefit of accruing no interest while the student is enrolled, while unsubsidized loans begin accruing interest immediately.
• PLUS loans are another type of federal loan available to parents of dependent undergraduates that can be used to cover student expenses not covered by other forms of financial aid. The maximum that can be borrowed is the student’s cost of attendance (as determined by the school) minus any other financial aid received.
SAVINGS PLANS
• 529 college savings plans are tax-exempt savings vehicles that allow families to invest for future college expenses. Unlike prepaid tuition plans, there are no guarantees and investments are subject to market conditions. However, with these added risks comes the opportunity for potentially greater returns.
• Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act are two types of custodial accounts that adults can set up on behalf of minors for college. Parents, relatives, and friends can contribute to the account and all of the assets (e.g. mutual funds, stocks, bonds, CDs, etc.) are turned over to the beneficiary’s control at age 18 or 21 (depending on the state in which it was opened.) The main benefit of this type of account is that the assets can be used for any purpose, not just college tuition. There are also no contribution limits, though contributions above the annual gift tax exclusion may incur federal gift taxes.
For many families, paying for college can be a daunting task, but professional financial advice can help you make decisions for your child’s future. Financial representatives don’t just help clients strategize for retirement; we help our clients develop strategies to address all of life’s major financial milestones, including paying for college.