027: What You Should Know About Paying For College
Jul 23, 2020
If you have kids, no matter what financial shape you and your family are in, you’re probably wondering how you’re going to pay for college. You’re probably wondering what your options are. You may need to know what the FAFSA is, what scholarships are available, and if they’re needs or merit-based.
You’re also probably astounded by the cost of college. It has risen eight times more than wages have over the last several decades. Furthermore, with colleges and universities in many parts of the world not able to reopen, many students are trying to figure out what their college experience will look like – and how to get the most out of it given the circumstances.
Today, we dig into the costs and benefits of college during this uncertain time, how and when to start your scholarship search, and ways to save for college. All of these things can help you achieve your family’s ultimate goal: your kids embarking on a joyful four years of learning and life experience come September.
Here are just a handful of the things that we'll discuss:
- Why four-year colleges often fail students by leaving them with massive debt, unsustainable monthly payments, and inadequate job opportunities upon graduation.
- The reason so many people don’t think they qualify for aid based on FAFSA – and how to start finding additional scholarships to take care of tuition costs.
- Why the scholarship search needs to start when students are sophomores in high school.
- The most effective ways to start college funds when you have children.
- How to have blunt conversations with your kids to make sure they’re not disappointed.
- “Who cares if it takes you 40 hours to apply for scholarships if those 40 hours will save you $$15,000 a year? Right now, all of a sudden you had a school that was out of reach or unaffordable and now it’s not only attainable but achievable.” – Ed Siddell
LeAnne Siddell: It’s The Retirement Trainer with Ed Siddell, a podcast about finding ways to help you become financially fit for your future no matter what financial shape you’re in now. College, how do we pay for it? What are the options? What is FAFSA? And are there still scholarships available? Are they needs-based, GPA-based, and is there too much that we need to know? This is LeAnne Siddell and here to help us with all of our questions and to give us some guidance on how to stay in the best financial shape possible, the retirement trainer, Ed Siddell. Hi, Ed.
Ed Siddell: FAFSA. I just like saying that.
LeAnne Siddell: I know.
Ed Siddell: You got to love the government and their acronyms. I mean, holy cow.
LeAnne Siddell: So true. And if we haven’t been through this ourselves…
Ed Siddell: Well, one down and two to go. So, we are intimately aware of what’s going on this time of the year. Those kids going off to college, hopefully, they are even with this COVID-19 and then the looming, the open dates for scholarship’s coming up here in a couple of months.
LeAnne Siddell: That’s right. And so many things have changed because of the lack of the ability to have ACT and SAT testing. So, I imagine a lot of things are going to look a lot different for those parents getting ready for their kids to go away to college. So, how do we pay for college?
Ed Siddell: You know what, that’s a great question. Yeah. But let’s kind of set the stage and so that people really understand what’s going on with the cost of college as compared to everything else in life right now. So, just to put it in perspective, so when I did my undergrad at Western Carolina, I was an out-of-state student and for everything all four years out the door, and by the grace of God, I was able to get out in four years. Okay. But it was less than $24,000. Okay. So, that was out-of-state as compared to in 1989, the average in-state for the United States, the average in-state tuition was $26,000 and adjusted for inflation in today’s dollars, that’d be about $52,000. And in 2016, the average cost for a four-year degree was $104,000 and it’s estimated that in 2020, it’s going to be somewhere north of $120,000 for a four-year degree.
LeAnne Siddell: If only we could guarantee a $200,000 paying job when we graduated.
Ed Siddell: Well, you’re absolutely right. The other big problem is that these four-year degrees are not four years anymore. The average student, it takes almost six years to complete a four-year degree. So, the finances, the cost, I mean, this is a big deal because the power struggle is. Do you leave your kids with all that debt to the point where they can’t survive? Because, I mean, we manage the 401(k)s and these participants and we help a lot of these participants realign and help pay off their debt. And the number one thing is student loans and how many times over and over again do we see student loans from a liberal arts college for $120,000, $140,000 is the balance because they have these private loans and they were being charged 7%, 8%, 9%, and what their monthly payment is, is more than a mortgage and they can’t survive.
LeAnne Siddell: Well, I know that I think a lot of people fall into the same realm that we do in the sense that you and I worked our way through college. We had those student loans, we had to pay those off when we first graduated, that was just part of where our expenses went to was paying that off. We don’t want our kids to have that. But there was no possible way for us to be able to project that college was going to cost this much.
Ed Siddell: Well, there are some estimates where the cost of the inflationary rate for tuition is 5%. There’s an article that I read in EducationData.org and that said that it’s actually north of 7% and so when you think about the actual cost of college, the cost has risen for college eight times more than wages have risen. So, think about that. And just to put it in perspective, now, when you and I were in college, I was able to work. I worked 30, sometimes 40 hours a week full-time, and going to school full-time. And so, that kept my loans really low and I was able to pay off everything a couple of years after college. You can’t do that now when college costs $22,000 and that’s what the average is for in-state tuition.
LeAnne Siddell: But I think the biggest misunderstanding that a lot of people have is that, for instance, FAFSA, there are people that based off of their income, they automatically make the assumption that they don’t qualify for a lot of different kinds of grants and financing that is offered. So, that is the big thing that is just understanding taking those steps going and filling out the FAFSA. Go into that.
Ed Siddell: Alright. So, let’s talk about all the steps. So, step number one is FAFSA. Even if you don’t think you would qualify, go ahead and fill it out because that’s where all the grants, the work studies, the scholarships all start. It’s right there. And if you don’t fill that out, you don’t even have a chance and that’s a big deal because there are billions of dollars left on the table every single year. And so, that opens up at the end of September. Sometimes this year, it’s actually October 1st and FAFSA just so everybody knows what that means is FAFSA stands for Free Application for Federal Student Aid. And there’s a whole lot of criteria. You can go online and understand and look at what the application is going to look like and that’s really important. And then for a lot of schools, there’s also the CSS. That’s a whole another scholarship program profile that over half of the universities, both public and private also subscribe to. And so, a lot of these scholarships are need-based, some are merit-based, and then there’s also other scholarships that we’re going to talk about here in a couple of minutes. So, filling out the FAFSA is really, really important.
The second thing is the scholarships. There are so many scholarships out there. So, our niece, I mean, she started putting some of these things together, these scholarships. And what was amazing was she spent hours and hours doing this, and she got some scholarships for $250, some for $500, $1,000 here and there. And because she applied for all those scholarships, she had a large portion of her tuition taken care of. And so, the amount that she had for loans was significantly less than the average person. And that’s key and I actually had this conversation with somebody last week. We’re talking about three hours. It could take anywhere from two to three hours to fill in an application to get a $500 scholarship and he said, “I would not waste my time.” Well, think about it. Just do the math. If it takes you three hours to get a $500 scholarship, that’s over $166 an hour. Now, how many college grads when they get out want to make $166 an hour? So, when you’re filling out these scholarships, you really have to do your research but look at it as a job.
LeAnne Siddell: Well, in a lot of the scholarships that you’re applying for they all accept, their prompts are somewhat similar. So, sometimes the one essay that you write can be used for multiple scholarships.
Ed Siddell: It really is. You’ve got private scholarships. You’ve got the needs-based scholarships. You got GPA scholarships. You have them out there for being an Eagle Scout, for being a caddy. There are so many different things out there that there’s a lot of different options. So, go online, do your homework and, again, there are millions and millions and millions of dollars left on the table every single year because people just don’t want to put in the time and effort but that’s a big deal. And I’m not even talking about full academic scholarships and ROTC or anything like that. I’m talking about stringing together a bunch of smaller scholarships to help cover the major cost of tuition.
LeAnne Siddell: Well, and you have down here number three, affordable school. Doesn’t that go against everything we’re just talking about here?
Ed Siddell: Well, it does go hand-in-hand with what we’re going through here in the country. You’ve got all these major universities, both private and public, paying the full boat to learn from home on your own computer. And I was just watching a Wall Street Journal report on CNBC in which they said that the enrollment for community colleges is rising significantly because they’re paying a fraction of the cost for those credit hours in those classes and then they can then transfer on. So, having a bigger picture as to what it is that you want to do and maybe now if you’re getting ready to go to college and you’re going to have to remote learn anyways, does it make more sense to go to a community college and save 20%, 30%, 40%, 50%, 70% or more of the tuition costs and apply that to your last three or two years or last year?
LeAnne Siddell: I do think it’s really timely that we’re talking about it right now because of the fact that so many other colleges have decided to do remote learning. A lot of people are making decisions just about where their kids go to school for your grade, your K-12, let alone talking about our college kids who are going off. So, it is important that you have those discussions now about what are we paying for? What are we actually paying for? And what are we getting for what we’re paying?
Ed Siddell: Well, and don’t go down the path of, oh my gosh, it’s a private school and it’s costing $58,000, $60,000. And the land grant school like the local schools here in Ohio, the major institutions are less than half. Yeah, they’re $22,000, $23,000 a year. Well, that sounds like a huge savings. Why would you spend the money on a private institution but the difference is the big institutions like Miami and Ohio State and Bowling Green here on Ohio and University of Cincinnati and the list goes on and on, they may not give you aid, but some of the smaller schools like Capital or Wittenberg, with all the scholarships, the Presidential Scholar, all these different things that they add in, you could wind up spending less than you would for state school even though the tuitions are higher. We’ve experienced that personally too. So, those are the things that, I mean, just do the math. Just do the math.
LeAnne Siddell: And when you’re going through the process, again, when you do the FAFSA and you send in your preliminary information for where your kids, they’re going to give you a financial aid package that is going to break it all down before you have to make a commitment.
Ed Siddell: And a lot of these private institutions will also offer other scholarship opportunities too, your goal statement, your mission statements to do these different things to earn additional scholarships that can add up to tens of thousands of dollars over your four-year career there. And a lot of these private institutions guarantee you the ability to graduate in four years where a lot of the state schools don’t. So, that’s kind of a big deal. Those are some of the things you want to look at as well as what degree am I going for? How much is it going to cost me and what are my earning potentials afterwards? Because if it’s going to cost you $150,000 to get a $30,000 a year job, how long is it going to take you to pay off that loan, and can you live?
LeAnne Siddell: And the process, I got to tell you, especially those of you that are having your first kid go off to college, the process needs to start when they are sophomores. That’s when your process needs to get started. You start having those conversations and begin the looking.
Ed Siddell: And actually, now is when you start putting together. So, if you’re going into your junior year end of September, October, this is when you fill out your FAFSA, October 1, and the CSS. That’s when those open. So, the next thing that we need to, the number four thing to do is to see if you qualify for any grants. So, when you fill out your FAFSA, it’ll tell you if you qualify for the Federal Pell Grant money. In any other grants that you may qualify for, now, that’s important because a grant, you do not have to repay it. So, that’s a big deal, right? It’s not a loan. When you fill out the FAFSA, it may also say, well, you’re not going to get all this in grant money but what we are going to do is give you the ability for a work-study program. Now, I did that as well as having other ancillary jobs in college. And what that allowed me to do is work in my field, in finance, in the university and do different things to get real-life experience and get paid for it to help cover the cost of tuition. So, that’s pretty cool. So, there are opportunities out there and that’s why it’s so important to fill out your FAFSA.
Now, when we talk about actually paying other than scholarships and grants and filling out the FAFSA and qualifying for aid, really you got to look at your savings. How much money do you have saved? And where is it? So, the closer you get or your kids get to college, you want to make sure that you start taking those chips off the table. We talk about this all the time, the concept of age-based investing when it comes to retirement. Well, it’s the same principle when it comes to investing for college too. So, like with our kids, once they hit high school, you get a lot more conservative and you want most in cash right before they go to college. So, if you experience a recession like we did this year, you don’t want to have to sell things at a loss because eventually, you’ll wind up running out of money. But you want to tap your savings first before you really get into any kind of loans.
So, how do people save for college? When you have a baby, your son or daughter is born, you’ve got a lot of things going on as a new parent. And one of the last things that most people think about is funding college, but starting off early, it’s the compounding effect. The earlier you start, the less you have to save each month because it’s going to grow and compound and compound. So, what are the avenues to be able to save? Well, a couple of them are the 529 plans so we’ll go through these. We’ll touch on each one of these, savings accounts, Roth IRAs, Coverdell Education Savings Accounts, CDs, savings bonds, and other trusts. So, when you break it down, how much do you need to save? And how much should you spend when it comes to loans? If you look at how much the annual cost of college is, when your son or daughter when your baby turns 18, you just work the math backwards. And then you use inflation. Let’s just say it is 7%. It’s better to save more than not enough.
And that will tell you how much you need to save each and every month. So, if the cost is $50,000 or that’s all you’re willing to contribute, which is an awful lot of money, okay, for your kid’s education then how much do you need to put away each and every month so that that way you can hit those goals. When you use 529 plans, there are two different types of 529 plans. The first one is the prepaid. When you use a prepaid plan, each state has different rules, where you can actually pay the money upfront and have the whole college experience completely paid for at a discount. And so, if the college makes a bad investment, they lose your money, whatever it is, they have the liability. Now, the cautionary tale is we have known people personally. We’re in different states where they did this prepaid program, and this was back in 2008 and 2009. And do you remember what happened? Yeah, the states ran out of money and they said, “Yeah, we’re not continuing on with the program, and here’s your money back. And oh, by the way, it only covers a year-and-a-half of tuition. You got to come up with the other two-and-a-half years.”
So, buyer beware. Those are some of the things that you need to worry about. And you really don’t have any control over that. The other type is just a traditional 529 plan and a lot of people like these. The rules have changed a whole lot. You’re not capped on by how much your earnings are. You could put up to 300,000 per person away, per beneficiary away. The reason that a lot of people like the 529 plans is that if my kids are my beneficiary and I’m giving them that money, and they don’t use it or they don’t use it all, they can’t spend it. I can then turn around and give it to my other kids all the way down. Now, part of the other problem with that is, is that the investments are really limited. You don’t have a whole lot of control over that. And if your child or kids decide not to go to college, when you pull that out, you have to pay not only ordinary income tax but also a 10% penalty withdrawal because you weren’t able to use it.
All right. So, some of the other choices that we have, you’ve got your Roth IRA, which is a really great savings because what it does is it gives you the ability to put money away, let it grow tax-deferred, and you can pull those contributions out without any penalty. You can’t pull the earnings out but you can pull those contributions out to help cover tuition costs. Now, the cons to that are you’re dipping into your retirement and that’s the delicate balance. We’ll touch on that at the end of this. Then the big thing was back in the day before 529s came out, the ESAs which are educational savings accounts, they had Coverdells and UGMAs and UTMAs and the problem with those is you are limited as to how much you could put in per year but once the child becomes of age depending on the state, it’s either 18 or 21, so it’s their money. They can buy a really cool sports car.
LeAnne Siddell: If they know about it.
Ed Siddell: If they know about it, yeah. That’s the key. And then obviously you have CDs and savings bonds.
LeAnne Siddell: Kids only know what you tell them.
Ed Siddell: Well, and so here is the problem in paying for a kid’s college because it has become so expensive. As we’re doing our plans for our clients and we’re going through and we’re trying to help people to fund college, it really for a lot of people becomes a choice. If you fully fund the college tuition and you take the loans and you do everything for your kids, how is that going to impact your ability to retire? Because if you have three kids and by the time it’s all said and done, it’s costing $300,000 plus interest. Are you ever going to be able to retire? So, where is that breakeven point? And that’s a really, really emotional, touchy subject with a lot of couples, but it’s a conversation that you have to have between you and your spouse and your family and saying, “Okay, yes, I understand. This is where you want to go to school and I understand it’s very prestigious, but it’s $70,000 a year. We can’t afford it. We can but we’re going to be living in your house.”
LeAnne Siddell: That threat alone will just end it right there.
Ed Siddell: “No, no, no, don’t worry. I’ll go to a community college.” But those are some of the things that you’re looking at. Because if you don’t have the savings then, again, one of the reasons why you want to fill out the FAFSA is hopefully you are approved for student aid and federal loans because they’re less expensive, okay, you’re still paying the interest rate. Now, that interest rate is accruing the whole time while you’re in school as a full-time student but you don’t have to make payments on it until so many months and so many days after you graduate. So, trying to find those degrees and those options where maybe there is a loan forgiveness. So, a lot of first responders, nurses, physicians in certain areas, they will even cover the cost of medical school. So, those are the things going forward that you really want to look at and as an absolute last resort, and I mean it as an absolute last resort. There are private loans. Because some of them have prepayment penalties if you pay them off too early. And as you’re paying them, now think about this, it’s accruing. The interest rates are zero for all intents and purposes, but yet they’re charging seven, eight, working with helping somebody out right now. Their private student loan is 9%, 8.9%. And that’s accruing each and every year for four years or five years, however long it takes to get out of that. So, that $25,000 a year or that $100,000 is going to be very significant at the end of four years.
LeAnne Siddell: How do you feel about people using their home equity line or the equity they have in their home to finance college?
Ed Siddell: That is a great question and everybody’s situation is different. And that’s why it’s so important to work with a professional so that they can run the numbers and really say, yeah, this is going to make sense for you or it’s not because if you do that for one year, but it’s your first year, then what are you going to do for the other three? So, how are you going to cover that cost for that four-year period? Are you going to be done in four years? Because we know personally with some friends and family whose kids change their major at a local major university, who we’ll remain nameless, and it added a whole year’s worth of tuition and expense. All right. So, when you’re trying to think about how much what’s the maximum amount that I can borrow and afford to borrow so when I get out of school I know I can make those payments, a good rule of thumb is figure out what you think your net pay is going to be.
So, if you think you’re going to net $36,000 a year, that’s what you’re going to be bringing home is $36,000 after college or if you think it’s going to be 50,000, you’re going to net $50,000 a year your first year. That’s your paycheck, right? Ten percent of that per month is about the maximum that you want to be able to have to pay because you still want to be able to live. You’re still going to have your car payments. You’re going to have to be able to eat and live and pay rent and all those other things. So, if you’re earning $50,000 a year, take home the most that your loan should be. Your payments should only be about $500 a month. Does that make sense?
LeAnne Siddell: I do think there are a lot of options out there for people to attend seminars and classes that teach you about how to pay for college. What that basically points to is there is so much information. It’s important that you find somebody that you’re going to trust as the advisor for you on this because there are so many different things to consider. So, again, that flashes back to the retirement fitness plan and just one of those things that we focus on it is there are all kinds of things that people come to the table with. They want to be able to afford their kid’s weddings, and college is just one of those wishes, wants, whatever it is that people want to pay for. And I put myself in that but it is something that you need to be able to work into your plan.
Ed Siddell: No, you’re exactly right. And how we ever broken down between needs, wants, and wishes too because you have to figure out what you can afford, what your kids can afford, what they want, what that degree is going to look like on the other end, and what their potential income is because that’s a big deal.
LeAnne Siddell: So, I’m just going to real quick recap the whole thing as far as steps for people to take. Number one, the steps are get online early when your kids are still at the early stages of deciding where they want to go to school. Number two, get hooked up with an advisor who is going to be able to give you those different areas where you can tap into finances and loans or funds or where to take that money from to pay for school. And then lastly, it is just to make sure that you have those very, very blunt conversations with your kids about what is the budget, what are we looking at, what can we afford, and that way, they’re not disappointed. The process is joyful for everybody involved, that you’re starting it off on the right foot and you’re taking it to the end, which is dropping them off at college in September something.
Ed Siddell: Well, you hope, right? But just to re-emphasize what you said earlier, start early and you actually said in the very beginning of the podcast, do it the beginning of their sophomore year and start working and finding those scholarships and doing your homework because who cares if it takes you 40 hours to apply for scholarships if those 40 hours it’s going to save you $10,000, $15,000 a year? Right now, all of a sudden you had a school that was out of reach or unaffordable and now it’s not only attainable but achievable.
LeAnne Siddell: That’s right. So, let us come back to how do we get a hold of Ed. If you have more questions or you want to dive deeper into this, you can get us at email@example.com. Send your questions there or go to our website at www.EGSIFinancial.com or give us a call at the office at 614-526-4118. Thank you, Ed, very much.
Ed Siddell: Thanks, LeAnne.