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How much do I need to save for my children’s college?


 

Recently my wife and I have renewed our effort to save money for our children’s college education. I have 3 children ages 10, 8  and 6. We had started funds for each of them when they were born but have withdrawn most of the funds to pay for private programs. Our thought was that giving them a good base to start from would be a better use for the money. We also bought a house in a more expensive neighborhood with a community school that all the kids are attending and have no regrets about that decision.

Now we are concerned about the cost of college for all of them but mostly the first because he will start in 8 years.

According to the U.S. Bureau of Labor Statistics, prices for college tuition and fees were 150.2% higher in 2018 versus 2000 (a $30,040.58 difference in value). http://bit.ly/2ORTYCX

  • This is an approximate average change of 2.7% over 18 years.

Considering that, the state University is approximately $32,000 per year presently. The cost of our first child’s tuition, fees, room and board (using the 2.7% for all) for 4 years will be $166,167.41 in eight years.

Options for paying for college.

  1. Pay out of pocket.
  2. Savings accounts: 529, retirement or brokerage accounts.
  3. Plus loans or equity loans for parents: 55% of parents have $40,000 of student loan debt.

https://studentloanhero.com/featured/parent-student-loans-survey/

  1. Student loans: Average student loan debt of $39,400.

https://studentloanhero.com/student-loan-debt-statistics/

It is about this time I start thinking about the legitimacy of the satirical Will Ferrell movie “The House”. https://www.youtube.com/watch?v=bLwII6-92_Y**

** The mention of the movie “The House” is for entertainment value only.

After getting over the sticker shock it is time to break this down and analyze the details. What is a realistic estimate of college expenses? I will break down the details for payment into a practical scenario and determine the value by comparing each colleges finished product or service.

What is the realistic cost for an undergraduate education? To determine this we need to look at how public and private colleges and universities determine a family’s financial need based off the following  equation.

Financial need = COA (Cost of Admissions) – EFC (Effective Family Contribution)

Types of Aid

  1. MERIT-BASED AID: grants and scholarships
    1. Amount determined school by school.
    2. Awarded to top 25% of students.
      1. Amount
      2. Based on ACT/SAT
      3. GPA
      4. No merit based scholarships for IVY League Schools.
  1. NEED-BASED AID
    1. Determine how much need-based support a college offers.
    2. Determine how much of the need-based support is paid by the college/university.

Tax Credits

  1. AOTC (American Opportunity Tax Credit)
    1. $2500 per individual per year for undergraduate only.
    2. Family must make less than $180,000 per year.
  2. LLC (Lifetime Learning Credit)
    1. $2000 per family for undergraduate and graduate school.
    2. Family must make less than $132,000 per year.

**Remember you can’t double dip and use 529 funds and the tax credit at the same time. 

Part time jobs and work study programs

  1. Students can pay for college through a work-study program or by working a part-time job.

Loans

  1. Federal Student Loans
    1. Direct Subsidized Loans
      1. Stafford
    2. Direct Unsubsidized Loans
      1. Stafford
    3. Plus Loans
  2. Private Student Loans
  3. Personal Loans, Lines of Credit and Home Equity

 

Let’s use my son as an example to compare the cost of 3 schools presently.

State School                            Private 1                                  Private 2

COA                             $32,074                                   $66,100                                   $61,375

EFC                              $12,000                                   $12,000                                   $12,000

Need                           $20,072                                     $54,100                                   $49,375

% need met                 53%                                         87%                                         80%

Need Grants                $4,893                                     $43,772                                   $35,155

Merit based                 ??                                            ??                                            ??

Tax Credit                     $2500                                      $2500                                      $2500 

Work Study                  ??                                            ??                                            ??

College savings**       $1200                                        $1200                                      $1200

** based on saving $4,800 or $50 a month for 8 years

Monthly assist

Parents**                     $3000                                      $3000                                      $3000 

** based on normal expenditure for food and lodging if child lived at home

Monthly

Student assist**         $2400                                      $2400                                      $2400 

**based on student earning $2400 working an outside job during the year or over the summer

Cost Year 1                $18,079                                   $13,228                                   $17,120

TOTAL Cost**            $73,355                                   $43,900                                   $61,756

 

Stafford Loans            $27,000                                  $27,000                                   $27,000

 

Balance                       $46,355                                   $16,900                                   $34,756

--Younger sibling factored in year 3 of college reducing EFC

My son has shown some interest in Engineering. The average salary for mechanical engineer degree from the schools listed above are:         

Salary***                    $65,700                                   $69,100                                   $66,006          

***Salary information provided by https://www.educatetocareer.org/

As a rule of thumb students should not take on more debt than their potential first year salary.

To my surprise the college with the greatest COA is the best value overall because of the amount of aid provided by the school.

This exercise provided a huge sense of relief for me and my wife because it broke down saving for college into manageable numbers with a greater possibility of attainment.

Takeaways from the analyses include:

  1. Continue to motivate my children to excel in academics and qualify for merit based aid.
  2. Calculate EFC and shop for schools with the greatest value.
  3. Create a realistic college savings plan and start saving now.
  4. Expand the search for a college that offers the best value (that may not be public or in-state).

Hopefully this has been helpful! 

Stay tuned for future guides for academic and healthcare professionals to help them take control of their money. Future articles include: Deeper look at savings options for college planning, student loan debt and a look at ways advisors charge for their services.

Would you like some assistance with college savings planning?

Have a questions about your finances you want help with or a second opinion?

Contact me for a free consultation.

Thanks!


Chip Hill, CFP®

Financial Advisor

155 W Bell Ct

Lexington, Ky 40508

Cell: 859.948.8717

[email protected]

chillfinancialplanning.com

 

 Sources of information for this article come from Capstone College Partners, Lynn O'Shaughnessy’s thecollegesolution.com, and the college funding solutions

 

Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC).

 

*Neither Voya Financial Advisors nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.

 

Chill Financial Group is not a subsidiary nor controlled by Voya Financial Advisors.