Planning and Paying for College

paying for collegePlanning and Paying for college is a major undertaking for most families. I believe strongly that further education is important to our success as individuals and as a society. Further education does not necessarily mean a 4 year bachelors degree for a desk job. Mike Rowe of Dirty Jobs fame recently stated in an interview “We are lending money we don’t have to kids who can’t pay it back to train them for jobs that no longer exist. That’s nut’s.”  I also encourage everyone to learn about his SWEAT Pleadge. It is vitally important to have detailed, meaningful conversations with our children and other young adults in our lives to help steer them in a mindful direction. The mistakes that can be made in this arena are too costly to just stand by and watch. With planning and hard work I graduated with a Bachelor’s degree for under $13,000.

Making a plan to pay for college:

Starting as young as 9th grade, have them make a plan regarding where they want to go to school and what for. This plan needs to be researched, and include knowing the demand for college grads int his field, the costs associated with the schools they want to go to, and a plan for paying for college. Then the young adult can compare these costs and benefits to other options, and find the best deal. In order to get a penny from the bank of mom and dad, there has to be a serious proposal that shows an understanding of costs and benefits associated with the degree. As an example, if Junior wants to go to an out of state private school to earn a communications degree that costs $150K, for a job that earns $30K a year, he needs to learn that that doesn’t make sense, having him run the numbers will teach him that. There are many skilled trades that require a 1 year certificate or 2 year degree program that offer great career tracks and are in high demand, from plastics, to welding, to nursing, there are several routes to gain education and increase wages than a 4 year degree.

Drastically reducing the financial burden of paying for college:

In -State public schools only: The first method is to insist that out of state and private schools are off the table. For the vast majority of two year and four year degrees the payback is just not there.

Two years of community college: The tuition and fees are substantially less expensive and the opportunity exists to live at home, rather than on campus, saving thousands. After transferring to a four year school, the final institution is all that appears on the degree. So if Junior does two years at community college, saving over $35,000, his final degree only states “Graduate, Michigan State University.”

Price comparison:

1 year Michigan State University 30 credits, shared room, in state: $21,764.

1 year Michigan State University 30 credits, shared room, out of state : $42,652.

1 year Lake Michigan Community College, 30 credits live at home, in state: $3,930

http://admissions.msu.edu/finances/tuition.asp

http://www.lakemichigancollege.edu/Default.aspx?DN=fa39b02e-7212-41c3-9533-681caf64db32

 

4 year bachelors degree out of state: $170,000

4 years bachelors degree in state: $87,000

4 years bachelor degree in state, 2 year community college: $51,500

2 year associates degree, in state community college: $8,000

1 year certificate program, in state community college: $4,000

Private schools and for profit schools are even mor eexpensive, Before it closed down Corinthian College was charging $40,000 for Associate degree programs.

Paying for college:

Working: This is the starting point. There is nothing wrong with requiring children to work during the school year and during college. Working 20 hours a week at an $8 per hour job in the school year, and 40 hours at $8 per hour during the summer equals roughly $10,000. Its also not unthinkable that a teenager could earn closer to $10 an hour or work more than 20 hours a week while attending school, or certainly more than 40 hours a week in the summer. Even $5,000 a year makes a phenomenal difference. I repeat: There is nothing wrong with young adults working and paying for college out of their earnings. It won’t cover everything, but it will make a large dent.

Financial Aid: Fill out the FAFSA form completely and accurately. The FAFSA calculation for “financial need” is overly complex, but understanding it and properly responding and planning for this incentive will result in a significant difference in college costs. The maximum pell grant that anyone can receive is $5,645 per year, for a maximum of 12 semesters lifetime. While the calculations for a Pell grant are complicated, there are several estimator tools online. Some basics of Pell Grant eligibility: The government determines what the estimated family contribution to education should be, based on family size, income and assets of the parents, and income and assets of the students. Retirement accounts and home equity on a primary residence do not count towards asset tests. $38,500 of other assets in exempt from the asset test as well. Even if you are certain your family will not qualify for financial aid, it is still important to file the FAFSA because many scholarships require you to do so in order to be eligible.

http://talk.collegeconfidential.com/efc/ This calculator is up to date and provides detailed instructions.

http://www.finaid.org/calculators/finaidestimate.phtml Note this calculator uses outdated numbers, but it shows the formulas for how financial aid is calculated.

Tax incentives:

The American Opportunity tax credit can be claimed for 4 years, per student for a maximum of $2,500 per year. The first $2,000 of eligible expenses receives a $1 for $1 tax credit. The next $2,000 receives a 25 cent for $1 tax credit. 40% of this credit is refundable, so even if no tax liability is owed, the credit holds an advantage. There are income limits on this credit. This tax credit alone, used for 2 years of full time study at Lake Michigan College covers 62% of the cost. If you spread 60 credits out over 3 years at 20 credits a year, it would cover 82% of the cost, with 1 year of credit remaining.  This means each year the student would only have to pay a net of $500 per year, for 3 years. This strategy works best for a student who is only planning on earning a 2 year degree, for those planning on earning a four year degree it makes sense to get the full credit each year, by attending full time, incurring total costs of $4,000 for 4 years to maximize the credit. Using this credit as part of a college payment strategy can result in a free associates degree.

http://www.irs.gov/uac/American-Opportunity-Tax-Credit

The Lifetime Learning tax credit provides a 20% tax credit for up to $10,000 in expenses. This is per tax filer, not student so parents with multiple school aged children are still limited to a total of $2,000 from this credit.

http://www.irs.gov/publications/p970/ch03.html

Tax Deduction: If a child attends school for more than 4 tax years, then the Tuition and Fees deduction can be used, it actually can be used any year, however at any tax rate, the American Opportunity tax credit is a better deal than the tuition and fees deduction. Up to $4,000 can be deducted in a year. There are income limits on this deduction

http://www.irs.gov/taxtopics/tc457.html

NOTE: Only one tax credit or deduction can be taken in the same tax year for the same student!

Scholarships: Scholarships are a great way to cover some college expenses. The majority of scholarships do require financial need be demonstrated. Many are for specific majors, and will require essays to be considered. Scholarships that are school specific (and for smaller schools), relatively low amounts, and require essays are applied for by fewer total students, so that is where to apply, rather than for large national scholarships, where the odds of winning are lower.

http://www.lakemichigancollege.edu/Default.aspx?DN=100eea43-fbb3-4816-acaf-e62f1c2c9611

http://www.fastweb.com

Parents work/child’s work benefits:

Many jobs offer benefits to employees and their children for college courses. Some will pay a percentage off the tuition and fees if a certain GPA is maintained, while others may offer scholarships that are only available to employees of that business. Some part time jobs available to teenagers and young adults also provide tuition assistance. UPS is famous for its program. UPS part time package handlers receive up to $3,000 a year in tuition assistance for a lifetime total of $15,000 towards paying for college.

https://ups.managehr.com/earn-and-learn-program.htm

National Guard/Military:

One of the driving reasons to join the military is the excellent benefits that are offered, the most notable being the GI Bill, which can cover 100% of all tuition and fees for 4 years of in state public school, or a max of $19,198 per academic year for private or foreign schools. Additionally, the GI Bill may provide housing assistance while attending school. http://www.gibill.va.gov/benefits/post_911_gibill/index.html

Promise Zones: In Michigan we have several school districts that are in promise zones, Benton Harbor school district, which includes charter schools in the area, is in a promise zone. This particular promise zone guarantees to fully cover 2 years of community college. The student must apply for financial aid, and any amount that is not covered by a federal pell grant will be paid by the promise zone, which is funded through donors and tax increment financing. Not only does this cover those first two years, it allows for 4 more years to be claimed on the American opportunity tax credit, since the first two years expenses are covered. It is possible, probable, and ADVISABLE to take an extra semester to graduate to get a $2500 credit for 3 years.

http://www.promisezones.org/

Dual Enrolment/Early college: Many high schools have partnerships with community colleges to help give students a head start. High schools will often pay for the tuition and fees for these courses, and students can take courses that satisfy both high school requirements and college requirements, allowing them the opportunity to go as far as finishing an associates degree while in high school, at little to no cost to the parents. Lake Michigan college has a program set up specifically for students to graduate from college at the same time as high school at the Bertrand Crossing Early College Academy. Only students from four area high schools are able to attend at this time, Berrien Springs, Niles, Buchanan, and Brandywine.

http://www.lakemichigancollege.edu/Default.aspx?DN=e09a760c-08a7-4ff9-8a13-46f21115de76

 

Parental cash flow and savings: College funding for children is a “nice to have” situation. It is more important to pay for retirement and stay out of debt than to fund college. If it isn’t possible to do, so be it.  My personal plan when my children reach college age is to cut my retirement savings down to 15% and fund what I can out of cash flow, while allowing them to live at home rent free. There are a couple decent tools for saving for college, coverdale education savings accounts (ESA), 529 plans. A coverdale account works like a Roth IRA. Contributions of up to $2,000 a year are non-deductible, but withdrawals for education expenses are tax free. Withdrawals from these accounts can be used by a student in the same year as the American opportunity tax credit, or the lifetime learning tax credit, but not for the same expense. Example: $6,000 of college expenses. The first $4,000 receives the American opportunity tax credit ($2,500) and then find the remaining $2,000 from the ESA. Money can only be added to the account until the beneficiary is 18, and at age 30, distributions must be made. http://www.irs.gov/uac/Coverdell-Education-Savings-Accounts.

529 plans are state sponsored, tax advantaged plans for college savings. 529 plans are viewed as wer controlled, not beneficiary controlled. Every state’s 529 plan may be different, but one advantage to this is that you can use any state’s 529 plan, not just the state in which you reside or plan to have a child attend college. Money is put in after taxes, like an ESA, and can be withdrawn tax free for qualified expenses. 529 plans allow for much larger sums of money to be put away than an ESA. 529 plan beneficiaries can be changed, so if an older child decides not to go to school, the beneficiary can be change dot his younger siblings or to his future children.

http://www.savingforcollege.com/intro_to_529s/what-is-a-529-plan.php

https://www.johnhancockfinancialnetwork.com/blog-entry/the-abcs-of-using-529-plans-for-estate-planning

 

Student loans: Student loans have some significant advantages and disadvantages. No where else in the marketplace can an 18 year old kid be handed tens of thousands of dollars on a charge card with no collateral and no income. The Student loan program in this country defies the rules of economics through its perverse incentives for lenders (and borrowers) that includes the fact that they are not dis-chargeable in bankruptcy. Because our society pushes college education as the key to financial success, especially in the form of a 4 year degree, parents and students are willing to borrow the money to pay for the investment, even if the break even point, or cost benefit analysis is not calculated. Student loans are often used to pay for far more than tuition and fees. Room and board and “living expenses” are also lent to students. When paying back student loans, the minimum payments are often so low that students will be paying on them for decades, accruing total interest charges that often exceed the original principal balance.

Federal student loans are limited to $31,000 aggregate for an entire degree program for dependent students and $57,500 aggregate for independent students. The amount available per year increases with each year, but the total can not exceed these limits

http://studentaid.ed.gov/types/loans/subsidized-unsubsidized#what%27s-the-difference

current interest rates on federal student loans are 3.86% for undergrads and 5.41% for graduates.

Private student loans will offer larger amounts to borrowers, will have higher interest rates, and will often require a co-signer. A Note for all parents: If you decide to cosign for a student loan, it is imperative to take out a life insurance policy on the student. There are many horror stories of parents who co-sign for $100,000 in loans, the student dies, and the parents now owe the money, without the education to get the jobs required to pay off such a burden. A $100,000 policy for a 20 year old student can be purchased for around $10 a month.

Student loans are a last resort for paying for college and I highly recommend not getting them at all. It is easy to spend other people’s money, and not realize how much will ultimately be owed. Without having a clear and realistic degree and career plan, student loan debt is dangerous. There has to be a substantial payback in a high demand field for it to be worth it to incur student loans. Doing everything else to avoid student loans comes first. Living at home while attending community college, working while in school, applying for financial aid and scholarships, taking an extra year to graduate, all come before getting student loans.

Currently over $1 trillion is owed in student loans. There has long been a disconnect in many areas of further education between the cost of a degree and the potential earnings of the career.  This has to be understood and calculated before pursuing further education.  We have overproduced graduates in degrees that have low demand and low payback. For new students it is important to choose a career they love, but also one that is in demand and can earn enough money to justify both the price of the education and the opportunity cost of going to school, instead of work, as the focus for however many years.

CLEP exams: CLEP exams allow students to essentially ‘test out’ of a class.  CLEP exams cost around $100 and the credits gained from them can range from 3 credits up to 16 credits, depending on the exam, the schoo being attended and the score received.  CLEP exams are great for basic courses and for electives.

Rent Texbooks: Renting textbooks can save thousands of dollars over a college career.  College texts books are by and large a scam.  Always comparison shop buying used vs. new at different stores and check out rental options as well.

In order to pay for college for my four kids I am utilizing a combination of these methods.  What is your plan to pay for college?

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. Check out the Action Economics archives section for all past posts.

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