Strategies for the Ages
Sticker-shock survival: the right moves for families to make
The headlines are dismaying for every parent and child. Even as a college education becomes increasingly necessary to a youngster's career and financial success, college costs are soaring out of reach. Tuition prices are rising so much faster than inflation that a baby born this year could well face college bills approaching a quarter of a million bucks.
Dig below the headlines, however, and the news is at least a little less dire. It turns out that only a small percentage of students actually pay the high sticker prices of private colleges. The vast majority of students pay less than half that because they will attend public universities or receive financial aid, or both.
And even for families that can't imagine scraping together the more likely cost of $50,000 to $100,000, there are glimmers of hope. As going to college gets tougher, parents and kids are themselves toughening up: figuring out new means to generate more savings, negotiating harder-to-win extra aid from colleges, and coming up with clever ways to further reduce education costs. When then high school junior Lucie Noriscat began scouting out colleges in 2002, "I started seeing the prices and I'm like, 'Whoa!' . . . and my mom said, 'It is too expensive.' " But Noriscat buckled down at school and took prep classes for the SAT. And her father learned to negotiate with college aid officers. "You have to stay focused . . . and work hard," she says. But it paid off. Noriscat is starting her third year of a full ride at the College of the Holy Cross in Worcester, Mass.
As millions of families like Noriscat's have discovered, paying for college is doable. But there is no point in sugarcoating: It isn't easy now, and it is only going to get harder. One reason: Tuition prices continue to skyrocket. The average public university hiked its tuition for the 2005-06 academic year by more than 7 percent, more than twice the rate of inflation or wage increases. And administrators expect the price of a degree will keep soaring to help pay for faculty raises and meet student demands for ever nicer dorms and gyms.
True, more than 70 percent of private-college students now get institutional and government grants that reduce their costs by at least $6,900 a year on average. And about half of all public-college students receive grants worth about $4,000 a year. Add in tax breaks for parents and students who pay their own bills, and most students pay only about 60 percent of their school's sticker price, the College Board calculates.
But that silver lining contains a cloud. Financial aid isn't keeping up with educational inflation. And a smaller and smaller share of what aid is being handed out these days is going to students who have a proven financial need for it. Elite schools with big endowments don't have to compete for applicants and can still afford the luxury of focusing their aid on needy students. But cash-strapped public schools and second-tier private schools are increasingly deciding they can no longer afford to give low-income students all the money they need to afford tuition. Rather, many are handing out more merit scholarships to attract the high-scoring students (who are, on average, wealthier) who will help raise the schools' rankings and reputation. The rules for winning aid have become so arbitrary and unpredictable that independent financial aid counselor Bryan Ward in Austin now tells families that even if they have low incomes or their kids are valedictorians, "I can't guarantee you'll get a dime."
Do it now. Nevertheless, at almost every stage of a child's life, there are actions parents can take that will at least prepare them for the pain of paying for college. And there are a few strategies that parents and students should adopt now, no matter how old a child is or how much a parent has saved.
Take budgeting, for example. It's never too early to try one of the financial aid calculators (such as those at Finaid.org or Collegeboard.org ) that will estimate eligibility for need-based aid and the parents' "expected family contribution" to their child's annual college costs. Don't forget to multiply the EFC by at least four, since the goal is to fund a degree, not just freshman year. A student planning to attend a public university should probably multiply the EFC by at least five, since only 40 percent of those students manage to get a degree within four years.
While the expected family contribution may seem daunting, it can be tackled more easily if divided in thirds. As the sample budget on Page 46 shows, many families of newborns could accumulate one third of the net cost of a public-college education by putting aside $25 a week or so. Paying another third of the expenses while the student is in school is often easier than parents anticipate, says John Trusela, a financial adviser in San Antonio. "A teenage boy can easily drink a gallon of milk a day. That's $3 a day," or nearly $100 a month, that is freed up when a kid leaves for college. Add in reduced transportation and insurance bills, and the typical family should be able to generate a few hundred dollars a month without much sacrifice, says Trusela. While borrowing the remaining third can leave students with an uncomfortably high debt load, the monthly repayment cost is roughly equivalent to that of a new-car loan.
Saving for college is getting trickier, but some tricks can work to parents' advantage. Before anything else, families should get their other finances in order by paying off high-interest credit card debt and maximizing an employer match for a 401(k). Then they can open a low-cost 529 tax-deferred college savings account, offered by mutual fund companies such as Vanguard and TIAA-CREF. They can ask friends and relatives to register their credit cards with BabyMint and Upromise. These free services rebate a small percentage of the charges to the 529.
Finally, more parents are learning to win the new financial aid game by focusing on a college's needs rather than their own. That's how Mike Horton, a part-time farmer and full-time crop insurance agent who had nothing saved ahead of time, slashed his college bills by about two thirds. Horton's two daughters were good students and collected college credits in high school. But Pepperdine and George Washington universities also gave them big scholarships because they seek geographical diversity. They like to spice up their mix with students from small midwestern places like the Hortons' hometown of Johnson, Kan., which is 80 miles from the nearest Wal-Mart. "You just have to have a product to sell," Horton says.
Experienced parents like Horton treat paying for college like a business. And like any business, Payingforcollege Inc. should start off with some working capital. Ideally, parents should start saving for college the day the child is born. But whenever they start, independent financial aid adviser Karen Busanovich of Woburn, Mass., suggests parents augment their own savings by asking family members to forgo traditional kids' gifts such as toys, or low-yielding savings bonds, in favor of donations to a 529.
The next important milestone is the start of school. When their oldest daughter, Cameron, was getting ready to start kindergarten, David and Leah Kauffman were feeling a little cramped in their small San Antonio house. But after they did the math, they realized that moving to a bigger house in a cheaper neighborhood would end up costing them more, since they'd be leaving an excellent public school district and would probably end up sending their daughters to a private school.
The Kauffmans also used kindergarten as their launching pad for college savings. The parents were briefly tempted to enjoy spending the $300 a month they had been devoting to Cameron's day care. But they buckled down and started sending that money to a 529 account instead. "It is not like you are spending new money; you are just shifting it, so it doesn't hurt as much," says David Kauffman. And by having the contributions automatically withdrawn from their checking account, they aren't tempted to spend it.
Of course, parents should always encourage their kids' academic studies and special talents, but counselors say the middle or junior high school years are crucial. "For my friends, I recommend they talk to the child's teachers and guidance counselors," says Bernie Pekala, head of financial aid for Boston College. "If they say 'Oh, she's such a bright child, but ... ' then the child is not performing to the best of her ability" and should receive extra tutoring in subjects, test-taking, or study habits.
These are also the years that will help determine whether your student should consider pursuing any specialized scholarship such as one for, say, music or soccer. While there are always a few late bloomers who walk on to college teams, most of the money is handed out to kids who've spent years training and succeeding. "If they are joining the clubs and getting into select teams by the time they are 14 or so, you've got a chance," says Meridy Glenn, coach of the University of Cincinnati's women's soccer team.
Academics first. Glenn warns parents against pushing students too hard and creating a burned-out kid who won't get anything. Glenn is letting her own two kids explore the activities they enjoy, while emphasizing homework. "You don't want to put all your eggs in athletics," she says. The numbers bear her out: Less than 1 percent of college students receives athletic scholarships, while 49 percent get some kind of need- or merit-based grant.
By the sophomore year of high school, athletes should start researching likely schools and E-mailing coaches asking to be scouted, while parents should start estimating their chances for need-based aid by using an online calculator. If they don't have a shot, parents should start making tax moves, such as giving monetary gifts to the child, and focus on merit aid. Those who might qualify for need-based aid should increase their chances by, for example, moving savings out of the child's name and into a 529 or spending it on summer camp or anything else for the child's benefit.
Sophomores should also start preparing for Advanced Placement classes. Many colleges will allow students with enough passing grades on the AP tests to enter as sophomores, thus saving an entire year's worth of tuition. Even one or two credits might help the student finish a little sooner. If the AP classes don't work out, the student can study on his or her own for other college credit tests such as the CLEPs or DSSTs.
Early in the junior year, Annalee Nissenholtz, a college counselor at Ladue Horton Watkins High School in St. Louis, says parents should have a heart-to-heart with their child. Encourage the student to aim high, but also lay out the costs of college and the family's finances. Parents worried that a student is focusing on expensive schools should call the colleges' admissions and financial aid offices and describe their kid's grades and the family's resources. The staffers are usually happy to give a ballpark idea of whether the student would be eligible for any merit or need aid, Nissenholtz says. "This should be a completely honest process," Nissenholtz adds. "If the kid has got a 2.8 average, you should say: 'You haven't shown me that you have put forth the effort' " to justify spending very much on college. "This is a two-way street."
Students should also start spending extra time prepping for the SAT s. Kids "don't understand how important the tests are," says Cliff Neel, head of financial aid for Baylor University. A look at Baylor's aid rules will wise students up: Baylor gives acceptees who score 1110 on the SAT s $1,500 a year in merit grants. If a student retakes the test and scores just 90 points higher, or 1200, Baylor will increase the annual merit grant by $2,000 a year to $3,500. Students who rack up 60 more points to score 1260 will get $6,500 a year.
Smart juniors will also start researching private scholarships at their high school's counseling office and online at sites like that of the College Board. Early birds get a jump on the many scholarships with fall deadlines and get a head start on things they'll need for their applications such as activity lists and essays, says Ben Kaplan, publisher of Scholarshipcoach.com.
Senior year is, of course, the most critical. To maximize aid, counselors say students should apply to about six colleges: one or two "reach" schools, one or two in-state public universities, and a couple of private colleges in which their grades and test scores place them in the top 25 percent of the student body. (To save big bucks, students can spend two years at a community college and transfer to a four-year school.) They should also search out schools in which some other quality would make them a hot commodity. Girls talented in math or science, for example, might try male-dominated technical schools such as Rensselaer Polytechnic Institute in Troy, N.Y. Boys might try liberal arts colleges where males are in short supply. Students hoping to maximize aid should avoid the temptation to apply to their dream school early, since that reduces their leverage and options, says independent adviser Ward. Getting scholarships "is a matter of leverage and finding the right fit for the kid," he says. Concurs high school counselor Nissenholtz, "It is not necessarily our top kids who get the most money. Lots of times it is the decent student who is willing to look at a school where they are highly recruited."
FAFSA for all. Filling out the Free Application for Federal Student Aid (FAFSA) is also key. Studies show that hundreds of thousands of families who would be likely to get some aid miss out because they don't bother. If the child is applying to a private university, fill out the College Board's Profile form as well. Don't assume you won't be eligible for aid. Private schools are so expensive these days they often hand out need-based grants to children whose families earn more than $100,000 a year.
Seniors too busy with applications and classes to write new essays for scholarship contests can still take a few minutes to troll for contests that will allow them to use essays they've already written. "They need to develop a suite of reusable material so they are just tweaking something they have already done," Kaplan explains. Don't rely solely on Web searches, Kaplan adds. Local contests often have better odds.
Once the offers start coming in, it's time to make tough decisions. Students and parents should beware of offers with fancy-sounding scholarships that will actually end up costing them more out of pocket. Research has shown that students and families are so flattered by the award of, say, a "Presidential" scholarship that they will often pass up less prestigious-sounding (but financially superior) offers from better schools. Families should also be skeptical of offers that expect the student to contribute more than about $3,000 a year in earnings. Most private schools expect students to contribute at least $1,150 in summer earnings. And counselors say kids actually do better in school if they work 10 to 15 hours a week during the term. But any more than that hurts their grades. Also, families should be leery of any offer that includes a PLUS or other parent loan, since those don't actually reduce the cost of attendance.
If the offers aren't enough, parents can appeal for a "professional judgment review," by documenting, say, extra doctor bills or other costs that the aid office didn't take into account. Families that can't prove they have extra costs but want more aid can try negotiating. Many schools refuse to bargain. But if approached politely, some will respond. "You can negotiate with me," says Glenn, the Cincinnati soccer coach. But she warns parents against playing hardball. She'll drop a student who lies about being courted by other schools. However, if a student says, " 'If you could just make it 10 percent more, I'd love to come,' I might say, 'OK, but you've got to earn it.' "
That's the new reality for parents and students. They've got to work hard to put every piece of the financial aid puzzle together. Now, more than ever, students really have to earn their degrees.
Newborn
Fix finances First, pay off credit cards and max 401(k) match.
No toys Ask for gifts to a 529 instead of birthday Barbies.
Age 5
Do math Considering private school? Calculate the advantages of moving to a better district.
Save painlessly Send day-care money to a 529.
Middle School
Evaluate Get teachers and coaches to honestly assess your child's talents, skills, and performance.
Catch up Provide tutoring or other aid to a student who isn't fulfilling potential.
Boost Encourage--but don't overemphasize--any special talent or interest.
Sophomore Year
Eye AP Prepare for Advanced Placement classes. Enough passing grades might save a year's college tuition.
Start budgeting Try online calculators to estimate your chances for need-based aid.
Move money Those with a chance at aid can better their odds by moving savings out of the child's name. Wealthier parents can make tax-free gifts to the child.
Junior Year
Heart-to-heart Parents should encourage students to aim high but also explain the family's finances and projected college costs.
Ask. They'll tell Ask admissions and aid officers for early guesstimates of aid.
My hero Get an early start on essay contests and other scholarship competitions. Save the materials for reuse in applications.
Sit for the SAT Start prepping for the tests by the end of junior year.
Senior Year
Don't give up Fill out the FAFSA and, if necessary, the Profile. Even families with six-figure incomes are now getting aid at some schools.
Apply strategically Don't just apply early to your dream school. Apply to a few schools for which you are the dream student.
Compare apples Calculate your true out-of-pocket costs for each aid offer. Loans are not free money. And scholarships with fancy names may blind you to a better offer elsewhere.
Get more help online
More about paying for college, including the top 10 financial aid mistakes parents and students should avoid, can be found at www.usnews.com/education . You can also narrow your school search with our annual college rankings.
Breaking the Burden Into Thirds
Paying for college is difficult but can be done. Here is one strategy to cover expected tuition, fees, room and board, and expenses at a public, four-year school.
Likely cost of degree for a baby born in 2005* (in today's dollars)
Sticker Price $91,742
After-Aid** Cost $64,963
From Savings. Estimated savings per month needed to amass this amount in 18 years assuming a 4 percent return above inflation
Sticker Price $30,581
After-Aid** Cost $21,654
Monthly savings for 18 years
Sticker Price $150
After-Aid** Cost $105
From Family Income. Amount the family could try to pay out of current income each year the student is in college
Sticker Price $6,116
After-Aid** Cost $4,331
Monthly cost for 5 years of college
Sticker Price $510
After-Aid** Cost $361
From Student Loans. Estimated debt upon graduation if the money is borrowed through an unsubsidized Stafford loan at 6 percent interest
Sticker Price $36,109
After-Aid** Cost $25,569
Monthly repayment for 10 years
Sticker Price $401
After-Aid** Cost $284
*Assumes five years to graduate, since only about 40 percent of public-university students now finish in four years.
**Includes all grants and tax benefits. More than half of public-university students receive grants.
Sources: The College Board, Missouri Higher Education Loan Authority, U.S. Department of Education
This story appears in the September 5, 2005 print edition of U.S. News & World Report.