Thursday, November 10, 2011
Houston Family Lawyer Discusses The Expanding Higher Education Bubble
According to the most recent College Board Annual Survey of Colleges, the sticker price of a college education keeps rising, faster than the price of groceries, health care and almost everything else in the basket of goods used to determine the Consumer Price Index (CPI). In the last 10 years, in-state tuition and fees at public four-year colleges increased 5.6% annually on top of a CPI growth of 2%. The average estimated total expenses for most public in-state four-year students (depending on the state) vary in the astounding range of $65,000 to $90,000.
S0, that means that if you were blessed with the birth of a child recently, you will need to save $430 monthly to pay for in-state college tuition, fees, room and board. Double this rate to cover the full costs at the average private institution. And this does not even include money for a cell phone, pizza, room decor or other stuff that college students deem "necessities."
Now it's true: most students do not pay full price for college. In 2009-10, undergraduate students received an average of $12,894 in financial aid, split almost equally between loans and grants. Grants are the most attractive because students are not saddled with a repayment plan after college. Federal grants make up 26% of total aid. Institutional college grants account for 17%, state grants for 6% and private and employer grants (scholarships) for 4%.
But that has not stopped the fact that students are graduating with larger debt loads than they were 10 years ago. This is one of the driving factors of the recent-graduate-laden Occupy Wall Street movement. Public four-year college borrowers graduate with an average of $19,800 in debt; their nonprofit private college counterparts graduate owing $26,100. This private college debt is 17% more than it was 10 years earlier, even after accounting for inflation. In addition, a growing percentage of all college debt is unsubsidized and begins accruing interest immediately.
Perhaps there are some good things which are shaking out here. That is to say, degrees might have to be evaluated a little more closely -- that anthropological art history degree might should be scrutinized a little more, yes?
So, students will have to make smarter education choices. Today's global marketplace places more value on hard skills such as engineering, computer technology, teaching and finance. Technical degrees and certificate programs will become commonplace. A liberal arts education will likely diminish in popularity and become more focused at the elite institutions. More students are likely to begin their education at lower cost community colleges and complete a four-year degree at schools that specialize in their concentration.
Parents may feel overwhelmed about the amount they need to save for college. But college education is one of the two lifetime investments for which we approve borrowing money (the other is a home mortgage). Students should plan to graduate with a debt load no higher than half of what they can reasonably expect from their first year's salary. For example, those with a starting salary of $40,000 should keep their debt at or below $20,000. Thus graduates can dedicate 10% of their annual salary to school debt and pay it off in five years.
New parents who are able should immediately begin saving $430 a month for college. Alternatively, a onetime $50,000 investment should cover tuition, fees, room and board at an in-state college 18 years from now. Yes, this is pretty scary. But there's other options...
Giving a child the gift of a college education and a debt-free start to adulthood is one choice. Other parents believe their children should participate in financing their college education and can apply the 50/50 savings approach. Parents commit to saving half of the money needed, and their children commit to the other half. Students participate by working hard in high school, applying for scholarships, taking summer jobs, seeking out work study opportunities and accepting reasonable loan levels.
The support of grandparents can help tremendously. The vast majority of the college accounts that I have seen are owned and funded by grandparents. Instead of buying the latest gadgets for their grandchildren, they make annual contributions to a college savings account. If the grandparents own the account, it has the added advantage of not being included as a resource on the student's financial aid forms -- and that is a beautiful advantage, trust me!
One last thing: I am not a stocks advisor, but--I do NOT recommend prepaid college tuition plans. At best, they tend to match college inflation, and if used at an out-of-state institution, returns are based on money market rates, which are abysmally low right now. Even worse ... who knows? This bubble may just burst, and you don't want to have locked into a tuition which might fall through the floor on its own some years from now.
I do hope this helps, if it didn't scare you too much! Let me know if there is anything I or my team can do to help. As you can see, both with estate taxes and family finances, we make it our mission to think ahead on your behalf!