Sending a kid to College? - Save 95¢ or borrow $3 for one dollar of tuition? By Christina Mae Olson, CFP®
Got kids? Got grandkids? Do you want to help them pay for college? The cost of a higher education is increasing at an alarming rate. The average annual “inflation rate” of college tuition is roughly 6%. Tuition and fees at UW – Madison this last school year was $7569 and UW – La Crosse tuition and fees averaged $6650. Annual increases of 6% would put the cost of college at UWL starting in 2022 at $62,049. If you have a 5 year old – they would be entering their freshman year in 2022. It’s nice to think that you might have 13 years to save for your kindergartener’s college education. If you are lucky enough to earn a 5% annual return on your money you would only have to save $282/month to be able to afford their tuition.
Oh, did I mention that the “total cost” (tuition, fees, transportation, room and board, extra curricular program costs, etc.) usually more than doubles the cost of college? You could need $124,000 in 2022 for your 5 year old to attend a state college and live on campus. Plan on saving $551/month to fund that plan! Split it with all the grandparents and it would be pretty easy meeting that goal.
Current costs at Viterbo are estimated at around $20,000 (living off-campus). St. Olaf 2008-09 tuition was $43,700 (living on-campus). What about Ivy League? $420,000 for four years starting in 2022!
The best way to pay for college is, of course, to pay cash up front for everything! It is so much better to save and spend a dollar than to borrow and pay back a dollar with interest. How many of you 40 or 50+-somethings out there are still dutifully making payments on your ancient student loans? Parents and grandparents of young children have the advantage of time on their side. If you save just a little bit now and every month until they go to college – you could realistically be able to pay for the whole thing out of your savings! Imagine, no student loans to pay off after graduation.
Get this: If you need $124,000 in 13 years – you can accumulate that amount by saving $551/month (earning 5% interest). That’s 156 months of payments. You save 95¢ to get $1. You could, on the other hand, borrow $124,000 in 2022. You can always get student loans, right? You could borrow $3 to get $1. BRILLIANT! If you borrow $124,000 at 5% you will have a monthly payment of $526 but it will require 956 months to pay it off. It will take you 79 years to pay off that student loan. You’ll be paying $379,550 in just interest on that loan or more than 3x the cost of college! If you amortized this student loan over 30 years, like a mortgage, your monthly payment would be $665 (only 360 months of payments)! Monthly payments over 15 years (180 payments) would be $980. Ugh. No matter how you look at it – saving up front and paying in full is always better.
Your child can always apply for grants and scholarships which won’t have to be repaid. S/he can work during school to pay some of the costs. S/he can live at home to economize. You will have other options for cutting back. In 2009 you have some nice tax breaks. There is the American Opportunity Tax Credit and the Lifetime Learning Tax Credit. You can deduct some tuition costs (if you don’t take the other credits). Student loan interest is tax-deductible up to $2500. President Obama is trying to make college costs more affordable so we’ll have to see if other incentives develop in the next few years.
How can you save for college? First, the Section 529 College Savings Plan. If you contribute to a 529 plan in Wisconsin (EdVest or Tomorrow’s Scholar) you can deduct up to $3000 of your contributions from your state income tax. 529 funds grow tax-deferred and will be tax-free if you withdraw them to pay for college expenses. Pre-paid tuition plans allow you to pay for future tuition at today’s rates. The Coverdell ESA (education savings account) allows a $2000 annual contribution. ESA funds grow tax-deferred and are tax free if spent on higher education expenses. US Series EE Savings Bonds can be purchased now and redeemed tax-free if spend on college expenses.
There are rules to follow in all of these special savings plans. There are parental income limits. Most college savings plans allow you to change the beneficiary if your child does not end up going to college. The most important thing about paying for college is that you should start saving for it NOW while time is on your side. Saving a dollar is always more cost effective than borrowing a dollar!
Next month I’ll offer suggestions on how to find LGBT college grants and scholarships.
Chris Olson is a licensed financial planner with a fee-only practice. You may contact her at CMOney@centurytel.net or 608-525-9818.
If you have comments on this article, please send them to Chris at the email address above, NOT to the LGBT Newsletter.