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    Feb 2008

    Default College Funding-Ten Things I Learned

    I had the opportunity, to research the college aid process as my own children approached high school graduation but I found I was unable to find a down and dirty guide for someone who is ‘a’ middle class and ‘b’ whose child is not a math prodigy, or a sports star nor one or ‘c’ meets a unique racial group. I then decided to write down my own ‘Ten Guide Points for Funding College’ in hopes that it might help some other person. Most college aid web sites and books seem to have a bias in promoting their site/book which is (are) supported by their advertisers. Also I found most of the scholarships offered have a very narrow focus and often offer small amounts of $500 and for which 10,000 people are probably competing for.
    The cost of educating a child at a college or university appears to be roughly $30,000 per year (tuition, books, room and board) plus or minus $5,000 depending on the institution. Thus the actual cost for a year of college in both private and public schools is about the same except for the exclusive universities which must pay their faculty much higher salaries. The difference is that state supported universities subsidize the cost of educating a child to the tune of roughly $12,000 per year plus or minus. If one wants to attend a college as an out of state student then you have to pay about $30,000 annually which represents the full cost of educating a person. The cost to educate a child at a private school also is roughly $30,000 per year but the full ticket price often exceeds $40,000 per year but this inflated cost is used either help subsidize other students or as a marketing gimmick to make it appear that the college is giving you a great discount on your child’s education.
    Point Number 1: First of all you will almost never qualify for a PELL grant if your income is over $50,000 per year. So unless you are a professional working for a low salary and assuming your spouse does not work, you will probably earn too much to qualify for any federal grants. The PELL grant formula is being modified but the changes will not take effect for years and conveniently enough the new formulas for aid will be dumped on the next president and the next Congress to fund. Second, I found for example, that the president keeps touting how much more he has allocated for financial aid for students. However, on close examination you will find that this increased aid is in reality just more ‘guarantees’ for student loans. In other words increased federal aid for students is really in the form of federal backing for student loans and not really any actual money. In other words the government is backing your debt by paying the interest on the student loan while Johnny or Jane is in college and also during the 6 month grace period after they graduate from college.
    Point Number 2: College aid is basically divided into either Merit or Needs Based tuition assistance. As far as institutional need based aid-the college itself is usually more liberal in awarding grants than the government. But once again most couples who earn more than $75,000 together will not qualify for a university needs based scholarship. Note, the 75K figure used by universities is a little higher than the federal figure. But the truth behind the scenes is that the college will use part of your tuition payment to subsidize other students. At the public university my daughter is accepted to, 18% of all tuition and fees paid for by students is used to grant other students financial aid! Let’s just keep screwing the middle class! With regard to merit aid: this is awarded to students who have high SAT scores and/or were high academic achievers or superior athletic students. This is where it becomes critical for a parent to have been involved with their child’s education process so that they have taken academically rigorous courses as well as an SAT prop course to maximize their academic achievement level. Many SAT prep courses guarantee a 200 point increase in PSAT scores. The cost for attending an SAT prep course can run $800 or so. But that is very cheap if it gets a student an $8,000 annual academic scholarship for 4 years. In short a merit scholarship is almost the only way a middle class child will qualify for anything from a college unless they receive a sports scholarship or if they have excelled in some other talent area which the college is willing to pay for.
    Point Number 3: The real cost to educate a child needs to be examined in more detail. If one applies for and is accepted to a private college, I found that the school will try to lower the cost of the education from roughly $42,0000 per year down to roughly $30,000 per year which appears to be the actual annual cost to educate a child. That is, unless the college suspects you have deeper pockets and that they can get away with making you pay the full sticker price. The extra money you pay above the $30,000 will be used to help subsidize other student’s educations. If one is accepted to a public university then you will pay the state subsidized rate for the education as allocate by your sates legislature. Most states seem to figure you should pay roughly $18,000 per year plus or minus books and some personal expenses. One should really think twice about passing up on a public university education as you have already paid a lot of state income taxes and sales taxes. For those few states which do not have income or sales taxes, you will probably find that a portion of your property taxes were being sent to the state. Consider this also, that you will have to keep paying more taxes into the state in years to come. Sending your child to a state university is one of the few ways you have to legally recoup some of the money the state has been gouging out of you over the years.
    Point Number 4: Have you ever heard of ‘out of state bragging rights.’ It seems that many seniors (and their parents) are jockeying for bragging rights about which college they are going to. By popular consensus, out of state schools are always deemed to be ‘better than in state schools and private schools are, as a class, judged to be better than all public schools. All of this ends up becoming sort of its own urban legend or suburban legend to coin a new term. Thus most students want to attend an out of state college so that they can have bragging rights (or put down rights) to other students about such and such college that they are going to. The problem is that the students in New York are saying that the schools in Pennsylvania are better and the students in Pennsylvania are saying that the schools in New York are better. It is all a scam, a suburban myth. Each state university has a target quota of out of state students which is factored into their annual budget because they know the out of state student will pay the full cost of the education. It seems that many parents feed into this whole out of state gobbeldy gook and the parents are willing to go $100,000 into debt just so that Johnny or Jane can have 6 months of bragging rights during their senior year. $100,000 of debt for 6 months of bragging in high school seems like a lot of money for some hot air!
    Having attended both public and private colleges I found that neither had an ‘edge’ on the quality of the coursework I took. In fact, through my research I found that often times one gets the undergraduate best education at a non-research based university for the following reasons; at a non-research based state university the professor’s goal is to actually teach. Thus, the new freshman is actually going to have a college course taught by a real professor. In research based universities, the professors are rewarded for publications and their ability to bring in more research grant money to the school. Hence, the professor’s focus is on fund raising with teaching undergraduates a task left relegated for the grad student and if you’re lucky you get one who speaks English. In other words the quality of the education can actually be much better in a state supported university devoted to teaching.
    Point Number 5. Total college costs are often underestimated. Not that many students are finishing their education in just 4 years. This actually may be because computers and word processors have made it much easier for professors to assign even more work. Whatever, the reason, Johnny or Jane will in all likelihood spend 5 years in college. Make sure you factor in that 5th year when estimating college costs AND also factor in some extra money for inflation. In other words, the cost of attending college will be much higher during one’s senior year than when one first started their freshman year. Hence the guaranteed aid package from the private school may end up covering a lot less by one’s senior year than it did during one’s freshman year. Then one has to add in incidental expenses, travel to/from home, cell phone expenses, and books, pizza night and on and on. You will have to decide if you want your child to work while in school which will presumably take away form their study time.
    Point Number 6. College savings plans, 529’s, Coverdell’s etc…Savings plans are great and they will probably be your major college funding salvation. I found that time and compounding interest are the real keys. One should automatically budget money for a Coverdell IRA or other investment vehicle from the time the child is born. It should be considered an expense just like diapers. In fact, one can theoretically be putting college money aside in anticipation of a child’s birth and then open up a college account once the child is born. In reality, college savings investments are basically a ‘tax’ that you have to pay to get your child into school with the government providing a tax free vehicle for you to save in with money that has already been taxed once by the government. You might ask that if college savings plans are basically a tax then why don’t we have a European system where school costs are low and income taxes are high? Here is the real difference; if you start saving when a child is born you only have to save for 18 years for each child and then you are done. In other words I would rather be stuck with a ‘stealth tax’ for 18 years than for al 45 years of my working life. At least the money is in my own name. Can you imagine what would happen if we all had to pay a separate ‘education tax’ like Social Security? How long would it take before the politicians plundered that money and divvied it out to special interest groups or a pay raise for themselves? The take on all of this is to keep your money in your own name and use self discipline to fund your child’s investment education fund.
    Point Number 7. Make sure Johnny or Jane have researched employment opportunities before they pick a major. These days adult children living at home with their parents, is a very frustrating phenomena nationwide. They often cannot afford to move out, even though they are college graduates because they do not earn enough. While I am sure that majoring in Greek Letters is a fine major, I have not seen any help wanted ads lately requesting their services. There will always be a few opening for those Greek Letters majors but not for most of us who have to work. The bottom line is do not pay a lot for a little. Often times a student can find a major that will give them employment and also get a minor in some esoteric interest combining the best of both worlds.
    Point Number 8. High School guidance offices are often more interested in getting your child accepted into a college versus figuring out if they will have enough money to pay for it. Ensuring that the child is getting into a major that will grant them employment is even further down on most high school guidance offices list of priorities. Often times guidance offices are evaluated on how many children get into college-period. So all of the other parental concerns or factors are of a secondary concern. This is yet another place for parental involvement. Do yourself a favor and set up an appointment with the high school guidance officer to discuss all the other factors affecting their child's decision so that the student is not dreaming of some out of price Ivy Tower School and you as the parent become the bad guy because you can ‘only’ afford the state university. High School guidance counselors can afford to dream with the student because they do not have to pay the bill.
    Point Number 9. College financial aid offices are often really in the business of ensuring the college gets its money. College financial aid offices are often more like loan consolidators versus actual aid offices. In other words, the school’s financial aid office is there to look out after the finances of the school. Thus they basically are there to help parents find loans, payable to the university, to fund their child’s education. There is a wide gamut of loans available for parents to borrow from. Roughly speaking, college financial aid offices will basically allow a parent to borrow $41,000 per year to fund their child’s education. If a parent borrows 41K per year for 4 years that adds up to about $160K. And if a child has to go for a 5th year they are looking at a cool $200K in debt. That is a lot of shekels!
    Point Number 10. Price of tuition does not translate into quality of education. My research showed that obtaining a bachelor’s degree from a top university is only helpful for a student in getting their first job. After that employers seem to be more interested in what professional certifications one has obtained and the depth and breadth of a person’s job experience. In other words, if a student graduates from a lesser known school but then in turn is aggressive and competitive with their job experiences they will quickly outshine the complacent graduate from a top university. The up and comer can then begin to seek out ‘OPM’ or other people’s money to fund their graduate degree. If one works for a company and has proven oneself, they will often find that the corporation will fund their masters. Then that Ivy League education begins to look much more affordable on the graduate level with someone else picking up the tab.
    I have summarized what I learned in the college funding process. I found that if one wants to get their child through college without a lot of financial grief, they should start saving when the child is born, stay involved with their child’s education to ensure they are taking a rigorous college prep curriculum, and strongly consider that child attend a state university or college. Do not get rooked. Make sure your child picks a major that will lead to employment and plan on your child taking 5 years to finish the major.

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