Knowing the true cost of college

College tuition and other expenses related to post-secondary education remain some of the most important investments U.S. families manage. But doing so is growing increasingly difficult, not only due to the generally high cost of tuition today, but also because of the many forms of financial aid and other programs that parents need to sift through. At the end of the day, the primary obstacle faced by those who want to save for their child's education is that no one really knows for sure how much it will cost.

Sorting through the options parents and prospective students have as they begin their quest to build a great college savings fund, it's possible to get a better idea of these costs that aren't always clear at first.

As The New York Times financial columnist Ron Lieber writes, paying for college has never been more complicated, regardless of how expensive it turns out to be for a given family. That's because while most students utilize some form of financial aid to offset tuition and other expenses - either from their school, another organization or public programs - it's rarely clear how this will all shake out until he or she is less than a year from their first semester of college. 

One example of the shifts in the college financial aid system is evident in what's known as merit aid. This is the financial aid provided to students from the institution itself that effectively reduces what they will pay in tuition each year from the school's "list price." At some schools, at least some merit aid is awarded to every student in attendance, while others have very strict and specific rules dictating who qualifies for certain discounts. The problem, Lieber wrote, is that none of this information is publicly available, and the methodology behind merit aid determinations varies widely from one college to another.

The result, for parents and students, is that saving for college becomes a minefield of uncertainty and confusion.

"It's frustrating bordering on maddening," wrote Lieber, who was also mired in the process of enrolling his own children in college soon. "Shouldn't we have as much data about merit aid and discounts as we do when buying a home or a car?"

CollegeKnowing the true cost of college can be difficult until tuition bills come due.

Perhaps thanks in part to his status as a nationally syndicated financial columnist, Lieber was able to get hard answers to these questions from a few schools: Mount Holyoke, Simmons, Smith and Wellesley Colleges. Each of these are small institutions in western Massachusetts that primarily enroll women in undergraduate degrees. But despite their many similarities, Lieber found each school distributed merit aid differently.

Only two of the four, Mount Holyoke and Simmons, provided Lieber with all the data he requested. At Mount Holyoke, the "list price" for annual undergraduate tuition during the 2018-2018 school year was nearly $66,000. However, school admissions staff told Lieber that only 22 percent of its students actually paid that price, while 12 percent received merit aid from the school. The average student receiving merit aid from Holyoke earned a grade point average above 4.0 as well as above-average SAT scores.

Meanwhile, the Simmons admission department told Lieber that every one of its students received some merit aid in the 2017-18 academic year, and none paid the full tuition price of almost $58,000 per year. The average student receiving merit aid at Simmons had a lower GPA and SAT score than at Mount Holyoke, but there was no information about how much those discounts usually amounted to.

"I believe I speak for most families and applicants when I say this: It should not be this hard to get basic information about what kind of discounts you might get from a school," Lieber wrote.

Developing a college savings plan

The takeaway for college savers with all this in mind is that they may need to rethink how they go about this task. For example, the first instinct many have when it comes to saving for college or another far-off financial goal (like retirement) involves setting a firm dollar amount. But this is rarely the best strategy for the job because we don't usually know what that endpoint should be, as Lieber found, nor do we really know what it will take to achieve it.

An alternative college saving strategy uses a monthly goal derived from an ideal endpoint given the circumstances. Let's say you want to start saving for a newborn child's college tuition - that gives you 18 years to build up a sizeable fund. Many financial advisors recommend opening a 529 college savings plan for long-term investing, since these accounts can grow tax-free and withdrawn without tax to be used for qualified education expenses. According to The Balance, monthly contributions into a 529 plan could be as low as $165 to cover most of the cost of the average tuition at a public, in-state university, as long as the family begins making these contributions in 2017. While this may sound difficult, remember that the benefits of a 529 plan mean this is only half the amount needed to save using a traditional savings account, at current interest rates.

Finally, savers can adopt a strategy that uses monthly savings goals based on what they can afford to pay in tuition. This will obviously be different for every family, but the Lumina Foundation recommends what it calls "the Rule of 10 formula" to break this down. Based on the Rule of 10:

  • A family should save 10 percent of their annual discretionary income in a tax-advantaged education savings account. For the average family of four in 2017, any income above $49,200 per year could be considered discretionary, according to the Lumina Foundation.
  • The family would save at this rate for 10 years.
  • The family member attending college would work 10 hours per week during school to supplement savings.

After taking advantage of financial aid and scholarships, these plans should put parents and students on a path toward sustainable college savings goals.

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