Updated: May 3, 2013 12:14PM
Originally published: December 12, 2005
Families of high school seniors will have some serious discussion about money and colleges in the coming weeks. For many middle class families, the discussion should revolve around which college the family can afford. And that’s often the most difficult discussion of all.
That point was brought home to me recently in an e-mail I received from the father of a high school senior. His child, he explained, is an excellent student, and has applied to some top colleges. He and his wife have saved some money, but not enough to pay tuition at the elite colleges their son has chosen. And they have too much in the way of assets to qualify for needs-based federal financial aid. So they’re considering alternatives.
Among the possibilities: a home equity loan, on which the interest would be tax-deductible; a “PLUS” loan, which is made to parents of college students, and is not based on need; or a withdrawal from their IRAs.
All have drawbacks. A home equity loan typically has a floating interest rate, and could quickly become very expensive. A PLUS loan is made directly to parents by private lenders, and there are no federal forms to fill out. But with most PLUS loans, repayment must start immediately. Borrowing or withdrawing from a retirement plan could severely undermine the parents’ own retirement, as well as costing potential penalties and interest.
And then I raised the real issue -- an issue that many middle class parents simply ignore: What if you tell your child you simply can’t afford the more expensive college?In this era where we all want everything now, I’m suggesting that it might be possible to get just as good an education at a less expensive school.
I asked the father to round up the costs for the two schools at the top of his son’s list, and for the state university, which happens to have an excellent reputation, and gives quite a discount to home-state residents.
Here’s what the cost comparison looks like for the two schools best known for turning out grads in the student’s chosen discipline, and a look at the cost of the state school:
Prestige school: tuition, $31,644; room/board, $9,873; books, supplies, $1,419; plus personal expenses and transportation. All-in cost: an estimated $44,592 per year.
Well-regarded school: tuition, $16,086; room/board, $6,540; books, supplies, $920; plus similar costs for personal expenses and transportation. All-in cost: an estimated $26,226 per year.
State university: tuition, $8,670; room/board $7,176; books, supplies $950, plus transportation. All-in cost: an estimated $18,452 per year.
Then multiply these costs by the four years of college, and add a small factor for inflation. Suddenly the numbers, even at the least expensive but still excellent state school, are staggering.
Then multiply by the number of children in the family.
If you want to learn more about college loans and financial aid, I suggest you go to the Web sites www.Finaid.com or www.CollegeBoard.com, where you can learn just about everything you’ll need to understand college costs, and the possibilities of getting the money to pay for your child’s education. You can use the calculators, and even be connected to the scholarship search offered by www.fastweb.com, one of many sites that can raise hopes of finding “free” money.
The real question
But eventually you’ll have to face the realities. Students who take out loans to pay for their education will start out mortgaged to the hilt, even before they begin their careers.
Parents who go into debt to pay these costs may find they have no possibility of retirement. And those graduates aren’t likely to offer help for aging parents.
So, maybe it’s time to ask the real question: Is it worth it?
Certainly, a college education is not only worth the expense, but is an absolute necessity in this new century. But, is it worth it to pay top dollar for the most prestigious college? That’s the real question parents and students should ask. And when enough people say “no,” then maybe those institutions will learn one of the basic lessons of capitalism: In a free market, competition lowers prices. That’s The Savage Truth.
Terry Savage is a registered investment adviser and the author of the newly published The Savage Number: How Much Money Do You Need To Retire? (256 pages, Wiley, $24.95).