College Planning for High Income Earners
College is expensive, but worth it. Unfortunately, according to Sallie Mae, 40% of all parents pay no attention to costs when searching for a school. It is easy to get caught up in thinking their child should go to the “best” school regardless of cost, and then figure out how to pay for it later.
I have said in the past that paying for college is a partnership shared by those vested in its benefits. Unfortunately, because the cost of college is a more immediate problem than retirement and it involves our beloved children, many parents fund college at the expense of their own retirement. Rather, even for those of high income – which I will define for this article as those with incomes greater than $200,000 - it is imperative that your life-long financial security is assured prior to committing to paying for “whatever college costs” for all of your children. Ideally, high income earners will have prepared for both their financial security and for college costs, by limiting lifestyles along the way.
THE BIG PICTURE
Valuable college educations are available for all types of students at any price (even for those with high incomes). You don’t have to pay high tuitions for a good education. Smart ambitious students who aim high are likely to do well no matter where they earn their bachelor’s degree – even if it is not at a prestigious university. In fact, most students love whatever college they wind up going to. Don’t you think fondly of your alma mater? Forget the competitive game and instead focus on finding the best education and the best fit (socially and academically) at an out-of-pocket cost that can be managed by everyone.
WHAT WILL THIS COST & WHAT AM I EXPECTED TO PAY?
A college education will likely cost between $30,000-$60,000/year. For example, an in-state public school may cost between $20,000-$30,000/year whereas private school tuitions are generally $45,000-$60,000/year. These costs are the “sticker prices” and (especially for) private schools, the sticker prices are generally higher than the actual out-of-pocket costs. Why? Marketing. Parents tend to equate “sticker price” with quality. However, many private schools (if you choose wisely) will discount the sticker price (via merit aid) in order to attract desired students.
It is a very good idea to find out what the government expects you to pay for a year of college. This is what is known as your Expected Family Contribution (EFC) and should be calculated as early as possible at www.bigfuture.org. This dollar figure is important because if your EFC is $25,000 and the school costs $30,000, you will be offered financial “aid” of $5,000. Of course this “aid” will likely be in the form of loans. The EFC can be as low as $0 for a poor family or over $100,000 for a high income family. The methodology used to calculate EFC figures for millions of Americans isn’t always fair. It’s no wonder since the EFC formula is actually a political creation driven primarily by income.
The government is willing to loan you (and your student) a lot of money, but that doesn’t mean you should borrow it. I said earlier the cost of college should be shared by those vested in the benefits, but students need to give serious consideration to minimizing their share. This consideration should be done within the context of their future earnings power. For example, if a student will end up as an investment banker, they should feel comfortable borrowing more than say a future school teacher. One rule of thumb is to borrow no more than the amount of their first year’s starting salary.
Let’s assume a “high income” family of four ($200,000 of income) with one child entering college where their EFC would be about $50,000/year. Since most colleges cost the same or less, not much or any assistance should be expected. Also, there is not much advantage to attempt to lower your EFC by minimizing assets or income.
However, Todd Fothergill, a college planning consultant with Strategies for College, states that high income parents must be aware how their EFC can change. For example, if and when a second child enters college when your first is already in college, the EFC would drop down to about $25,000/child. In other words, even those of high income will qualify for help. Therefore, don’t assume if you don’t qualify for aid with your first child, that you won’t with your second child. Of course with two in college, you would still see a cash outflow of about $50,000/year, plus added debt in the form of need based “aid”. Families either must be ready for this, or must consider how to minimize the net cash outflow.
Once you have an idea of your EFC, the next step is to get an idea of the ACTUAL cost of your desired schools. Unlike the sticker price, the actual NET price of attending a school reflects the “discounts” due to financial aid and merit awards. The best tool for calculating your net price is a “Net Price Calculator”. These Net Price Calculators can be found on the website of each school or try http://costoflearning.com/. The results will provide an estimate of the net price of the chosen school AFTER grants and scholarships (i.e., free money) as well as from the Federal and State governments.
Best Practices for High-Income Parents
- Avoid the Northeast. A good rule of thumb is if there are more “cows”, you will pay less. It only takes a quick glance at a list such as Kiplinger’s Best Values in Public Colleges to see this correlation. For example, public schools in North Carolina, North Dakota, Missouri, and New Mexico cost quite a bit less than those in the Northeast.
- Apply strategically to schools where your child is most likely to receive free merit aid. Since need-based assistance is off the table, find a school where your child is in the top 25% academically. In other words, find schools that areexcited to have them. Another method of increasing merit aid is to find good-fit schools that generally offer higher amounts of merit aid. US News keeps a list of schools providing the highest percentage of non-need based aid. These schools are willing to pay for “brains” in order to improve their status
- Avoid the brand names – NYU, MIT, University of PA, University of Michigan, etc. According to Todd Fothergill, “Elite undergraduate degrees don’t hold the weight they did 30 years ago”. Prestigious brand-name schools don’t give merit money because they don’t need to. They charge more because there are folks willing to pay for the name. In fact, there is far more merit aid to be had from the schools you have never heard of in a Midwestern or Southern state.
- Look for schools with high four year graduation rates, and screen out those schools where only a small percentage of students graduate in four years.
- Other ideas include taking college credits while in high school, or using the College Level Examination Program. Many schools will give credits to kids who pass these proficiency exams.
The goal is finding the best education and the best fit while keeping out-of-pocket costs at a manageable level. Ideally, your child should know early on how much you can afford and work within those guidelines.