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As tuition prices skyrocket,
alternative routes to a higher education are helping save parents and students
from future financial pain.
By Kim Clark and Penelope Wang
For parents with college-bound kids, it seems like a no-win situation. Your child is eyeing the grassy quads and Gothic dorms of Dream U. while you’re staring down at a too-small 401(k), a shaky job market and a house worth a lot less than it was a few years ago.
Meanwhile, colleges are bidding up tuition prices faster than a hedge fund manager at an art auction. According to The College Board, in-state tuition and fees at public four-year schools jumped 7.9% between the 2009-10 and 2010-11 school years, while the price tag for an education at a private nonprofit four-year school increased by 4.5%. And those with younger kids can expect tuition to continue that upward climb: By 2020, The College Board predicts you’ll be looking at a four-year bill that’s likely to top $240,000 for private schools and $125,000 at public universities. Sure, there’s financial aid, but it is not likely to keep up with tuition inflation. So long, retirement hopes; hello again, boss.
Your children will suffer too if they’re forced to start their adult lives with onerous debt. “Student loans can affect every decision young adults make: whether they can go to graduate school, buy a house, even start a family,” says Patrick Callan, president of the Higher Education Policy Institute.
It doesn’t have to be this way. Many colleges across the country are working to halt the tuition spiral by instituting innovative programs to make a college education more affordable. Meanwhile, many parents and students are making smart choices regarding their higher-ed experience that add up to savings in the tens of thousands of dollars. Here are three examples, followed by advice for beefing up your college savings.
Strategy 1: Go to a Lower-Cost College Abroad
Amanda Gesten, 19, Santa Fe
When Gesten’s parents objected to the $40,000-a-year price of her first-choice college, the University of Oregon, she looked north to the University of Victoria, across Puget Sound from Seattle. The university’s high placement in international rankings and its picturesque island campus sold her. While Victoria may not be a household name in the U.S., Gesten—a business major—thinks it will be a net plus for employers once she explains where it is and what a good school it is. “British Columbia has a good reputation for colleges,” she notes. “And I went international. I went outside the box.”
HER TOTAL COLLEGE COSTS: $115,000
ESTIMATED SAVINGS: $50,000
Strategy 2: Pay With Future Earnings
Matthew Turcotte, 19, Clayton, N.Y.
Turcotte has traded 10% of his growing Web-design firm, which specializes in sites for small businesses, to Clarkson in exchange for a full tuition scholarship. It’s not easy: On top of his classes, the business major spends at least six hours a day managing his contractors and meeting with clients. Last winter he often didn’t leave his office until midnight. But his professors give him extra help. And the president has connected him to alumni interested in hiring his company. “The college is continually checking on me,” says Turcotte. “They see this as a long-term investment.”
HIS COLLEGE BILL (FOUR YEARS): $53,000
ESTIMATED SAVINGS: $150,000
Strategy 3: Start at Community College
Ebonee Parrish, 21, Charlottesville, Va.
When her mom lost her job running a day-care center in 2008, Parrish gave up the dream of going to a university and instead enrolled at local Piedmont Virginia Community College, where she got a small grant to cover tuition and books. There, students who earn a 3.4 average in a prescribed course load can automatically transfer to the University of Virginia, which promises enough grant aid to meet all student needs. Parrish buckled down and qualified, and she’s happy with how things turned out. “I got to stay home and get more prepared for the university,” says Parrish, who is studying criminal psychology. “And I liked the smaller classes. Every teacher knew your name.”
HER TOTAL COLLEGE COSTS: $0
ESTIMATED SAVINGS: $95,000
Three Ways to Potentially Beef Up College Savings
Face it: Tuition won’t get more affordable anytime soon. So aim to save as much as you can now. If you’re considering a tax-advantaged 529 plan, try these timely tips.
CONSIDER STOCKS: The jittery economy has prompted many plans to add CDs and other fixed-income options. If college is at least a decade away, you may be able to take on more risk with your investments. A financial adviser can help you determine your best strategy.
ADJUST YOUR PATH: With age-based funds, your asset mix shifts from stocks to bonds as your child grows. Plans vary in their mix for the same ages; if your fund feels too aggressive, consider shifting to one for an older child. Utah’s plan (uesp.org) allows you to customize your path.
Investment risks change over time as the underlying investment asset allocation changes. The investment is subject to the volatility of the financial markets, including equity and fixed-income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, commodity-linked, and foreign securities. Principal invested is not guaranteed at any time, including at or after the target dates.
WATCH THOSE FEES: Competition is pushing down 529 expenses, but explore your options for further savings. While sometimes a broker can add value and is worth the commission price, you may be able to trim costs by buying directly from the sponsor or by favoring age-based funds that generally charge less than 0.5% of assets.
Adapted from the September 2011 issue of Money. © 2011 Time Inc. All rights reserved.
Investing involves risk, including the risk of loss.
To be eligible for favorable tax treatment afforded to amy earnings portion of withdrawals from Section 529 accounts, such withdrawals must be used for “qualified higher education expenses” as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes.
If your state or your designated Beneficiary’s state offers a 529 plan you may want to consider what, if any, potential state income tax or other benefits it offers, before investing. State tax or other benefits should be one of many factors to be considered prior to making an investment decision. Please consult with your financial, tax or other advisor about how these state benefits, if any, may apply to your specific circumstances. You may also contact your state 529 plan or any other 529 college savings plan to learn more about their features. Before investing, carefully read the plan disclosure document or prospectus and, if available, a summary prospectus for any of the underlying funds. Carefully consider the funds’ investment objectives, risks, charges and expenses.
Information provided is general in nature. It is not intended to be, and should not be construed as, legal or tax advice. Mercer does not provide legal or tax advice. [Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information.] Consult an attorney or tax advisor regarding your specific legal or tax situation.
For parents with college-bound kids, it seems like a no-win situation. Your child is eyeing the grassy quads and Gothic dorms of Dream U. while you’re staring down at a too-small 401(k), a shaky job market and a house worth a lot less than it was a few years ago.
Meanwhile, colleges are bidding up tuition prices faster than a hedge fund manager at an art auction. According to The College Board, in-state tuition and fees at public four-year schools jumped 7.9% between the 2009-10 and 2010-11 school years, while the price tag for an education at a private nonprofit four-year school increased by 4.5%. And those with younger kids can expect tuition to continue that upward climb: By 2020, The College Board predicts you’ll be looking at a four-year bill that’s likely to top $240,000 for private schools and $125,000 at public universities. Sure, there’s financial aid, but it is not likely to keep up with tuition inflation. So long, retirement hopes; hello again, boss.
Your children will suffer too if they’re forced to start their adult lives with onerous debt. “Student loans can affect every decision young adults make: whether they can go to graduate school, buy a house, even start a family,” says Patrick Callan, president of the Higher Education Policy Institute.
It doesn’t have to be this way. Many colleges across the country are working to halt the tuition spiral by instituting innovative programs to make a college education more affordable. Meanwhile, many parents and students are making smart choices regarding their higher-ed experience that add up to savings in the tens of thousands of dollars. Here are three examples, followed by advice for beefing up your college savings.
Strategy 1: Go to a Lower-Cost College Abroad
Amanda Gesten, 19, Santa Fe
When Gesten’s parents objected to the $40,000-a-year price of her first-choice college, the University of Oregon, she looked north to the University of Victoria, across Puget Sound from Seattle. The university’s high placement in international rankings and its picturesque island campus sold her. While Victoria may not be a household name in the U.S., Gesten—a business major—thinks it will be a net plus for employers once she explains where it is and what a good school it is. “British Columbia has a good reputation for colleges,” she notes. “And I went international. I went outside the box.”
HER TOTAL COLLEGE COSTS: $115,000
ESTIMATED SAVINGS: $50,000
Strategy 2: Pay With Future Earnings
Matthew Turcotte, 19, Clayton, N.Y.
Turcotte has traded 10% of his growing Web-design firm, which specializes in sites for small businesses, to Clarkson in exchange for a full tuition scholarship. It’s not easy: On top of his classes, the business major spends at least six hours a day managing his contractors and meeting with clients. Last winter he often didn’t leave his office until midnight. But his professors give him extra help. And the president has connected him to alumni interested in hiring his company. “The college is continually checking on me,” says Turcotte. “They see this as a long-term investment.”
HIS COLLEGE BILL (FOUR YEARS): $53,000
ESTIMATED SAVINGS: $150,000
Strategy 3: Start at Community College
Ebonee Parrish, 21, Charlottesville, Va.
When her mom lost her job running a day-care center in 2008, Parrish gave up the dream of going to a university and instead enrolled at local Piedmont Virginia Community College, where she got a small grant to cover tuition and books. There, students who earn a 3.4 average in a prescribed course load can automatically transfer to the University of Virginia, which promises enough grant aid to meet all student needs. Parrish buckled down and qualified, and she’s happy with how things turned out. “I got to stay home and get more prepared for the university,” says Parrish, who is studying criminal psychology. “And I liked the smaller classes. Every teacher knew your name.”
HER TOTAL COLLEGE COSTS: $0
ESTIMATED SAVINGS: $95,000
Three Ways to Potentially Beef Up College Savings
Face it: Tuition won’t get more affordable anytime soon. So aim to save as much as you can now. If you’re considering a tax-advantaged 529 plan, try these timely tips.
CONSIDER STOCKS: The jittery economy has prompted many plans to add CDs and other fixed-income options. If college is at least a decade away, you may be able to take on more risk with your investments. A financial adviser can help you determine your best strategy.
ADJUST YOUR PATH: With age-based funds, your asset mix shifts from stocks to bonds as your child grows. Plans vary in their mix for the same ages; if your fund feels too aggressive, consider shifting to one for an older child. Utah’s plan (uesp.org) allows you to customize your path.
Investment risks change over time as the underlying investment asset allocation changes. The investment is subject to the volatility of the financial markets, including equity and fixed-income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, commodity-linked, and foreign securities. Principal invested is not guaranteed at any time, including at or after the target dates.
WATCH THOSE FEES: Competition is pushing down 529 expenses, but explore your options for further savings. While sometimes a broker can add value and is worth the commission price, you may be able to trim costs by buying directly from the sponsor or by favoring age-based funds that generally charge less than 0.5% of assets.
Adapted from the September 2011 issue of Money. © 2011 Time Inc. All rights reserved.
Investing involves risk, including the risk of loss.
To be eligible for favorable tax treatment afforded to amy earnings portion of withdrawals from Section 529 accounts, such withdrawals must be used for “qualified higher education expenses” as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes.
If your state or your designated Beneficiary’s state offers a 529 plan you may want to consider what, if any, potential state income tax or other benefits it offers, before investing. State tax or other benefits should be one of many factors to be considered prior to making an investment decision. Please consult with your financial, tax or other advisor about how these state benefits, if any, may apply to your specific circumstances. You may also contact your state 529 plan or any other 529 college savings plan to learn more about their features. Before investing, carefully read the plan disclosure document or prospectus and, if available, a summary prospectus for any of the underlying funds. Carefully consider the funds’ investment objectives, risks, charges and expenses.
Information provided is general in nature. It is not intended to be, and should not be construed as, legal or tax advice. Mercer does not provide legal or tax advice. [Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information.] Consult an attorney or tax advisor regarding your specific legal or tax situation.
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