Saving for college should start early to maximize compounding
- Take advantage of college savings plans offered by your state. The contributions grow tax free for your child to use.
- Some states offer a tax deduction on state taxes on your contributions. In my state for example you get a $5000 state tax deduction so it’s almost like free money.
- You put in post tax dollars. Then you pay with tax free gains dollars. Wohoo.
- The longer the time period you save over the greater the compounding effect on the gains. This is the time value of money being put to work.
- Stick with stock funds like SP 500 index for the biggest bang for the buck in gains. Conservative investments like bond funds won’t get you there given college costs are increasing at 5-7% per year.
- Family members like grandparents can contribute directly to these funds.
- Encourage family members to make a contribution to the fund in lieu of a gift or toy.
Evaluating schools by cost and value provided
- Before you get ready to pay consider your school choices carefully. Slick websites and brochures are nice but loans need to be repaid. Look at the ROI of the program you are attending very carefully.
- Remember that federal student loans are not dischargable in bankruptcy. Don’t borrow too much. It’s nearly impossible to escape from these loans.
- If two schools are comparably ranked you may want to consider the cheaper one. Slick diplomas are nice but $1200 per month student loan bills will crimp your style for years.
- Consider working part-time in school to reduce borrowing.
- Work summer jobs to save up money. Get paid internships ideally.
- Hunt for scholarships both need based and merit based
- Look at the costs of attendance very carefully and consider the implications as shown by the examples below
- Avoid for profit scam schools. The school has to be ranked in US News or some other guide.
- Ask specifically about outcomes and stats for recent graduates. If they can’t provide this run away.
- Make sure the chosen major has jobs in it down the line that pay the bills. Engineering, finance, IT, accounting, nursing…..good. Art history maybe not.
College cost example #1: Frankie Finance
Frankie is going to college. He gets into a number of schools but decides to go to State U as the finance program is good and the price is reasonable. State U also has a low living cost as it is in a smaller city with cheap rent. His total debt upon graduation is $30K as he worked summers, paid in state tuition and lived frugally feasting on ramen.
His student loans are through the government at a rate of 5.5% over ten years. Frankie’s monthly loan payment is $325 per month. He has no problem paying this off once gets a job. He pays it off early so he doesn’t have to make $39K in total payments, meaning $9K in interest. Instead he pays it off in five at $573 per month paying only $4382 in total interest. Now he can focus on buying that condo downtown.
College cost example #2: Uppity Ulysses
Uppity Ulysses has the same scores and grades as Frankie. He also plans to major in finance. Ulysses goes on a college tour and falls in love with City U. It is in the nearby big city and is a private university ranked about the same as State U according to US News and World Report. The finance programs are comparable in nature. Due to high cost of tuition and high cost of living in big city Ulysses graduates with $120K in student loans.
Uppity’s student loans are also through the government at a rate of 5.5% over ten years. His monthly loan payment is $1302 per month. The loan payments end up eating up much of his disposable income once he gets a job. Ulysses can’t afford to go out and do things like Frankie. He drives a beat up old Camry, doesn’t save for retirement, he can’t afford cable TV or much furniture. He is not happy and regrets attending City U.
Grad school: Worth it?
Med school, Dental school, Vet school, Pharmacy? Probably yes but ask around
Law school and MBA: Maybe, dig a bit more. The ranking of the school is important to outcomes. A Harvard MBA will likely do well versus one from U Phoenix employers won’t care much about. The same applies for law schools. Grads of say Columbia Law can pay their loans whereas grads of some bottom feeder schools may not be able to get a legal job at all let alone pay their debts. Do your homework and investigate very thoroughly before paying a lot of money and spending a lot of time for grad school.
Ways to save on tuition: Tuition reimbursements
Can you go part-time and get your employer to pay some via tuition reimbursement? Your salary will cover the rest.
I knew guys in Boston that did their MBA part time at nights and weekends at Boston College and Boston University. I saw the same with people in Detroit at Michigan State at their weekend program. They graduated with no debt in three years.