Spring has sprung, and it's that time of year when college acceptance letters begin arriving in the mail -- if they haven't already. It's an exciting time helping your child prepare for the next step toward independence. But it's also a bit humbling to realize the real cost of that next step.
If your child is about to graduate high school, you probably already know this, but if your child is just entering high school, it's important to be aware of some common myths about the cost of higher education expenses:
Myth No. 1: Financial aid is a reliable source of college funding.
First the good news: in the most recent academic year, the financial aid provided per full-time student averaged $15,000, and 52 percent of that came from grants, which usually do not require repayment. Now, the not-so-good news: the vast majority of grants are needs-based, and more families are requesting aid every year. So even though there has been an increase in student aid over the past decade, 82 percent of families sending their kids to college are requesting assistance every year, which means there is not as much assistance to go around per family. For high-income families (combined annual income > $100,000 annually), 42 percent of college expenses are covered by grants, scholarships and borrowing, and for families earning less than $100,000, this represents more than 60
percent of the funding total.
Myth No. 2: Saving with a 529 Plan greatly reduces the aid for which your student can qualify.
Federal financial aid looks at the resources of both the parents and the student. 529 Plan assets do count toward the expected family contribution for dependent student expenses, but the impact is actually quite small. Only 5.6 percent of the account value is factored in to the aid calculation, and if the 529 plan custodian is a grandparent, the account value is not counted at all.
Myth No. 3: Borrowing is the best way to fund the cost of a college education.
Today, four years of college expenses for an in-state public college average $75,000 and $125,000 for an out-of-state college. Private institutions cost an average of $160,000 in today's dollars, which will likely double for today's newborns. About 60 percent of students who graduated last year did so with debt, at an average cost of $26,500, and 26 percent of graduates owed between $25,000 and $100,000 upon graduation. Debt of more than $100,000 (which is true for 4 percent of graduates) can be a significant burden for young people entering the workforce -- especially at current student loan interest rates, which these days, averages around 8 percent.
Myth No .4: It's too late to start saving for college.
It is never too late to start saving for college, especially if it means avoiding debt. While 529 plans are a good vehicle for saving when your child is young, if you start saving after they are in their teens, it's probably best to use less costly methods. For the best strategy to meet your current needs, consult your certified financial planner practitioner.
Karin Grablin, with SRQ Wealth Management, can be reached at firstname.lastname@example.org. This information is not intended to be a substitute for specific, individualized tax, legal or investment planning advice.