The Rising Costs of Higher Education

Once upon a time, in a not-so-distant past, the phrase "working your way through college" wasn't just a quaint expression - it was a reality for many students. In the 1960s and 1970s, a diligent student could cover their tuition and fees with earnings from a part-time job and a summer gig. Fast-forward to today and that same scenario sounds like financial science fiction.

Even in the 1980s, students working 15 hours a week during the school year and full-time over the summer at minimum wage could still cover their tuition at a public four-year college. Today, that same work schedule would barely cover a third of the average in-state tuition and fees, let alone room, board, and the ever-growing list of additional expenses. This stark contrast paints a vivid picture of the challenge facing today's families as they plan for higher education costs.

College costs have steadily risen over the years, often outpacing inflation and household income growth. For parents, this means that saving for their child's education is more important than ever. Based on historical trends and economic forecasts, by 2033, in-state tuition at public four-year colleges could reach between $15,000 and $18,000 per year. Private college costs could exceed $60,000 annually for tuition and fees alone.

Whether your child is a newborn or entering high school, understanding the savings options can help you prepare for one of the most significant expenses many families face.

Hidden or Often Overlooked Costs

When planning for college, many families focus solely on tuition and fees. However, many additional expenses can significantly impact the overall cost of higher education. Travel to and from school, books, supplies, and even health insurance may add substantially to the overall cost.

Living expenses constitute another significant category of often underestimated costs. Whether living on-campus or off, students need to budget for housing, meals, transportation, and personal expenses. In some urban areas or at universities with limited housing options, these costs can rival or even exceed tuition expenses

But what about financial aid?

When discussing college costs, financial aid often arises as a potential solution - and it frequently is. However, the term "financial aid" can be confusing, and families may harbor misconceptions about what it truly entails.

Financial aid is often divided into two categories: gift aid and loans. Gift aid, such as scholarships and grants, typically doesn't need to be repaid -around 60% of all financial aid is gift aid. Loans, on the other hand, must be repaid with interest.

Even with most financial aid comprised of scholarships and grants, gift aid isn't sufficient to pay the entire cost of college. For example, the average student loan debt for a four-year degree is around $30,000 - and that doesn't include education loans taken out by parents.

Further, just because a large portion of all financial aid doesn't need to be repaid doesn't mean that your family will qualify for it. Financial aid is complex, with variables ranging from family income to the amount of institutional aid provided by the school to select students. As a result, it's challenging to know exactly how much college will cost for your child.

The Importance of Early Planning

Rather than simply hoping everything works out, many families create a college savings strategy. Thanks to the power of compound interest, the earlier you start saving, the more time your money has to grow. Even small, regular contributions can add up significantly, given a long enough time horizon.

Early planning also provides more flexibility in college choice. A robust savings plan allows your child to consider schools that might otherwise be financially out of reach. This expanded range of options can be crucial in finding the best fit for your child's educational and career goals.

This week, we'll explore many ways families can save for higher education. From college savings accounts to pre-paid tuition plans to understanding the potential impact of college savings on financial aid, we'll outline the tools you need to get started.

We'll also look at another potentially overlooked concept - balancing helping your kids with the cost of college versus saving for your financial future. Tapping retirement savings or home equity may work for some families. Still, it's essential to understand the pros and cons before making decisions that may impact your future self.

The Takeaway

The rising trend in tuition and fees, combined with often overlooked expenses and the uncertainty of gift-based financial aid, makes it clear that many families should consider a comprehensive approach to college savings. Early planning remains the most effective strategy for managing these costs.

Let's get started!