2
Oct

Estimating College Costs

College CostsBefore diving into college costs and how to estimate them, we’d be remiss in not announcing that IT’S FAFSA TIME! Starting October 1, you are able to fill out and submit your FAFSA. As we mention in our workshops and discuss with our families, financial aid is a first come, first serve bucket of money. The sooner you get your forms in, the better chance you stand of being awarded fairly. This is particularly true of families with exceptional need who may qualify for the Pell Grant and/or the Federal Supplemental Educational Opportunity Grant.

Even if you do not except need-based financial aid, the FAFSA is required in order to receive the Federal Direct Loan For Students – arguably the most favorable student loan available – and is also a requirement to be eligible for many merit-based grants and scholarships offered directly by schools. There simply is no reason NOT to submit the FAFSA.

In fact, if you’re the parent of a high school senior, stop reading right now. Go submit your FAFSA and come back. This blog post isn’t going anywhere.

…waiting…

…done yet? Great! On with the article!

What is the forecast for college cost increases?

You’ve seen the numbers — a college education is expensive. All those benefits of personal growth, expanded horizons, and increased lifetime earning power come at a price, a price that increases every year. According to the College Board’s annual Trends in College Pricing Report, for the 2017/2018 academic year, the average cost of attendance at a four-year public college for in-state students is $25,290, the average cost of attendance at a four-year public college for out-of-state students is $40,940, and the average cost of attendance at a four-year private college is $50,900. Many private colleges cost substantially more.

For decades, college costs have outpaced annual inflation, and this trend is expected to continue. Annual college cost increases in the range of 3% to 6% would be a reasonable projection based on historical averages.

The following table shows what college costs might be in 5 or 10 years based on current costs and a 5% annual college inflation rate.

Year Public Private
2017/2018 $25,290 $50,900
2018/2019 $26,554 $53,445
2019/2020 $27,882 $56,117
2020/2021 $29,276 $58,923
2021/2022 $30,740 $61,869
2022/2023 $32,277 $64,962
2023/2024 $33,891 $68,210
2024/2025 $35,585 $71,621
2025/2026 $37,364 $75,202
2026/2027 $39,233 $78,962
2027/2028 $41,194 $82,910

What expenses are included in the cost of college?

In the academic world, the cost of college is generally referred to as the cost of attendance (COA). Each college has its own COA. The COA consists of five items:

  • Tuition and fees: These expenses are generally the same for all students.
  • Books and supplies: These expenses can vary depending on the courses selected.
  • Room and board: These expenses can vary depending on where the student lives (e.g., dorm, off-campus apartment, at home) and the meal plan chosen.
  • Transportation: This expense can vary depending on how far the student lives from the college. It can involve daily commuting expenses, three round-trip flights home a year, or anything in between.
  • Personal expenses: This category varies greatly among students. It can include telephone bills, health insurance, late-night pizzas, personal spending money, or even day-care bills.

Twice per year, the federal government recalculates the COA for each college and then adjusts the figures for inflation. The government then uses the COA figures to determine your child’s particular financial need come financial aid time.

Why you should start saving early

Next to buying a home, a college education is the largest expenditure most parents will ever make (and perhaps the biggest expenditure when more than one child is in the family picture). Faced with such a daunting task, you might be inclined to ignore the problem and wait until you are more financially settled before you start saving. But that would be a mistake.

The key to sanity in the area of education planning is advance planning. The earlier in the process you become informed about the potential costs and your saving options, the greater chance you will start saving. And the more money you save now, the less money you or your child will need to borrow later.

It is important to begin saving as early as possible so you can earn interest, dividends, and/or capital gains on as much money as possible. With a long-term savings strategy, you can hopefully keep ahead of college inflation.

Regular investments add up over time. By investing even a small amount of money on a regular basis, you have the potential to accumulate a significant amount in your child’s college fund. The following table illustrates how your monthly investment can grow over time (assuming an approximate 6 percent after-tax return rate):

Monthly investment

5 years

10 years

15 years

$100

$6, 977

$16,388

$29,082

$300

$20,931

$49,164

$87,246

$500

$34,885

$81,940

$145,409

Note: The above example is for illustrative purposes only and does not represent the return of any investment. There is no guarantee that your investment will realize a return and there is a risk that you will lose your investment entirely.

How much do you need to save?

How much you need to save obviously depends on the estimated cost of college at the time your child is ready to attend. Often, these numbers are staggering. For many parents, the question of how much they should save becomes how much they can afford to save.

To determine how much you can afford to save for your child’s college each month, you will need to prepare a budget and examine your monthly income and expenses. Don’t be discouraged if you can save only a minimal amount at first. The key is to start saving early and consistently, and to add to it whenever you can from raises, bonuses, or unexpected gifts.

After you determine how much you can save each month, you will need to choose one or more college saving options. There are many possibilities for college savings–529 plans, Coverdell education savings accounts, custodial accounts, bank accounts, and mutual funds. To help make your nest egg grow, you will want to maximize the after-tax return on your savings while minimizing risk.

Finally, keep in mind that most parents are not able to save 100 percent of their child’s college education (after all, do you know anybody who purchased a home entirely with his or her own savings?). Instead, parents generally supplement their savings at college time with a combination of personal loans, financial aid (student loans, grants, scholarships, and work-study), and tax credits to cover college costs.