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Beware These Financial Pitfalls When Choosing a College

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Financial Pitfalls When Choosing a College

With more and more high school students deciding to attend college, the race to find the “perfect” college often begins as early as a high school student’s sophomore year, though more typically their junior year. Students may consider a school’s “vibe,” and its ranking when picking a college, but there are more important things to consider. As the parent, stepping into your child’s college search with a dose of reality is necessary. After all, attending college can cost tens of thousands of dollars. Advise your child to beware of these financial pitfalls when choosing a college.

Financial Pitfalls When Choosing a College

College is expensive! Even if your child attends a local university and lives on campus, the price tag could be $20,000 per year or more. For that kind of investment, you should carefully consider these factors, which will save you money and help you and your child choose the right college carefully.

The Retention Rate

How many students who come in as freshmen come back for their sophomore year? That is the college’s retention rate. Colleges with high retention rates are likely doing something right for their students. If the college your child is considering has a low retention rate, be concerned.

Transferring to a different college because your child is unhappy at the one she initially chose can be expensive. Not all of your child’s credits may transfer, which means she may have to pay more to complete her college degree, which happened to me. I left my initial college after one semester. It ultimately took me five years to graduate college, in part because of the college I initially chose and the fact that some credits didn’t transfer.

The average retention rate nationwide is 78%. If the college your child wants to attend is lower than that, make sure you understand why before sending your child.

The Graduation Rate

How likely are incoming freshmen to graduate in four years? That is the graduation rate. Unfortunately, the nationwide graduation rate is surprisingly low. “According to the National Center for Education Statistics, just 41% of first-time full-time college students earn a bachelor’s degree in four years, and only 59% earn a bachelor’s in six years” (CNBC).

What do those lower graduation rates represent?

Financial Pitfalls When Choosing a College

First, some students drop out and never complete their degrees. My cousin dropped out of law school after one year, and he had tens of thousands of dollars of debt to show for it without the law degree. He did eventually get his Master’s in a different field, but paying off the law school loans took him years. This is the worst-case scenario.

Second, if your child does graduate but takes five or six years to do so, your child is in a better position—he has his degree. However, do you have the money to pay for an additional one or two years of college? Most families expect their child to graduate in four years and budget for that. When graduating takes longer, many families are left taking out additional loans they hadn’t planned on. Unfortunately, this scenario is surprisingly common as most schools have fairly low four-year graduation rates.

Some Scholarships Aren’t Renewable

If your child qualifies for financial aid, be forewarned that the college can usually manipulate the first-year financial-aid package to make attending the school possible. However, they often do that by finding scholarships the college offers. Yet, what you may not realize is that some of these scholarships aren’t renewable.

Perhaps for the first year of college, parents need to pay $7,000. However, for sophomore year, after some of these one-time scholarships end, you may be looking at a bill of $15,000 a year. Can you afford that if you were expecting to pay just $7,000 a year? That can be a shock to many parents.

Make sure when you sign your financial aid agreement that you know which scholarships are renewable and which are one-time scholarships so you’re not surprised next year.

Paying for College Can Increase Your Income

Some parents choose to pay for college by taking money out of their retirement accounts. However, when they do this, the money they withdraw counts as income in the next tax return that they file. Then, when the college sees this, they see that the parents’ income has gone up, and financial aid is further reduced.

Ideally, have a way to pay for college that won’t make your income increase and reduce the amount of financial aid for which you qualify. If you feel that taking money out of your retirement fund is the only way to pay, consider choosing another college. Or, choose to take out PLUS loans and either pay them back traditionally or pay them back with money from your retirement fund after your child graduates. Then, doing so won’t affect your financial aid offer.

Consider Living Expenses

Financial Pitfalls When Choosing a College

When people think of the price of college, they most often consider tuition and room and board. However, your child will have many more expenses than that. Consider the following additional costs students may incur:

  • travel home for vacations,
  • clothing if the climate at school is different from the climate at home,
  • entertainment,
  • food when the college cafeteria is closed,
  • fraternity or sorority fees if they are pledging,
  • laundry,
  • parking fees,
  • summer storage for their college furniture and other goods when they are home on summer break

Final Thoughts

Choosing a college can be exciting, but make sure your child isn’t swayed by the college’s slick advertising. More importantly, consider the many financial pitfalls when choosing a college. Investigate the college’s retention and graduation rates. Understand your financial aid package, especially if the scholarships that your child receives are renewable or one-time scholarships. Don’t forget to also account for living expenses. If you consider all of these variables, you will be more financially prepared for what is to come in the next four (or six!) years your child is a college student.

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How We’re Helping Our Teen Save for College

Help Your College Student by Adding Them as an Authorized User to Your Credit Card

Money Management Tips for the College Student and Their Parents

How We’re Helping Our Teen Save for College

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College is getting more expensive every year, and with the student loan crisis, more and more students and parents are trying to forego student loans.  Avoiding student loans, if possible, is a smart way to go.  We should know; my husband and I are still paying off his student loans from graduate school, which he finished eight years ago.  So, we want to do everything we can to help our own children go to college without accruing any debt.  How we’re helping our teen save for college involves a multi-pronged approach.

How We're Helping Our Teen Save for College

How We’re Helping Our Teen Save for College

There are four ways we’re helping our teen save for college:

Using an Employee Discount

My husband is employed at our local university, so our children will get 75% off the price of tuition.  While this school currently costs approximately $12,000 for in-state tuition for a year, our children, thanks to the discount, will only need to pay $3,000 a year.

Matching Our Teen’s Savings

From the time our children were young, we set up a savings account for college.  We match each dollar that our child saves in this account.  Our three children all have varying balances, and one of our children is a much more prolific saver than the other two.  While this account won’t cover their $3,000 a year that they will have to pay for college, it will likely cover their textbooks for several semesters.

Paying for AP Tests

 

How We're Helping Our Teen Save for College
Photo by Ben Mullins on Unsplash

Our teen is bright and this year decided to challenge himself with an AP history course.  We paid for the AP test that he will take in May.  If he scores a 4 or a 5 on this test, he will be able to earn college credit for the course.

Next year, he plans to take several AP classes and tests, and we’ll pay for those, too, in the hopes that he can score high enough and reduce the amount of time he needs to be in college.

Finding Scholarships

Our teen took a practice PSAT at school, and while his score was okay, it wasn’t stellar.  Since he has a 4.0 in school, if he can raise his SAT score by at least 100, he will qualify for a $6,000 scholarship from our university.  (The higher the scores, the higher the scholarship amount he qualifies for.  If he could get his score even more than 100 points higher, he would qualify for an even larger scholarship.)

We don’t have money to pay for SAT tutoring, but having it would be valuable, especially if it helps our child raise his score and qualify for the scholarship.  I found a scholarship offered through a private foundation that could be used for SAT prep.  We applied, received the scholarship, and he’s begun tutoring this semester.

Final Thoughts

Money has been tight throughout our marriage, so we’ve never had much money to set aside for our children’s college education.  (Our priority has been paying off our student loans and saving for retirement.)

However, helping a child in other ways rather than just paying tuition outright can also be valuable.  This is how we’re helping our teen save for college.

 

Oregon Changing Student Loan Repayment?

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Could the landscape of student loan repayment be changing?  I have to admit, I don’t cover a whole lot of college topics here (because I’m a bit removed from that age group), so I almost missed this altogether.  But, it kept coming through on feeds, and it finally piqued my interest enough to get me to take a look.  I’m glad I did, because it’s actually gaining traction and could be something that becomes normal in the years to come.

What is the Oregon Pay it Forward loan repayment plan?

oregon changing student loan repaymentPay it Forward seems to have had an interesting life cycle. It was originally devised by a class of college students, working with the Economic Opportunity Institute, and then presented to the state legislature.  From there, it appears that the Working Families Party of Oregon, who happen to have been co-founded by the students’ teacher, took it under their wing and started pushing it.  According to this article in the New York Times, the resulting bill passed the Oregon House and Senate earlier this month.

From there, I would imagine that it’s got all kinds of structural work to be done in order to put the systems and processes in place to be fully functional.  But, once that’s done, it should become available to students in a few select universities and colleges sometime around 2015.

The plan, as it’s stated on the Working Families Party of Oregon website, will operate with a dedicated fund from which the tuition will be paid to the school.  After the student graduates, and gets a job, the student will then pay a fixed % of their salary back into the fund for 20 years.  The % that the graduate pays will depend on how much schooling they’ve received.

Under the proposed system, you would pay .75% of your adjusted gross income (AGI) for each year of school, or 45 credits. This means a student who goes for a 2-year degree would pay 1.5% of their AGI per year, while a student seeking a 4-year degree would pay 3%.

That should account, mostly, for the discrepancies of cost in tuition from a two-year degree vs. a full four-year degree.  The website also states that should a graduate be unemployed, there would be no repayment necessary until the graduate attains a job.

Is the Oregon Pay it Forward plan a good idea?

In my opinion, it’s both good and bad.  It all depends on how you look at it, really.  If you’re like me, and intend to work in a profession that basically requires a degree of some sort to even get your foot in the door, it could be a really good deal.  Heck, I’ve been out of college for 7 years.  Almost half way to their repayment period.  I’m not even close to half way to the end of my student loans, yet.

So, in that way, the plan might be a good thing.  It lowers the financial barrier to higher education, and makes less of a burden of the repayment of any tuition bills.  The lowering of barriers is also why I think it could end up being a bad thing.

Part of the reason that I think the higher education system is under so much fire is because it’s already too easy to get a student loan and go to college.  If anyone can do it, suddenly everyone must do it. If you want any sort of foothold in the professional community of your choice, you’ll need that degree.  That causes problems.  Demand for a college education never decreases.  The law of supply and demand says that the supplier (colleges in this case) can charge whatever the market will bear based on the fluctuations of demand.  If demand decreases, so too should supply.  If you want demand to increase, you reduce the cost of whatever you’re selling until demand begins rising again.  But, if demand never decreases, why should the cost of the education?  The supply of college attending students increases, increasing the demand for classrooms to teach them in and professors to teach them with.  School expenses increase due to the new buildings and additional staff.  If the fund for the plan doesn’t keep up, the money has to come from somewhere else.  Know where?  The state.  More specifically, the taxpayers of the state.

It’s too early to pass judgement on whether the plan will work or not.  Heck, the ink is barely dry on the bill itself.  It’s still got all kinds of tape to work it’s way through before it can begin being used.  I doubt that we’ll see any real results aside from an increased enrollment in the schools that pilot the program for at least 5-10 years.  Remembering that repayment likely won’t start for 4 years from the first enrollment.

I think it’s clear that the current state of student loans and their repayment needs to be reworked.  It’s unclear, however, whether this plan is the right answer.  It might be part of the answer though.  Combine something like it with a more rigorous acceptance process, and you might have a winner.

What do you think?  Is Oregon changing student loan payment forever? Is the program the right answer?  What would you change?  Would you have used it if you had the opportunity when you enrolled in college?  (I would have)