MONEY College

The Important Talk Parents Are Not Having With Their Kids

College tuition jar
Alamy

The new Fidelity College Savings Indicator survey reveals that parents are only on track to pay a third of college tuition—and that they're keeping mum on the topic.

Moms and dads expect their children to pay for more than one-third of college costs—but only 57% of parents actually have that conversation with their kids, according to a new study out by Fidelity today.

The cost of college has more than doubled in the past decade, and parents are having a hard time saving for it, Fidelity’s 8th annual College Savings Indicator study shows. While 64% of parents say they’d like be able to cover their kids total college costs, only 28% are on track to do so.

That jibes with reality: For current students, parents’ income and savings now only cover one-third of college costs on average, according to Sallie Mae’s recently released report How America Pays For College. Kids use 12% of their own savings and income. Loans taken by students and parents account for 22% of the funds, while another 30% comes from grants and scholarships.

Experts urge parents to have a frank conversation well in advance with their children about how much college costs and how much they are expected to contribute, either through summer jobs, their own savings or part-time jobs while in school. “If children know that they are expected to contribute to their college funds, they are more likely to save for it,” says Judith Ward, a senior financial planner at T. Rowe Price.

A T. Rowe Price study released earlier this week found that 58% of kids whose parents frequently talk to them about saving for college put away money for that goal vs. just 23% who don’t talk to their parents about how to pay for school.

There’s also reason to believe that parents shouldn’t feel so bad about not being able to take on the full tab. A national study out last year found that the more money parents pay for their kids’ college educations, the worse their kids tend to perform. In her paper “More Is More or More is Less? Parent Financial Investments During College,” University of California sociology professor Laura Hamilton found that larger contributions from parents are linked to lower grades among students.

Apparently, kids who don’t work or otherwise use their own money to pay for school spend more time on leisure activities and are less focused on studying. It’s not that these kids flunk out, according to Hamilton. She found that students with parental funding often perform well enough to stay in school, but they just dial down their academic efforts.

Given all these findings, parents should feel less pressure pay the full ride for their kids—especially if it means falling behind on other important goals like saving for their own retirement. “Putting your kids on the hook for college costs is better for everyone,” says Ward.

MONEY 101: How much does college actually cost?

MONEY 101: Where should I save for college?

MONEY Ask the Expert

The Best Way to Give Your Grandkid Cash for College

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: “My wife and I will soon be first-time grandparents and would like to make monthly investments for our grandson. What are the benefits and limitations of 529 plans? We live in N.Y., but our grandson will be born in Massachusetts.” —Joe Kostka, Fairport, N.Y.

A: If you want to help with your grandchild’s college costs, a 529 plan is the best route, says Mark Kantrowitz, publisher of Edvisors.com, a website that helps people plan and pay for college.

These state college savings plans have significant tax advantages. Your contributions grow tax-deferred, and withdrawals are tax free as long as the money goes toward qualified higher education expenses such as tuition or books. (If you spend it on something else, you will be hit by both income taxes and a 10% penalty.)

Since you’re funding an education account, you can contribute even more than the annual gift tax exclusion—$14,000 in 2014, or $28,000 as a couple—without running the risk of owing gift taxes. You can gift five times the annual exclusion in a single year, or $70,000 for a single person and $140,000 for a couple (but you then can’t give that child more for the next four years).

In more than half of states, if you use your state’s 529 plan you can deduct at least a portion of your 529 contribution on your state income tax return. New York offers a deduction of up to $5,000 per year ($10,000 for married couples filing jointly). Massachusetts has no deduction. To find out which states offer tax benefits, check out Edvisors’ full list.

For you to get a tax break in New York, you need to be the account holder of the 529 plan (naming your grandchild as beneficiary). But you might want to forgo the deduction and make the parents the account holder (or the child, though custodial 529 plans have other drawbacks, including no option to later change the beneficiary).

When grandparents own 529 plans, the account is not reported as an asset on the student’s FAFSA application for financial aid, but any plan distributions count as income. This can reduce your grandchild’s aid eligibility by as much as half of the distribution amount.

If the parent or child owns the plan, the account is reported as a parental asset on the FAFSA and has a minimal impact on aid eligibility, says Kantrowitz (aid is reduced by no more than 5.64% of the value of the 529). And 529 distributions are not reported as income.

The savings from the state tax deduction are small compared to the harm it could cause to your grandchild’s financial aid, says Kantrowitz.

Other Ways to Stay In Control

To keep control of the account without jeopardizing future financial aid, you have a few options. You can retain ownership of the plan until right before your grandchild takes a distribution and then switch it to your children. While New York allows this kind of account change (not all states do), you risk having to pay back the your tax savings (talk to an accountant).

Another option to minimize the hit to financial aid while still getting the tax break: Wait to take out the money until the child’s senior year of college, after the last financial aid application has been filed. The only risk is that if their expenses don’t outweigh what’s in the account, you could be stuck with leftover funds.

Best Plan Options

While you can invest in any state’s 529 college savings plan, you should opt for a direct-sold 529 plan, which usually has much lower fees than adviser-sold 529 plans do.

“The best option is to focus on a 529 plan with low fees that has an age-based asset allocation that mixes an all-stock fund, such as a S&P 500 fund, with a fund that has no risk of loss to principal,” says Kantrowitz, who prefers plans run by Vanguard, Fidelity, or TIAA-CREF. New York’s plan is run by Vanguard, while the Massachusetts direct 529 is run by Fidelity.

To help you boost what’s in the 529, Kantrowitz also suggests joining a program like Upromise. You earn rebates on everyday purchases, which are automatically put into the 529 plan you specify. Kantrowitz says a family will typically earn between $1,000 to $2,000 in rebates over the lifetime of the account.

MONEY College

Why Your College-Bound Kid Needs to Meet Your Financial Planner

Parents showing jars of money
Jamie Grill—Getty Images

Sheltering children from tough money choices now can lead to unhappiness later on.

When I schedule a meeting with parents to talk about college costs, I always ask if the student will be attending the consultation.

About 80% of the time, the parents say no. Their usual response: “He’s too busy,” or “We would rather not include her.”

That’s a big mistake.

What I do is help estimate the final costs that the parents will be facing, taking into consideration projected financial aid, merit awards and the family’s current resources. Those costs can vary widely, from $5,500 a year to attend a community college while living at home to over $70,000 per year to go to a private college such as New York University.

Students should be involved from the start, so they can understand the financial issues that their parents will be facing. Students need to see the great disparity in cost outcomes among the different colleges on their wish list.

When I meet with the whole family, we can narrow down the types of schools that would be affordable to the parents as well as meet the academic and social needs of the student.

That way, we can avoid a situation in which a high school student, ignorant of any financial implications, pursues whatever college he is interested in. Then, in April of his senior year, when all of the acceptances and awards arrive, his parents review the options and say, “We can’t afford any of these.”

At that point, the only choices are for the student to attend a school he’s not happy with (such as a local college commuter school), or for the parents to go into deep debt in order to finance an education they cannot afford.

So I try my best to convince the parents to invite their student. Perhaps the parents are trying to shield their finances from their children. Eventually, however, the kids will be part of the parent’s estate planning. The earlier the children know about the parent’s financial situation the better. If a family limits the college search to the types of colleges that meet all needs (financial, academic, and social), then the only outcome in senior year will be a happy one for both the parents and the student!

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Paula Bishop is a certified public accountant and an adviser on financial aid for college. She holds a BS in economics with a major in finance from the Wharton School and an MBA from the University of California at Berkeley. She is a member of the National College Advocacy Group, whose mission is to provide education and resources for college planning professionals, students and families. Her website is www.paulabishop.com.

MONEY College

$182,000 in Student Debt for a Film Major?!?

Film clapper board
A film student can't take too much debt. Losevsky Pavel—Alamy

A financial adviser laments the choice faced by a high school senior: A large amount of college debt vs. a ridiculous amount of college debt.

When a high school senior starts receiving college acceptance letters, it should be a cause for celebration. But this April, when I met with a couple whose son got into two great schools, I was disheartened.

The parents wanted my thoughts on which school their son should attend. He wanted to study film, and the choice before him was between New York University and Emerson College in Boston — two good schools with good film programs. He had to make his decision by May 1.

The parents were convinced that NYU’s program had a better film program. The big issue, though, was money. The list price for NYU’s film school, including all expenses, is around $71,000 a year, and the school didn’t offer any financial assistance to the student other than a $5,500 federal student loan.

Emerson’s list-price cost of attendance would be about $57,000. The school also offered a $17,500 annual scholarship and a $5,500 federal loan.

The parents were willing to chip in $25,000 annually if their son attended NYU, but only $13,000 if he were to attend Emerson. Their reasoning, right or wrong, was that Emerson’s film program was not as good as NYU’s.

So where did that leave the student? With the parents’ contribution figured in, the student would have to come up with nearly $46,000 a year — more than $182,000 over four years. And that’s assuming no price increases over four years.

For Emerson, the student’s cost would be less than $27,000 per year, given the merit award and the parents’ contribution. Total cost over four years: at least $107,000. That’s a much more palatable figure, though still a hefty one.

My first question: Why were the parents not willing to contribute for Emerson the same $25,000 as they would for NYU? If they did, the student would have to pay only about $15,000 per year, or $60,000 over four years.

My second question was about the $182,000 the student would have to pay for NYU: Where was he supposed to get this kind of money? The federal student loan system will only offer him $5,500 as a freshman. The next level of borrowing for this student would be private loans, which have variable interest rates that can rise to 18% or higher, depending on the economy and the indexes to which the rates are tied.

Burdening a student with $182,000 debt upon graduation (and, most likely, monthly payment of $1,800 for 10 years) is intolerable. Even leaving him with $60,000 upon graduation from Emerson (and monthly payments of about $600) is something I find abusive.

This is too much borrowing! You can’t repay that kind of debt on a film major’s starting salary, and you can’t get rid of student loans in bankruptcy. For this family, I might suggest their son could handle about $25,000 in debt for a four-year college education. More than that would seriously limit his living options upon graduation, threatening his ability to buy a car, get married, or have children.

Given the circumstances under which I met the family, their story turned out to have a relatively happy ending. The student will be going to Emerson. I’m hoping that the parents will chip in more than they said they would.

Even so, I wish I had been included in the initial college search, since I most likely would have identified colleges that offered film programs that were reputable, and also satisfied the financial issues facing the family. April of senior year is too late to start grappling with college-finance issues.

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Paula Bishop is a Certified Public Accountant and an adviser on financial aid for college. She holds a BS in economics with a major in finance from the Wharton School and an MBA from the University of California at Berkeley. She is a member of the National College Advocacy Group, whose mission is to provide education and resources for college planning professionals, students and families. Her website is www.paulabishop.com.

MONEY College

Scholarship Judges’ Secrets Revealed: Three Essay Topics Likely To Win Money

...And one topic that will definitely get your application forwarded to the circular file.

Every year, companies, non-profits, charities, churches and clubs award about $6 billion in private scholarships to undergraduates.

But many students fail to apply because they get stumped by the essay requirements, while those that do decide to submit often recycle a familiar theme—”here’s why I need the money.” But everybody who’s applying needs money.

The more likely path to reward, judges say, is to demonstrate why you’ll be a good investment of their scholarship dollars. Three topics that can give you that edge:

1. What you love and why. Do you love your dog? Your church? Basketball? Your shoes? Great! There’s your topic! But scholarship providers want to know why you love something, not just that you do. An ability to analyze the whys and wherefores of your own likes and dislikes is an indication that you’ll do well in life. There’s nothing too mundane, as long as you’re passionate about it. Says Amy Murphy, who oversees 35 different scholarship programs worth more than $1.3 million through the Greater St. Louis Community Foundation: “One of the best essays that crossed my desk was about a student’s shoes—where they had been, what messes they had gotten into and out of, how they supported the student as troubles were averted and successes achieved.”

2. How you recovered from a mistake, challenge or disappointment. “We’re looking for qualities like persistence, determination, optimism and a maturity of decision making,” explains Oscar Sweeten-Lopez who runs the Dell Scholars Program, which awards 300 scholarships of up to $20,000 each year. “Since college life brings new challenges and adversities, students need to demonstrate self-determination to succeed.” So tell them about a time when you faced a challenge and carried on. Did you make a mistake? Write about what you did, how you took responsibility for your actions, and what you learned. Did you fail at something? What happened, and how did you recover from that? Were problems at home hurting your ability to succeed in school? What were they, and how did you handle them?

3. Your family history. “Many students limit their scholarship essays to what they want to study, their income level or their ethnicity, completely missing out on other opportunities,” says Kim Stezala, a scholarship coach. Instead, she suggests students ask relatives about military service, clubs they belong to, or causes they have been active in. What you learn can serve as a winning essay topic. Students who can show that they can think broadly, and see themselves as a part of a bigger history, are demonstrating critical thinking skills needed to succeed.

Amy Weinstein is an expert on private scholarships and directs the National Scholarship Providers Association (NSPA).

TIME Paying for College

The Next Massive Bailout: Student Loans

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Christopher Futcher—Getty Images/Vetta

A new repayment option is really about student debt forgiveness. It's been popular, and is getting very expensive for taxpayers.

A few years ago, I began interviewing adults at least 10 years out of college and who had never managed to pay off their student debt. Some were past the age of 50 and headed slowly but surely for personal bankruptcy. Sadly, their stories were as common as they were upsetting.

Not much has changed. Outstanding student loans continue to balloon, and they now total $1.2 trillion nationally, according to the Consumer Financial Protection Bureau. Among students graduating in 2012, 71% had student loans averaging $29,400, according to a report from the Project on Student Debt. So while today’s grads may be part of the most educated generation in history they are also the most indebted twentysomethings the world has ever seen.

This isn’t good. Young people should be buying cars and setting up households—not boomeranging home to Mom and Dad and dedicating their income to loan repayment. Household formation is half the rate it was seven years ago, and most of that is due to the drag of student debt, the CFPB has concluded.

Government is trying to address the problem. There has been talk of refinancing student debt at lower rates. But that discussion has largely stalled. President Obama is pushing for a new funding model, where the amount of student financial aid available to universities is tied to things like their graduation rate and the initial salaries of their graduates. But the rating system, which might eventually hold tuition hikes in check, is at least a year away.

Another new initiative may be backfiring–at least at it relates to keeping college costs contained. Since 2011, student borrowers have been able to choose a plan that limits their amount due to 10% of discretionary income, which is defined as 150% above the poverty level—now at $15,730 a year for a two-member household. That means such a household would owe based on income beyond $23,595. If this household earned, say, $35,000 a year, it would make payments of about $100 a month.

For public employees and those working for a nonprofit, so long as they made regular payments the debt would be considered settled after 10 years regardless of how much was owed or paid back. For private sector employees the debt would be settled after 20 years. This payment plan, which is really more of a debt forgiveness plan, has proved so popular that enrollment is up 40% in six months and now includes 1.3 million Americans owing $72 billion.

Yet there is no free lunch, and we now have what looks like a high stakes game of Whac-A-Mole. Every time we bat down one source of escalating tuition and student debt, another source rises up. Because of the forgiveness feature, students appear more willing to borrow; universities are advertising the forgiveness plan and seem poised to raise tuition to soak up the funds. Just like that we are back where we started—a lot of borrowing and little incentive for colleges to keep tuition hikes down.

And it gets worse. In this popular new arrangement, taxpayers get stuck with the tab. Already the future cost of the forgiveness feature is pegged at $14 billion. To keep students and colleges from running up too big a bill, President Obama is pushing to add a lifetime forgiveness cap of $57,500. That would help. But make no mistake: the next bailout is happening now. It may be more palatable than bailing out banks and car companies. But the costs are mounting.

 

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