How to Cut College Costs__________ in Half.

OK, I’m a bit guilty of a click bait title.  In my defense, I’m not a repeat offender, and google search had many serial offenders using the “cut college costs in half” key words.  This method is effective for all students, even those who aren’t National Merit scholars, and it doesn’t require winning competitive scholarships.  It doesn’t involve community college, or study abroad.  It will cut college costs ________ in half for anyone.

The completed statement including the blocked words is:

This method is effective, but not necessarily easy. Why would paying for college be easy?  College tuition, fees, and loans have become painfully expensive.

Depending on the area of the country, houses and college educations can have similar price points.  My home cost $112k (in 1998), and many kids today spend $120,000 on public, in-state, undergraduate diplomas.

We’ll use $120,000 as the example cost throughout this post.  Actual cost of attendance varies wildly depending on college choices.

The key to to cut the cost of college per year in half requires paying for college more than 4 years.

Prepare to review simple fractions.

Numerator on top.  Denominator on the bottom.  The resulting answer is called the quotient.

A larger denominator reduces the quotient.  Sometimes the effect is bad.  I’d rather share a pizza with 1 buddy than share with 7 people.  Adding 6 people to the denominator reduces half a pizza down to a single slice.

On the other hand, when paying for college, a small quotient is the desired effect.

Insert the relevant variables.

Examples

Unprepared families who waited until senior year of high school, have 4 years to pay $120,000 for college.

$120k divided by 4 years =  $30k per year.

Rather than paying for college as tuition bills arrive, what if we begin paying for college when the student enters 9th grade? 

Now there are 4 high school years and 4 college years, increasing the denominator to 8.  Consequently, the quotient is half as big.

$120k divided by 8 years =  $15k per year.

Already got a kid about to graduate high school? Consider paying 4 years during college, and the 4 years after college.  It is less powerful after the added expense and complications from loan fees and interest are factored, but the idea still works.

The cost per year will continue to decrease as you begin paying tuition earlier.

Starting when the kid begins middle school as a 6th grader.

11 years of $11k per year.

Starting with a kindergartener.

17 years of $7k per year.

$7k is still an intimidating amount, but it’s much better than $30k.  A few bucks here and there helps, but the extreme costs of college require meaningful chunks of money.

Can you just pay early?

The method was oversimplified, because colleges aren’t prepared to accept tuition payments early.  If I mailed Va Tech a check for my 15 year old daughter’s tuition, I suspect they’d cash it, but that is not how things work.  It’s best to create a way to separate college money from your check book.  Making the money inconvenient makes it safer, and less likely to be raided when the new I-phone comes out.

There are many options to separate and save college funds.  529 plans are the highly advertised college saving vehicles. They have tax advantages, as well as some limitations.  Roth IRA’s are another possibility.  Despite their intention of being a retirement vehicle, Roth’s can be effective saving tools for college with tax advantages, and FAFSA advantages.

Other complicating factors exist.  Some are positive and some negative.

Good factors.

Time and interest.  If the money is effectively invested rather than just saved, it will grow.  In the kindergarten scenario, the $7 grand saved in kindergarten could grow significantly in time for college. 12 years is enough time for the money to double if it earned 6 % interest per year.  The numbers look even better with higher investment returns.

Other bloggers have weighed in on the power of investing college funds over time.

ChiefMomOfficer’s recent post gave all the details and results of her college saving effort.  Her story includes an early start and fluctuating contributions to 529 plans for her 3 boys.  Her numbers are messy due to events in her life.  Read her real story here.

ActuaryonFire also wrote a helpful post that examined historical stock prices, in order help predict necessary savings rates when appreciation from investments is included.  As always AoF goes way beyond fractions with his mathematical analysis.

Negative factors.

Taxes may work against you. Depending on the investment vehicle, you may have to pay taxes on earnings when cashing out investments ear-marked for college.

FAFSA is the form that calculates need for financial aid.  Unfortunately FAFSA punishes you for saving.  The only assets that are excluded from calculations are retirement accounts and home equity.  Money in bank accounts and 529’s will reduce your eligibility for need based aid.

The scariest negative complication has a large degree of uncertainty.  Cost of college tuition and fees has been escalating faster than inflation, and it is difficult to predict future trends about the cost of college.

Get started.

If $30k per year doesn’t fit your budget, begin paying for college now.  Do the math, and solve the fraction, based on your child’s age, and your expected contribution to their education.  Preparation now will make paying for college less stressful.

Posted in Family finances, Paying for college., Uncategorized.

7 Comments

  1. Cool summary. As a European I would add as another choice to consider study abroad. I agree that this is definitely something which is not good for everyone, but it is definitely an option. Tuition fees can be much lower in European countries and good quality education is existing for english speakers.

  2. Didn’t make 529 contributions a priority and used all $20k on first kid, in first year, yikes! I managed to be prepared through saving and investing other ways, but getting started early with a 529 is a great suggestion!

  3. I am so glad I live in Canada, so much cheaper. But I have still been saving thru our equivalent 529 (RESP) for my three kids and so far so good. One is graduating this Spring…two more to go!

Leave a Reply