6 Steps For Tackling Higher Education Costs

As the 2022 fall semester begins, an estimated 16 million undergraduates are enrolled at colleges and universities throughout the country. While many parents and grandparents began planning for this milestone by saving for college when their children were still young, tuition increases have gradually outpaced incomes, forcing many families to rely on student loans to help foot the bill. According to a recent report, 48 million Americans have student loan debt totaling nearly $1.75 trillion. While that includes private loans, the large majority, held by 45 million people, is federal student loan debt.

The New York Federal Reserve reports that student loan debt is the only form of consumer debt that has grown since consumer debt peaked in 2008. Balances of student loans have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.

As student loan debt continues to rise, the public debate over education loan forgiveness continues. Critics of cancelling all or a portion on student debt believe it would disproportionately benefit wealthier families and individuals, while proponents think the student loan burden is far more nuanced. While questions remain about the appropriate level of federal involvement in cancelling debt, those on both sides of the debate view student loan programs as a sound investment in U.S. workers and essential for maintaining the country’s competitive edge. The U.S. Bureau of Labor Statistics backs up that argument, reporting that workers with a bachelor’s degree earn more than 1.5 times the amount of workers with only a high school diploma earn, while those with doctorates or professional degrees earn more than double. As a result, competing for the highest paying jobs leads to many students taking on significant education-related debt. While avoiding student debt altogether would be the ideal solution, it’s just not feasible for many students and their families.

Despite many colleges and universities freezing tuition costs during the pandemic, many related expenses, such as housing, meals and on-campus transportation, continued to rise with inflation. According to the College Board, the average tuition and fees for full-time undergraduate students for the 2021-22 academic year was $10,740 for public four-year in-state schools, which was $170 higher than in 2020-21 (1.6% before adjusting for inflation). Public four-year out-of-state costs were $27,560, $410 higher than in 2020-21 (1.5% before adjusting for inflation) and the average for private nonprofit four-year institutions was $38,070, $800 higher than in 2020-21 (2.1% before adjusting for inflation). Those are daunting numbers for anyone seeking to pay for higher education in today’s environment. However, there are steps that parents, grandparents and students can take to help lessen the burden of these costs at every stage of the planning process. We’ve outlined six of those steps below.

1. Plan early. Ideally, you want to begin saving for a child’s education costs as early as possible. One of the best ways to do so is through a 529 education savings plan. All fifty states and the District of Columbia sponsor at least one type of these popular tax-advantaged savings plans which offer federal, and in many cases, state tax benefits. Account earnings grow tax-free, enabling you to save even more money for college. Best of all, contributions and earnings remain tax free when used to pay for qualified education expenses.

2. Take college level courses in high school. A great way to help offset college costs well before a student even enters college is to encourage them to take Advanced Placement (AP) courses in high school. At the end of the AP course, students have an option to take an exam to receive credit for the equivalent entry-level college courses. Many high school’s also offer a GPA boost to students who successfully complete AP courses, which may help them qualify for merit-based scholarships or other forms of financial aid.

3. Research scholarships. While every parent would love to see their child receive a four-year academic or sports scholarship to the college or university of their dreams that’s simply not realistic for most. In fact, recent data indicates that only about 1.5% of students are awarded full scholarships each year. However, approximately 58% of families are able to take advantage of some type of scholarship, from private scholarships to federal Pell Grants, which provided financial aid to 7.5 million students in 2020. Overall, scholarships and grants are estimated to help to pay for about 19% of college costs.

4. Don’t rule out financial aid. Federal Student Aid, an office of the U.S. Department of Education, is the largest provider of financial aid for college in the United States. Any college student attending an eligible school qualifies to submit the Free Application for Federal Student Aid, or FAFSA. To qualify for financial aid, students will need to verify their citizenship, enrollment status and financial need, among other eligibility requirements. While many applicants receive some kind of aid, such as grants, scholarships or work-study programs—most are not eligible for all types. In addition, failure to meet some of the needs-based requirements can result in losing aid eligibility altogether. To make sure you’re not leaving money on the table, enlist the help of your financial advisor or tax professional to complete your FAFSA form to help determine your eligibility for aid.

5. Consider community college. What if you or your student still feel under-prepared to tackle higher education costs? For many students, attending a local community college for the first year or two may be an option. Community colleges can provide significant costs savings compared to traditional four-year public or private institutions. For example, tuition for in-district students at public two-year colleges for the 2021-22 academic year ranged from $1,430 in California and $1,950 in New Mexico to $8,600 in Vermont, according to the College Board.

6. Evaluate the need for student loans. If you need additional help paying for college costs after applying for grants, scholarships or other forms of aid, student loans may be a good option. The key is to only borrow what you need and can reasonably repay once you’re working. There are two main types of student loans, federal and private. To obtain a federal loan, you will need to complete the FAFSA. Federal loans are preferable because you don’t need a credit history to qualify, and they offer income-based repayment plans and forgiveness that private loans do not. If you’ve maxed out all other options, you may want to consider a private loan.

If you’re a parent considering taking out a loan to help pay for a child’s education, be sure to speak with your financial advisor first. Your advisor can help you determine the best course of action for you and your family, based on your personal financial needs and goals. You want to make sure that prioritizing education costs doesn’t put your own future in jeopardy or cause you to delay your retirement. Remember, an adult child can borrow money to help finance their education, but you can’t borrow money to pay for your life in retirement.

There are also many options available to grandparents seeking to help fund a grandchild’s education that can do double-duty in the areas of tax and legacy planning. Whatever your goals or stage of planning, an independent wealth advisor can help you find ways to balance these and other goals and priorities across all aspects of your financial life.

To learn more about education planning, download our complimentary checklist, Financial Milestones for College Planning.