Getting over College Sticker Price Shock

Hey Paul: Our high school son is looking at colleges in central Kentucky. He is a junior at WJHS. The Transylvania University website lists a “total cost” of $45,690 – about what we paid for our home a few decades ago! Your school, Asbury, posts total costs of around $35,000. How can college be worth these sky-high prices? What kind of “deal” can we expect?

When I attended UK about 25 years ago I believe the tuition was around $3000 a year and total cost around $6000. A student could combine relatively modest scholarships, financial aid, a summer job and a bit of help from parents and have no student loans. For this coming school year UK lists the total costs at $24,278! The magic of compounding growth is working against us. The typical annual increase of around 6% has doubled the costs every dozen years.

I have compiled some core information from four local colleges that may help clarify what you really are facing in terms of college “investment” (note the subtle change in wording from “cost”) as well as what a student can take from the college experience. This information is from the U.S. Dept. of Education’s College Scoreboard. See https://collegescorecard.ed.gov for complete information on these schools and any other colleges of interest.

Centre Transy Asbury UK
Family Income AVERAGE COST
$0-$30,000 $17,161 $15,256 $18,677 $9,743
$30,001-$48,000 $17,024 $16,435 $19,565 $11,831
$48,001-$75,000 $20,676 $19,470 $24,526 $15,416
$75,001-$110,000 $23,685 $23,085 $26,365 $17,779
$110,001+ $28,445 $25,716 $29,741 $18,220
Debt $26,063 $27,000 $26,000 $20,500
Starting Salary $45,000 $41,100 $34,100 $41,500
Graduation Rate 85% 73% 70% 60%
ACT Range 26-31 24-30 21-27 22-28

The first thing to note is that virtually no one pays “sticker price” – Even wealthy students that attend Transy get around $20,000 knocked off the sticker price. Your family’s income will be a major determinant of your financial aid package. For each of these four schools the lowest income students received about $10,000 more in financial aid.   Of course even the lower income student is looking at around 17 grand a year to attend a private college and around 10 grand to attend UK.

Keep in mind that these costs are averages – some students will receive more generous financial packages due to academic scholarships. Others will be eligible for further financial aid due to their specific financial situations. The College Scoreboard provides a link to each college’s Net Price Calculator that gives more precise estimates of potential financial aid packages.

Typically the “deal” includes the Kentucky Educational Excellence Scholarship (KEES), Kentucky State Grant and the college’s financial grants. Note that a grant is essentially a gift with no payback! The offer may also include Federal loans that like all other loans need to be paid back but often have no interest until six months after completing college.

The median student loan at the three private schools was around $26,000 – think about it like a car payment for the five years after college with a diploma in hand rather than a vehicle. Again that’s an average figure. I’ve known a few students with $100,000 in undergraduate debt and many with mid-five figure debts. That’s a heavy burden even before you start throwing in graduate school costs, a wedding, first home, and the first baby.

So, is it worth it? Yes, I think the college experience can be “the best four years of your life” and a springboard to a career that is not possible without a college degree. Over the years I know many college graduates that question the utility of their college degree but very few who would forgo college if they had to do it over again. On the other hand I know many people who regret they didn’t take advantage of continuing their education through college when they had the chance.

The one catch is that if you are going to invest tens of thousands of dollars a year than you better complete college – unless you are an NBA first-rounder. Half a degree is worth zilch. As I mentioned in last week’s column, college success is more about grit and wisdom than smarts.

Finances are important but don’t let money be the sole factor. The smaller classes and collegiality of a private college may be the difference between college success and dropping out.   Admission teams will work with you to “make it happen” and then the rest is up to you boy!

 

 

Is College for Everyone?

Hey Paul: I just graduated from East Jessamine. I was an ok student making mostly B’s. I didn’t take any AP classes. I haven’t decided what I want to do next in life. I’m thinking about working for a while and then maybe going to college. Do you think that is a good plan?

 You should join me at Asbury University this fall. Sorry, I’ll try to provide unbiased advice on this very important life decision. There is much I don’t know about your exact situation so some of my advice may or may not apply to your decision.

First let me congratulate you on earning a high school diploma. In doing so you’ve demonstrated a number of key life skills. You’ve avoided and perhaps overcome the educational derailers of trouble with the law or starting a family a little earlier than planned. You’ve been able to sit in a seat and listen for several hours each day – no small task and one that I didn’t do too well.

There are three general paths following high school – college, work, or the military. Of course there is a fourth path of living off your parent’s or the state’s generosity – but that’s not what we aiming for here.

Joining the Army, Navy, Air Force or Marines is not only patriotic but also a great way to build a career. My suggestion is to binge watch war movies ranging from Saving Private Ryan to Lone Survivor. If you end your movie marathon feeling called to serve your country then contact your local recruiter. My recommendation is that you go to college with the ROTC providing an introduction to military life as well as potentially covering your educational costs.

Taking a job after high school can literally buy you some time to figure out your next move. In some cases it may be necessary to have an income as you move on to living on your own or perhaps to afford paying for college. My observation has been that taking a year away from school can easily become a few years and then a permanent break from the classroom.

If you start a job I recommend at a minimum taking one course at JCTC in a subject that really interests you. Take a class that they didn’t offer in high school – auto technology, nursing, or marketing. Learn a practical skill and see if you have a natural flair for that type of work. This will keep you connected to formal learning that is essential for almost any career of choice.

What about college? Well despite what some say, college isn’t for everyone. Less than 20% of Kentuckians have a bachelor degree or higher. This statistic could suggest that only those in the top fifth of their high school class are solid prospects to go on to complete college. In your case I wouldn’t buy into the theory that because you were “average” in high school that you won’t be able to complete college.

I have been a professor at Asbury University for four years and before that taught a Marshall University – yes, as in the movie, We are Marshall! I’ve got to know hundreds of students that are probably much like you. They weren’t academic stars in high school but they made a decision, really a series of decision to make it through college.

Rev. Chuck Swindoll has a famous quote on how attitude and the choices we make are much more important than our circumstances:

“The longer I live, the more I realize the impact of attitude on life. Attitude, to me, is more important than facts. It is more important than the past, the education, the money, than circumstances, than failure, than successes, than what other people think or say or do. It is more important than appearance, giftedness or skill. It will make or break a company… a church… a home. The remarkable thing is we have a choice everyday regarding the attitude we will embrace for that day. We cannot change our past… we cannot change the fact that people will act in a certain way. We cannot change the inevitable. The only thing we can do is play on the one string we have, and that is our attitude. I am convinced that life is 10% what happens to me and 90% of how I react to it. And so it is with you… we are in charge of our Attitudes.”

The “average” students who succeeded in college found a balance – finding a major they enjoyed while sticking out classes that seemed a waste of time, connecting with a core group of friends through FCA, the Greek system or other gatherings of like-minded people. They went to class – 15 hours a week isn’t too much to ask, is it? Being successful in college is more about being wise than being smart.

To many people going to college is about preparing for a career. A rule-of-thumb is that college graduates makes about twice what high school graduates earn over a lifetime. At the state level this rule holds as states like Colorado and Massachusetts that have roughly twice as many college grads as KY and correspondingly about double our income per capita.

The formula: college degree = money = happiness, doesn’t hold true for many college graduates. A cynic could modify the equation to college degree equals huge student loans working in a job that doesn’t require a college degree equals regret. Perhaps this cynic needs a poster size version of the Swindoll quote.  My college equation looks like:

Wisdom + Grit = College degree = Fulfilling Career & Personal Life.

Of course many people can substitute “Army”, “Working” or “Being a Mom” for “College” and end up with everything you could want out of life!

 

 

 

Try Not to be Valedictorian

Hey Paul: I currently in middle-school taking the top classes. My goal is to have straight A’s in high school. Any advice?

 I am glad to hear from another young person. Last week’s column was my first that deviated from “only the serious stuff grown-ups think about” like taxes and social security. In fact this week I met for the first time a reader of my column under the age of 20 – a shout out to Meredith, my new favorite of my daughter’s friends.

I’ll probably not the ideal person to be asking this question – my two sisters were straight A students from kindergarten through college and my brother a 4.0 Civil Engineering student at UK. My goal in high school was to be the top GPA for those who didn’t study – something I think I accomplished although I’m not sure if this a distinction to be proud.

So here is my advice – don’t try to be valedictorian. Sure, work diligently and earn good grades. I have encouraged my three high-achieving daughters to try to get a B in at least one class. There’s a couple of reasons behind my “B’s are not bad advice”. First, you should focus on learning not grades. Second, you will put immense pressure on yourself (or perhaps your parents will) to maintain that perfect 4.0. And third, you will live life conservatively not taking the challenging, risky path that is fraught with failure.

Let me ask you this – what’s your best dive off the board? Head-first, no spring? A pencil? C’mon give me a break. That’s way too safe. When the Jessamine pool opens next month you are going to run down the board, take a deep bounce, and do as many flips as you can before splatting into the water. Why? Because an ugly flip trumps a perfect pencil dive any day.

Hey Paul: I am seeing a lot of ads claiming that Social Security rules are changing this month and that there are strategies to increase our benefits by up to $50,000. Can you explain what this is all about?

 Well like most ads there is some truth and some hyperbole in these claims. First the truth – Yes, the Social Security Administration is changing a few policies on how benefits are paid. The only immediate concern is the changes to what is called the “file-and-suspend” strategy. The option to “get a better deal” ends after Friday, April 29.

The simplest story is a couple, both age 66, where one spouse is a high earner (say the husband but gender is not relevant for how this works) and the other spouse was a low earner. Suppose the husband and wife are entitled to their own social security annual benefits of $20K and $5K, respectively. They could both start their benefits with the husband receiving $20K and the wife receiving spousal benefits of $10K – half her husband’s benefit which is greater than her own benefit of $5K.

The file-and-suspend strategy has the husband filing for benefits and then immediately suspending (stopping) his benefits. This has two purposes – by filing he makes his wife eligible to begin spousal benefits of $10K. By suspending he allows his own benefits to grow by 8% annually once he restarts his benefits. In four years his $20,000 of forgone annual benefits will have grown by 32% to $26,400 when he restarts benefits at age 70.

The BIG social security law change is that while a spouse can still file and suspend, when they suspend this stops ALL benefits based on that person’s earnings record. For the case described above if the husband suspends his own benefits then the wife is no longer eligible to receive spousal benefits. She could file for her own benefits of $5000 at age 66. The monetary damage in this case is $5K each year (the difference between her spousal and own benefits) and a total reduction of $20,000 from age 66 to 70. This loss would have equaled $40,000 if the wife had less than 10 years of earnings and was entirely dependent on the spousal benefit.

Under the new laws could the husband go ahead and start his own benefits of $20K at age 66 and the wife draw spousal benefits of $10K? Yes! This strategy is very appealing as the couple would be up by $80K at age 70 compared to the file-and-suspend strategy. The downside to this go-for-it strategy is that eventually the file-and-suspend strategy will catch up and surpass the cumulative benefits. If one or both live into their early 80’s or older then the file-and-suspend strategy would have been preferred.

To take advantage of the perk of being able to suspend your own benefit and not impact a spouse’s benefit you need to meet three criteria. One, be between the ages of 66 and 70 on April 30th. Two, have a spouse (or minor child or adult disabled child) whose social security benefit is based on your earnings up to you turning 70. Three, have a desire to maximize your own social security by starting benefits at age 70. Many people meet the first two criteria but only a few percentage of people wait until age 70 to start social security benefits.

So if you are one of those rare birds that meets all the criteria to benefit from filing and suspending your benefits, you have only about a week to lock in that strategy. Feel free to contact me for a quick consultation if you are truly perplexed on how to proceed with Social Security benefits.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups.

 Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com

 

 

 

Who Needs a Financial Advisor?

Hey Paul: We are a middle-class family with three children the oldest headed off to college next fall. We are halfway through a 30-year mortgage but otherwise do not have any debt. All our retirement savings of about $300K is in our employers’ 401(k). Do we need a financial advisor? What would be the benefits as we plan towards retirement and other life goals?

It’s a great blessing to have people in your life that you can rely on for trusted advice and accountability. The trick is, of course, how to identify those people with the skill set and character to deliver advice at a reasonable price.

The truth is that almost anyone can call himself or herself a “financial advisor”. If they provide “investment advice” then generally they need to register with the state and undergo background checks and have achieved a certification such as being a Certified Financial Planner (CFP). But that fact that a person is not a criminal and has some book knowledge of money doesn’t necessarily make them a good financial advisor.

A recent commercial (http://goo.gl/bG0tB5) features a Chase Financial Advisor visiting various retirement parties where his clients profusely thank him for making this all possible. While I am all for being grateful for those who have helped us along life’s journey, it is preposterous to claim that it was the advisor rather than the client who put in 40 years of work that is owed the lion’s share of the credit.

Perhaps the small print of the commercial should include Vanguard founder, John Bogle’s take on financial advisors:

“Our hypothetical fund investor has earned $1,170,000, donated $700,000 to the mutual fund industry, and kept the remainder of $470,000. The financial system has consumed 60% of the return, the fund investor has achieved but 40% of his earnings potential. Yet it was the investor who provided 100% of the initial capital; the industry provided none. Confronted by the issue in this way, would an intelligent investor consider this split to represent a fair shake? “ In other words your advisor brought you a bottle of wine to celebrate your retirement and drove up in the Porsche that you bought him.

Now that I have thoroughly bad-mouthed my own (side) occupation, let me provide some brighter views and various alternatives to getting good financial advice. There are several opportunities to obtain solid financial advice. For those who work in a company with a Human Resources office, some basic but very important guidance can usually be gathered on selecting a health insurance plan, flexible spending accounts, and opportunities to contribute (often with a company match) to the employer retirement account.

A second resource is your tax preparer particularly if they are a CPA. A CPA’s forte is tax planning but some have developed expertise in financial planning. Since they would be familiar with much of your finances from your tax return, turning to financial advice is a natural compliment to their services. My mother-in-law has been relying on David Hudson, CPA for many years for both tax and financial advice.

To truly receive comprehensive financial planning one must typically turn to a “financial planner” which as I mentioned earlier can mean many different things. The Hatfield and McCoy feud in financial advising is between those who are fee-based versus those who are commission based. I won’t drag you into all the gory details but much of the challenge is that people are reluctant to pay for advice but will accept a “free” financial review that almost always concludes with a sales pitch for an annuity, permanent life insurance &/or long-term care insurance. These aren’t necessarily bad financial products but often are riddled with exorbitant fees.

The fee-based financial planner is not necessarily a viable option for middle-class households. A typical comprehensive plan will run you around $2000 and for those assets they manage for you there is around a 1% annual fee. [Shameless self-promotion warning] In my own practice I charge $1000 for the plan and show the client how to manage their assets using Betterment.

Let me ask you something. When you’ve been at a restaurant and got a so-so meal did you complain to the manager? No, probably not. Your ‘problem’ is that you are too nice. And when your supposedly trusted advisor puts the hard sell on you won’t be able to say no or ask the tough questions and expect full answers.

What would be some tough questions to ask your advisor? If I invested the funds in an index fund instead of buying this financial product, what is the probability that I’d come out ahead? [No advisor will answer this. Watch out for a mildly related fact such as ‘70% of seniors rely at some point on long-term care.’] How much is your compensation for selling this product? [Could easily be more in an afternoon than you make in a month.]

Fortunately an imminent ruling by the Department of Labor is going to impose a ‘fiduciary standard’ on all financial advisors. A fiduciary is required to put the client’s interest above their own – a modern version of Love Thy Neighbor as Thyself.   The DOL fiduciary ruling will dramatically change how financial planners provide advice and sell products.

Do you need a financial advisor? You know it sounds like you’ve got some enduring financial principals figured out on your own – living within your means, avoiding debt, and working hard. My first advice would be to self-educate by reading a general book on finances as well as religiously turning to my More-Than-Money column each week. A second piece of advice is to seek out a fee-based planner and pay an hourly fee to get specific advice such as financing your child’s college education.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups.

 Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com