1

Slides by Pamela L. Hall

Western Washington University

Financing a College Education

Chapter 15

2

Introduction

A college degree is an excellent investment

College graduates Earn almost twice as much as non-college

graduates Are unemployed less often and for shorter

periods of time

Many of the fast-growing occupations require an advanced degree

3

Introduction

A college education is expensive Average annual cost of a four-year

university Private—$26,000 Public—$12,000

Costs are rising faster than inflation However, financial aid programs have

increased

4

Figure 15.1: Average College Tuition

$1,738

$3,754

$9,518

$17,123

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2-year public ins titutions 4-year public ins titutions (res ident) 4-year public ins titutions (non-res ident) 4-year private ins titutions

Av

era

ge

An

nu

al T

uit

ion

(2

00

1-0

2 S

ch

oo

l Ye

ar)

5

The Cost of Going to CollegeMost people tend to think of only tuition and

feesHowever, these do not represent the total costOther costs include

Room and board Books, etc.

Costs have risen rapidly since 1970 Increased at a rate of about 7.5% annually

Costs are probably going to rise in the future

6

Figure 15.3: Distribution of College Costs

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

4-year public ins titutions (res ident) 4-year private ins itutions

An

nu

al E

xp

en

se

s

Other Expenses

Room and Board

Tuition and Fees

$11,976

$26,070

7

Figure 15.4: Average Annual Cost of Attendance

8

Figure 15.5: Projected College Costs

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years in the Future

An

nu

al A

tte

nd

an

ce

Co

st

6.5% increase

3% increase

9

Sources of Financial Aid

Over half of all college students receive some form of financial aid

Financial aid awards have risen faster than college costs over the last decade

Composition of financial aid has been changing

10

Classifying Financial Aid ProgramsGrants

Don’t have to be repaid Loans

Have to be repaidMerit-based

Examine issues such as a student’s academic record when deciding who receives aid

Need-based Examine family income for determining aid

11

Figure 15.6: Breakdown of Financial Aid Awards

12

Grant Programs

Pell grants Largest federal grant program Do not have to be repaid Average size is $2,000 annually

Supplemental Education grants Based on need and school cost Do not have to be repaid Average size is $550 annually

13

Grant Programs

Merit-based grants also available, including Robert C. Byrd Honors Scholarship National Science Scholars Paul Douglas Teacher Scholarship

State governments also provide grantsCollege and universities also provide

grants

14

Web Links

Information about student financial aid:

www.ed.gov/offices/OSFAP/students

15

Loan Programs Perkins Loans

Low-interest loan Undergraduates can borrow up to $4,000 per year (with

a 4-year limit of $20,000) Loan repayment begins within 9 months of graduation

Stafford Loans Repayment begins w/in 6 months of graduation Subsidized (federal government pays the interest accrued on

loan while in school) Unsubsidized (student can either pay interest while in school, or

defer it until after graduation)

PLUS Loans Parent borrows money to use for student’s college education—

repayment begins w/in 60 days of loan disbursement

16

Repayment Options Your repayment options may include

Fixed monthly payment over fixed time period Graduated repayment in which loan payments increase

over time Income-sensitive repayment in which monthly payments

are based on income

Loan consolidation Allows borrower to combine several types of federal

student loans into one Convenient single payment May end up paying more interest over life of loan

17

Other Sources of Financial Assistance

Federal Work Study Provides a minimum wage (at least) job for

undergraduate and graduate students Must always be for a public or private non-profit

organization

Cooperative education programs Student attends class for part of year and earns

tuition money by working for another part of the year

Military service

18

Tax Benefits for College Students

Hope scholarship credit Tax credit but phased out once adjusted

gross income reaches $100,000 (married)Lifetime learning credit

Tax credits for adults who return to school Income restrictions and limits apply

Deductions for interest on student loans Income restrictions and limits apply

19

Applying for Financial Aid

Free Application for Federal Student Aid (FAFSA) form Available from college/university

financial aid offices and online Can be filed manually or electronically

Pay close attention to deadlines To attend college in fall deadline for

FAFSA is July 1 of that year

20

Applying for Financial Aid

After filing a FAFSA the Department of Education sends applicant a Student Aid Report Confirms information on FAFSA Lists the expected family contribution

Based on household income, assets, number of dependents, etc.

Remaining college costs may be covered by financial aid

21

Determining College Savings Needs

Highly individual and depend in part upon Child’s age Expected annual increase in college

costs Expected return on college savings

22

College Savings PlansUniform Transfer to Minors Act (UTMA

Accounts) Up to $11,000 (per child) per parent or grandparent

annually can be transferred Assets are owned by minor but managed by custodian

Extensive investment options including stocks, bonds and mutual funds

Child pays taxes on any taxable income Gifts are irrevocable Income can be used to pay tuition, but not room and board Since assets belong to child, UTMA account could reduce the

amount of financial aid because child’s assets count more heavily when determining expected family contribution

23

College Savings Plans

College Savings Plans Formerly known as Education IRAs Can contribute up to $2,000 annually Not tax deductible but investment profits are

tax deferred Withdrawals are tax free if used to pay qualified

college expenses Subject to stiff penalty if not used for this purpose

Income restrictions apply

24

College Savings Plans 529 Plans

College savings vs. prepaid tuition plan Return on prepaid tuition plan is equal to the rate of increase in

tuition—rate of return on college savings plan is likely to be higher

With a prepaid tuition plan child is locked in to a state university If child doesn’t attend required university, only the amount deposited

plus a modest amount of interest is returned Tuition is only a portion of college costs

Contributions are not tax deductible but investment returns are tax deferred

Withdrawals are tax free if used to pay qualified college expenses

Subject to stiff penalty if not used for this purpose Assets are transferable

25

College Savings Plans

Investment recommendations The younger the child, the longer the

investment time horizon Growth in capital should be primary

investment objective Most of account’s assets should be invested

in common stocks As child ages and college approaches,

shift some assets from stocks to bonds and money market instruments