Guess what – there isn’t a standard definition of an affordable college. Google “Affordable Colleges” or “Is College Affordable for Me?” and you get a hodgepodge. No wonder families are overwhelmed when trying to figure out how they know if they can afford college or if they’re saving enough. How can families assess the financial fit of a college when the “experts” can’t agree on what it means for a college to be affordable?
I’d like to solve this problem for families. I’ll tell you what I think — let me know if you agree or not — with the hope that we can start to demystify this important question.
First, despite the current good-faith efforts by many, my google search for “Affordable Colleges” amplified the problem. The returns included:
- The 100 most affordable colleges — after community colleges and others were eliminated from the sample. But those that were eliminated are likely very affordable options.
- Affordable colleges ranked by ROI — a measure that many champion as “the answer” which may be true if you can accurately predict a student’s future income and the total cost of college before your student enters. Although I like ROI calculations and it’s a financial term that many use because it sounds sophisticated, its fundamental value is as a backward looking comparative tool. Like all such measures, the output can only be as accurate as the inputs, which in the case of predicting college costs and post-graduate wages are highly variable, at best.
- Affordable colleges ranked by annual tuition and expected income — the winners were the U.S. Naval Academy and West Point, which don’t charge tuition but require a highly selective appointment.
- Advice to attend a community college for two years, then attend a state school, live at home, buy used textbooks, work at a paying job during the summer and avoid debt.
All good — but not particularly specific to guide a family. So I tried to narrow the search by asking “Is College Affordable for Me?” I hoped that would give me more personal financial advice. Here’s what I found:
- A U.S. Department of Education Blog, which is mostly cheerleading about the Administration’s efforts. The efforts, like most high-level policies are well intended, but don’t specifically help me unless I like to eat tax credits.
- Many articles arguing to make some colleges free — likely driven by the election sound bites to make community colleges free. A interesting political idea but somebody’s still going to have to pay for the college experience. In this case, taxpayers.
- A link to The Lumina Foundation’s excellent study arguing that a college is affordable if the total cost of a bachelor’s degree does not exceed the total of 10% of a family’s discretionary income over 5 years plus the amount a student can earn working 10 hours per week during the school year. It’s mostly applicable to lower income families but is a useful guide.
Kudos to Lumina for more good work and an attempt to address the issue. But what’s the answer for most families? How does a family know if a college is affordable?
There are 5 factors that determine if a college is affordable without taking on debt:
- The college selected. Families have COMPLETE control over this important part of the equation. There are over 7,000 colleges and universities — one will certainly be a good academic, social and financial fit. Picking a college based on cost is one sure fire way of ensuring that it is affordable. The problem: many, if not all, students and parents have a pre-conceived notion (their dream, which I completely get) of the type or specific college they seek, so many choose higher cost alternatives than they may need. Knowing the student’s longer-term goal is helpful. Do they want/need a job after college or is grad school an immediate option?
- Family Income. Financial aid is mostly driven by family income – not assets. Need-based aid is readily available at most colleges — and some of the most selective colleges provide 100% aid for low income, high achieving students.
- Savings. How much will likely be saved by the start of freshman year? Very few families will save 100% but establishing a savings plan early — and contributing routinely — will make a big difference.
- Getting “Free Money.” Grants and scholarships will help defray college costs. In addition to federal, state and third-party grants and scholarships, many colleges offer generous Merit Aid to students who help the college fill-out the entering class. The college may be seeking an actor or thespian or woman/man from a particular geographic area and will offer lots of money to them. Other times gifts from relatives and others help students cover college costs.
- Current Income. Will parents and/or students be able to contribute cash while the student is in-school?
If these sources cover the full-cost of college (tuition, fees, room/board, other projected expenses such as travel), the college is affordable. If there is a gap, the discussion gets more interesting because loans are now necessary — and this is where parents and students get into trouble.
Part of the problem: the federal government allows schools to include loans as “aid” in Financial Aid Award Letter — including a Parent PLUS loan that is offered for the full amount of attendance with little regard for whether the parents can actually afford the loan. So the college indicates that it is affordable — based on packaging a boat load of loans without regard to a family’s capacity to repay them. Sometimes, schools will also front-end load grants or scholarships that might not be renewed or available after freshman year. Again, the college may appear to be affordable, but maybe only for freshman year. It’s mind-boggling but true. It’s like walking into a car dealership and getting a “no questions asked” loan to buy a Mercedes. The dealer will no doubt think: Enjoy the great drive — until we repossess the car because you can’t afford the loan payments (which, by the way, we knew before you drove away). Don’t let this happen to your family!
In my world, a college is affordable if — after exhausting 1-5 above — the student or parents need a loan to fill the gap and BEFORE taking a loan consider:
- Student’s post-college life. Students needs to avoid the trap of simply taking big loans to attend the school of their dream without first UNEMOTIONALLY and REALISTICALLY thinking about what their goals are after college — how much are they likely to earn per month? Before signing for the first loan, determine how much debt is likely to be necessary over 4 years and see what the monthly payment will be — for 10 or more years after graduation. There are a few rules of thumb on this: Don’t borrow more than your first year’s starting salary. Don’t borrow more than 15-20% of your projected monthly disposable income. If the monthly payments do not line up with projected income, that college doesn’t sound affordable to me.
- Parent’s life style and retirement plans if they co-sign their students or take parent loans. If parents take on debt to pay for their child’s education, they’re best advised to understand what it will mean to carry that debt for 10 or more years after graduation, which just may happen to coincide with their planned retirement. Will the college debt extend the number of years they have to work or substantially reduce the amount of their available retirement savings? Do they plan to borrow against retirement savings? If so, that college doesn’t sound affordable to me.
This may all sound simple. Theoretically it is: choose a college that is affordable and offers a social scene and academic rigor in line with your student’s abilities and interests. We should also consider how the student can make progress from the challenges they face in college. Ideally they are given the opportunity to learn from failure after giving their best efforts towards something they are passionate about. Not everything has to be perfect to make for a great learning experience. The result will be a happy, empowered college graduate who, like fearless Felix Baumgartner, lands on his feet: with a diploma in hand, a well-paying job, and student loans, if necessary, that are manageable. And parents who have helped their child successfully navigate this process without putting their retirement or life style in jeopardy.
Let me know if you disagree with this train of thought — and why. Together we can help families grapple with this vexing issue.