Despite rising tuition costs, most families still believe college is a worthwhile investment. Yet when it comes to how they’ll pay for college, only 40 percent of families have a plan in place before the student enrolls, according to Sallie Mae’s How America Values College 2018 report.
Having a plan is important
Nearly half of families without a plan felt frustrated, overwhelmed or worried when it was time to pay for college. And although 78 percent considered costs when researching schools, many were surprised about how much additional expenses such as program fees, travel costs and costs of living could add up. Families may borrow to cover unexpected costs, resulting in higher student loan balances after graduation.
The earlier a family starts to plan for college costs, the better. If you start save money in a 529 plan when the child is born, you’ll have 18 years to benefit from tax-free compounding. Each year you wait to start saving misses out on potential earnings growth, which means you’ll have to contribute more to reach the same goal.
How families are tackling college costs
Students without enough savings to pay for college are taking other steps to bring costs down. Twenty-four percent will earn their degree in less time to reduce costs or start working sooner, 21 percent are changing their major to something more marketable and 15 percent are taking less-expensive online classes. Others are making significant lifestyle changes, including cutting back on spending (67%), working year-round (45%) and living at home (37%).
Families also expect financial aid to help cover costs. According to the survey, the student’s expected aid package is the top cost consideration when families look at colleges.
Myths about college costs
Some families are confused about paying for college and could be misunderstanding costs or missing out on potential financial aid. The survey contained several true or false questions related to paying for college, and on average about 20 percent of parents and students answered each question incorrectly.
Nineteen percent of families believe the sticker price is the amount they would have to pay to attend a particular school. However, the sticker price is the cost of college before any scholarships, grants or financial aid are factored in. The net price, what the student actually ends up paying, is often thousands of dollars less than the sticker price. According to the College Board, the average amount of grant aid and tax benefit per student attending a private, non-profit 4-year college in 2017-18 was just over $20,000.
Forty-two percent of families think work-study is automatic money to pay for college. Work-study is actually a type of financial aid program where students earn money through a part-time job. The student is employed by the college or other organization and can only earn up to the amount of their work-study award.
Just over one-fifth of parents and students are confused by the term “free tuition” and assume this means college is completely free. But, even if a college offers free tuition, the student will still be responsible for other expenses such as room and board, books and transportation. Room and board is generally the second largest expense after tuition, topping $10,000 at many schools. With the exception of transportation, families can use 529 plan savings to cover many of these additional costs, so it still makes sense to save even when tuition might be free.