College Debt and Costs

[Matt]

As someone who didn't attend college in the US I'm still trying to break through to the real story about college costs and the debt that people get into.

On the surface, I saw that even top end Ivy's aren't 'that' expensive using the CSS profile, for most middle class families... so where is the debt coming from?

Is it that the price estimates for college include scholarships that are untainable, or do most students study full time with no income, and therefore create debt for just general living expenses?

Here's an example with Harvard: https://college.harvard.edu/financial-aid/net-price-calculator

I ran an example with a student with not a lot of assets, $2500. Parents earning $100K, and having $150K in assets. I excluded home equity and retirement plans from this as (I believe) CSS profile doesn't consider these? As such, assuming most of the family wealth is in retirement and home equity, I'd say that this is a somewhat wealthy family.

Out of state tuition, including room and board contribution showing only $9,725... does this seem right, or crazy?

 

[Saphira2021]

As a mother of a child who graduated good university this year, i can tell you that this estimate doesn't reflect reality. Finding work in college isn't all that simple, same for summer work and nowhere the books are mentioned. Just books alone can run $1k per semester. Then there are all those incidentals and meal plans and snacks and for even non Harvard you are looking at $300k.
If you plan well for it, as we did, your child will get out debt free but even the you are still running expenses of job hunting and apartment rental etc very expensive, but well worth it.

 

[Free-quent Flyer]

There are a lot of moving pieces on college debt. Here's a brief guide:

Colleges and universities produce an estimate of their total cost (the $64,700 number at Harvard). Then the FAFSA/CSS Profile produces a number that's the amount they expect you to contribute. The difference is your "demonstrated financial need."

Most colleges and universities do not even pretend to meet your demonstrated financial need. Harvard and a few of the other multi-billion-dollar endowment colleges and universities do, and you should certainly encourage the children to focus on applying to such colleges and universities.

The colleges and universities that DO "meet" your demonstrated financial need generally include as a component of their "financial aid package" the maximum amount of federal student loans for each grade level. If you accept such a package and graduate in 4 years, you graduate with $27,000 in student loans: $19,000 subsidized, $8,000 unsubsidized.

A very, very small number of colleges and universities both meet demonstrated financial need without loans. They are extremely elite places that are hard to get into.

So that's for starters. An additional source of student loan debt comes from those expected family contributions. After all, just because FAFSA/CSS thinks you can contribute a certain amount out of assets and current income doesn't mean YOU think you can contribute that amount. To make up that difference, many people take out student loans. Most universities, even if they include some amount less than the maximum federal student loans in their financial aid package ALLOW students to borrow up to the maximum. Parent Loans for Undergraduate Students are an option for parent borrowing, and private student loans (usually require parent co-signer) can be taken out in the student's name.

As you may have guessed, there's a tax rationale for all this: scholarships and fellowships are only tax-free to the extent that they cover billed tuition and fees (and technically books — keep your receipts). Any scholarship in excess of billed tuition and fees (and books) is taxable income. If parents claim the student as a dependent the income is taxable at the parent's marginal tax rate (thankfully you don't owe self-employment tax on the amount)! That means the same dollar of scholarship money goes further when given to students to bring their total scholarship up to billed tuition and fees rather than given to students to cover their room and board, and most universities consequently do not give scholarships and fellowships to pay room and board. Student loans, of course, can be used for those expenses.

Keep in mind that at residential colleges and universities room and board are also billed by the university! But they're separated out as line items and scholarships to cover them are taxable income.

 

[Matt]

As a mother of a child who graduated good university this year, i can tell you that this estimate doesn't reflect reality. Finding work in college isn't all that simple, same for summer work and nowhere the books are mentioned. Just books alone can run $1k per semester. Then there are all those incidentals and meal plans and snacks and for even non Harvard you are looking at $300k.
If you plan well for it, as we did, your child will get out debt free but even the you are still running expenses of job hunting and apartment rental etc very expensive, but well worth it.

Yeah I know living isn't cheap, but what I'm trying to do here is really drill into that tuition fee. I'd be happy to strip the housing and food out of the equation to help clarify that.

I'm trying to see if you meet the criteria mentioned in my example, what would be expected of you for the $46K of tuition. This will help build a more sophisticated plan.

Awesome work getting that done without debt too!

 

[Matt]

There are a lot of moving pieces on college debt. Here's a brief guide:

Colleges and universities produce an estimate of their total cost (the $64,700 number at Harvard). Then the FAFSA/CSS Profile produces a number that's the amount they expect you to contribute. The difference is your "demonstrated financial need."

Most colleges and universities do not even pretend to meet your demonstrated financial need. Harvard and a few of the other multi-billion-dollar endowment colleges and universities do, and you should certainly encourage the children to focus on applying to such colleges and universities.

The colleges and universities that DO "meet" your demonstrated financial need generally include as a component of their "financial aid package" the maximum amount of federal student loans for each grade level. If you accept such a package and graduate in 4 years, you graduate with $27,000 in student loans: $19,000 subsidized, $8,000 unsubsidized.

A very, very small number of colleges and universities both meet demonstrated financial need without loans. They are extremely elite places that are hard to get into.

So that's for starters. An additional source of student loan debt comes from those expected family contributions. After all, just because FAFSA/CSS thinks you can contribute a certain amount out of assets and current income doesn't mean YOU think you can contribute that amount. To make up that difference, many people take out student loans. Most universities, even if they include some amount less than the maximum federal student loans in their financial aid package ALLOW students to borrow up to the maximum. Parent Loans for Undergraduate Students are an option for parent borrowing, and private student loans (usually require parent co-signer) can be taken out in the student's name.

As you may have guessed, there's a tax rationale for all this: scholarships and fellowships are only tax-free to the extent that they cover billed tuition and fees (and technically books — keep your receipts). Any scholarship in excess of billed tuition and fees (and books) is taxable income. If parents claim the student as a dependent the income is taxable at the parent's marginal tax rate (thankfully you don't owe self-employment tax on the amount)! That means the same dollar of scholarship money goes further when given to students to bring their total scholarship up to billed tuition and fees rather than given to students to cover their room and board, and most universities consequently do not give scholarships and fellowships to pay room and board. Student loans, of course, can be used for those expenses.

Keep in mind that at residential colleges and universities room and board are also billed by the university! But they're separated out as line items and scholarships to cover them are taxable income.

Good info- thanks.

Is there a way to drill into this further? IE look at Harvard and get a real understanding of what they might give you (and the chance that you might be eligible).

I've got some high end college planning software models, and I just don't trust them.. they pull in real data, but I think following their guidance would create a less optimal situation than working the CSS system.

 

[Free-quent Flyer]

No, there's no way to predict your final financial aid package except at universities that guarantee certain levels of support, like the University of California and University of Washington systems which guarantee full tuition and fees if your income is below a hard cap (and you're in-state!).

CSS is gameable but it's not trivial. If you can shield income in an entity that's not reported on your personal income taxes for 2 years then you can get CSS to produce a very low/zero estimated contribution. Of course you need money to live on during that time, but we're travel hackers so that's not too heavy a lift (pay for everything with prepaid debit cards, for example). You'd still have to report your assets but parent contributions from assets are lower than parent contributions from income.

Oh one other thing about student loans, since student loan interest is deductible against ordinary income, if you're in a high tax bracket it makes your cost of funds very low.

 

[Saphira2021]

Yeah I know living isn't cheap, but what I'm trying to do here is really drill into that tuition fee. I'd be happy to strip the housing and food out of the equation to help clarify that.

I'm trying to see if you meet the criteria mentioned in my example, what would be expected of you for the $46K of tuition. This will help build a more sophisticated plan.

Awesome work getting that done without debt too!

No way to truly predict what your share of tuition would be. I know we got acceptance from 2 universities with about the same tuition where one told us we made enough to pay it all while the other in another state though we were entitled to get a small grant.
About discounting food and lodging costs. Keep in mind that those depend on location. Try NYC for example if you don't actually live there. Talk about horror stories.

 

[Matt]

No way to truly predict what your share of tuition would be. I know we got acceptance from 2 universities with about the same tuition where one told us we made enough to pay it all while the other in another state though we were entitled to get a small grant.
About discounting food and lodging costs. Keep in mind that those depend on location. Try NYC for example if you don't actually live there. Talk about horror stories.

I need to clarify:

I'm not so interested in what it costs to put a kid through college. (I am, but not right here.. that comes in a bit..)

I'm interested in understanding how much of that cost comes from the college, specifically the big ticket items like tuition, and how many people need to actually fully pay that vs it being subsidized.

The reason for this is because I want to accurately plan the tuition payments being covered in full. My gut tells me that assigning $45K per year (college inflation adjusted) per year is not the best way to do this for most people.

The goal being that we can create a savings plan that is favorable for aid. The rest of the stuff (actual cost of living etc) is a distinct calculation.

I'm looking at this through theoretical eyes as I've not been through the system, and I wanted to know are people being charged full whack vs subsidized. You get a lot of emotion/anecdotes and whatnot about costs/debt etc, but I want to break it down to understand it.

We can figure out the living expenses later

In other words - I'm trying to hack it.

 

[Free-quent Flyer]

Ah I didn't realize this was a component of your financial planning work. The short answer is that high net worth/high income people in the United States pay the full cost of tuition, with the exception of so-called "merit" scholarships which are basically ways top schools compete for students that will boost their reported student quality metrics, but typically only amount to a few thousand dollars. Such parents may or may not decide to make their kids take out the $27,000 in student loans they're entitled to.

There are lots of ways to game the price of higher education (simple example: start at a community college, transfer to a 4-year college to graduate), but they're not things you can plan 18 years in advance.

There are also lots of ways to game financial aid, but they phase out once you get above $70-80k in annual income.

I have a lot of experience with this stuff.

 

[Saphira2021]

One hint i can give you but it will not help in financial planning is that a safety deposit box is your friend. It can hold plenty of cash for a while. That cash doesn't earn anything but there are benefits. ......

 

[GettingReady]

Ah I didn't realize this was a component of your financial planning work. The short answer is that high net worth/high income people in the United States pay the full cost of tuition, with the exception of so-called "merit" scholarships which are basically ways top schools compete for students that will boost their reported student quality metrics, but typically only amount to a few thousand dollars. Such parents may or may not decide to make their kids take out the $27,000 in student loans they're entitled to.

There are lots of ways to game the price of higher education (simple example: start at a community college, transfer to a 4-year college to graduate), but they're not things you can plan 18 years in advance.

There are also lots of ways to game financial aid, but they phase out once you get above $70-80k in annual income.

I have a lot of experience with this stuff.

Don't forget dual enrollment. Depending on your local CCs (Community Colleges not credit cards) a lot of students can have an AS or AA by the time they graduate HS. There's also online colleges which saves on housing and tuition. Many CCs offer Bachelor level classes.

Our kid was homeschooled, started CC at 12, had a dual Associates Degree at 14, Bachelor's at 16. After that he went to Bible College for a year to experience "real" college, tried out different entry level jobs for about a year, then took a different path which led to him making more money than us. In his early 20's, he's planning and thinking about retirement and wants to be "retirement ready" in his 40's.

 

[Matt]

Ah I didn't realize this was a component of your financial planning work.

Yep, part of what I do is help people allocate savings towards the goal. I've got some great software that pulls in real time college costs and then creates a success ratio based on current savings etc..

But I'm trying to just make sure that I'm not missing something based on how much to allocate, because I believe that if you allocate too much to saving in traditional ways you'll lose out on the aid side. I'm still running numbers on this, and wanted to check the data with people who have been through the system.

 

[knick1959]

I wonder what would happen to the ultra-high tuition costs if the ability to pay via debt was eliminated. I've got very strong opinions on college and the debt they expect ... and I'll bet that if the government subsidized even more, tuition would increase to match. Supply and demand from a different angle. I see similarities between college tuition and skyrocketing medical costs. If the consumer isn't doing all of the paying, why not bill way high?

Sorry ... I know I'm not helping, but I scratch my head sometimes at the massive struggle of parents, often with poor end results. I'll wait and find a better medium for my ideas, probably not here .

 

[Free-quent Flyer]

Yep, part of what I do is help people allocate savings towards the goal. I've got some great software that pulls in real time college costs and then creates a success ratio based on current savings etc..

But I'm trying to just make sure that I'm not missing something based on how much to allocate, because I believe that if you allocate too much to saving in traditional ways you'll lose out on the aid side. I'm still running numbers on this, and wanted to check the data with people who have been through the system.

Assets are treated much more favorably than income by the financial aid system so saving for college isn't "punished" as heavily as simply earning a high income.

 

[Matt]

Assets are treated much more favorably than income by the financial aid system so saving for college isn't "punished" as heavily as simply earning a high income.

Kitces just dropped a good article about them changing the year of earning on FAFSA today also: https://www.kitces.com/blog/amended-fafsa-rules-to-allow-prior-prior-year-ppy-income-data-when-qualifying-for-financial-aid/

I like him because he makes my posts look concise.