Slides by Pamela L. Hall Western Washington University 1 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

5 The Cost of Going to College  Most people tend to think of only tuition and fees  However, these do not represent the total cost  Other 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

7 Figure 15.4: Average Annual Cost of Attendance

8 Figure 15.5: Projected College Costs

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 Programs  Grants Don’t have to be repaid  Loans Have to be repaid  Merit-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 grants  College and universities also provide grants

14 Web Links  Information about student financial aid: 

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 Plans  Uniform 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