By Aimee Calderon, CFP

The cost of attending a four-year university in the United States has risen an average of 8% per year over the last 20 years, which is more than twice the rate of inflation. It is no wonder that parents and students together must carefully weigh the benefits of a higher education versus the cost and debt necessary to obtain bachelor’s and graduate degrees.

On average, college degrees lead to more pay, steadier employment and better benefits.  A graduate degree can even further boost earnings.  The following chart with data from the Bureau of Labor Statistics shows the average weekly earnings rate of workers age 25 and over from 2019.

As the chart indicates, actually obtaining a degree, not just attending college is crucial in realizing the benefits of higher pay and employment benefits. 

Public vs Private

Although the data above supports degrees, the cost of different schools is extremely important to consider.  Paying top dollar to a prestigious school doesn’t always lead to more pay than a state school. The Wall Street Journal recently wrote an article that focused on elite master’s degrees.  They noted that Columbia film alumni had the highest debt compared with earnings of graduates from other major university master’s programs in the US.  Their research showed that the median debt of film program graduates was $181,000, yet half of these graduates were making less than $30,000 two years after earning their master’s degree.  While Columbia is ranked among the world’s most prestigious schools, these graduates are definitely not seeing the financial benefit of their prestigious degree. In fact, they have likely seriously damaged their financial future.

When parents and students start looking at different options for higher education, it is important to not only look at the “sticker price” of the school but also the average cost for students. While state schools typically have lower tuition and fees, some private schools have large endowments and large scholarship opportunities for students.  We have worked with several clients whose children have gone to private schools and paid less than they would at a state school because of the aid package offered to them.

College isn’t for Everyone

It is also appropriate for parents and students to realize that a 4-year university is not a one-size fits all solution.  Depending on the interests of a student, a trade school may be a better fit.  Seeking out expert advice in the field of study is very valuable.  Find someone in the career of choice and ask them for their ideas on the different paths that can lead to that career.

Borrower Beware

With the rising cost of college tuition, the use of school loans has become a necessary evil for many families.  There are several kinds of loans available to students and parents, so it is extremely important to know your options and what to watch out for.  Graduate PLUS loans and Parent PLUS loans are two loans to watch out for.  They are federal loans with fewer restrictions and higher interest rates.  The Grad PLUS loan program has no fixed limit on how much graduates can borrow for tuition, fees, and living expenses.  With recent rates as high as 7.9%, it has become the fastest-growing student loan program.  The Parent PLUS loan allows parents to borrow enough to cover the full cost of attendance minus any financial aid the student receives. Parents can borrow money regardless of income which leads to them taking on too much debt.  PLUS loans also have high fees, about four times higher than subsidized and unsubsidized loans.  Currently, PLUS loans charge a 4.228% fee and deduct it from the loan disbursements to you.  That means if you borrow $25,000 this year, you will only get about $24,000 disbursed to you.

It is also important to balance the amount of debt with the expected earnings after graduation.  Some guidance suggests that student loan payments should not exceed 10% of projected after-tax monthly income your first year out of school. There are many college debt calculators on the internet that can be used to help determine this number.  This is conservative guidance and will likely surprise many borrowers on what is actually considered affordable debt.

Seek Help

It is very important to seek help when making decisions on where to send your student to school and how to pay for it.  College Financial Aid departments can be a good resource.  They can show families all the different options available for scholarships, aid, and loans.  It is important to realize that colleges have an inherent conflict of interest when recommending students or parents take out loans to pay for their tuition.  Consider speaking with a fee-only financial advisor as well when making these decisions.  As fiduciaries, fee-only advisors can give advice with your best interest in mind.