Financial planning for college: should you bother saving?

Nobody wants to pay for something, then watch someone less deserving who gets it for free. A dear friend recently raised this situation: are you a sucker for saving, while somebody else spends freely and their kid gets more money from a college?

I’ll give a very qualified yes to this—there are a few situations where it doesn’t pay (very much, at least) to save for college. Let’s say you make under $75,000 a year and have no investments beyond retirement accounts. Your family probably will qualify for some serious financial aid, and would get less if you saved into a 529 plan. But I really question how much a family would be able to save on that income, and if they can, they should be pouring it into their 401k and a Roth IRA. Can a family making $75,000 a year really manage to save more than $25,000 (the maximum into these accounts)? I seriously doubt it.

If your child doesn’t finish school or joins the military instead, you might have done better saving into your own accounts.

That’s it. That other family of merry spenders who got so much more than you? Did you see the award letter? Because lots of people lie. Especially people like to “reinvent” things in the best light possible—that “aid” might have actually been in the form of a subsidized loan, or the “free ride” might have been a waiver of tuition or some small amount of “scholarship” aid. If it was a state public school, and they are remotely middle class, it’s all going to be loans. If it’s a private school, it’s probably still some loans, or they have financial issues you don’t know about, or the school competes with publics by bringing the cost of attendance down to approximately what a state uni would have cost. Cost of attendance is the important number: what it actually costs to spend a year at the school, including tuition, dorm, food, books (can be a whopper), fees, etc. Add in transportation, moving the kid’s belongings back and forth or in storage, and the inevitable dorm refrigerator (not included in the school’s website estimates).

For nine years now, I’ve challenged anyone to tell me about somebody they know first-hand, who had family income over $100k, who’s child got all costs of attendance covered with no loans, for 4 years (athletic scholarships not included). I’ve yet to have someone come up with that family, but I’m still interested. It’s always 3rd hand, or a one-year fellowship (usually after the kid is already at the school), or tuition only.

It’s easier for a college to waive tuition than it is to cover the full cost. Why? Because tuition just requires paying professors and administrators, and those costs can be averaged onto other people. You can always stick a few more people into a given class. But coming up with an actual dorm bed, feeding the kid, and providing books actually costs money. Those “free rides” you hear about that go to low income families are usually free tuition, and then a loan package for living costs—and living costs are often the whopper.

But let’s say you have family earnings of $76K-150K, and maybe even another kid who will be in college at the same time. You might qualify for some aid. What if you were really careful and managed to amass $100,000 in a 529 college savings account? At worst, about $5,000 of that would be considered “available” each year for all your kids in college. (Same for parents’ non-retirement investments). Sadly, a reduction in aid of $5,000 is real money, but compared to the total cost of attendance, it’s a drop in the bucket. But having $25,000 available each year is going to make some serious difference to your child’s options and future indebtedness.

Remember, many colleges do not cover all demonstrated financial need. They’ll give you something, but sorry Charlie if you can’t scare up the rest—I’m not sure how they can assume you’ve been honest about your finances, then expect you to come up with more. Or maybe they just don’t care because there’s somebody right behind you on the waiting list.
Some schools have grandly announced that they’ll cover all need for families making under $XX a year. Note that that does not necessarily mean free—it only means they’ll cover the gap (as they calculate it) with aid rather than loans. For example, the University of Chicago says that if you make under $125K, they’ll cover tuition. But you have to make under $60K for them to cover the entire cost of attendance ($83,760 according to the school, compared to Northwestern’s $78,654).

But here’s the hitch—the kid has to get in, and any school that announces that will suddenly see an enormous jump in their applications, so your kid has even less chance of getting in than previously. I’d genuinely like to know how many kids attend who actually receive the full ride. Does anyone seriously believe that they will fill their class by allegedly need-blind selection, and then just randomly discover that they have to cough up more money from their endowments from all the kids they just admitted? I think I hear the sound of one hand clapping.

The exceptions to this are two: your kid is a world class athlete and gets an athletic scholarship that includes living expense, or your kid is a nationally desirable scholar (think published a novel, won the Davidson or Intel, has ground breaking published research or inventions) and is willing to go somewhere lesser than the ivy league. If your kid will outrank (grades + test scores + other achievements) 90% of that school’s current population, they might be willing to ante up something to entice them to come—but you should check that the guarantee is for more than one year.
Saving for the kid’s college means they won’t be burdened with very heavy debt incurred for living expenses, books, getting home for holidays, and every other surprising thing it actually costs to go to college.

BTW, if your child does get significant merit scholarship aid, you can withdraw the amount from the 529 penalty free. Or you can just leave it alone, because there’s always grad school…

About the author

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Danielle L. Schultz, CFP®, CDFA

Danielle L. Schultz, the principal financial planner of Haven Financial Solutions, is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a NAPFA-registered Financial Advisor, and a Registered Investment Advisor in the State of Illinois. She studied financial planning at Northwestern University’s Certified Financial Planner™ certification program. She also holds a Series 65 license (Registered Investment Advisor Representative) and a CCPS (Certified College Planning Specialist).

She writes a regular column for Better Investing magazine and is currently working on a revision of their mutual funds handbook. In addition to academic training and professional experience, Ms. Schultz has personally managed Social Security, Medicare, retirement and long-term care issues; college funding concerns; and cash flow and transition planning in self-employment and divorce situations. Her social work background gives her an innovative perspective on financial planning issues; for her, financial planning is not only about money, but also a key component in a satisfying and well-lived life.

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