Sticker Shock: How Much Does a College Degree Cost?

Graduation cap on top of a pile of cash

"Many families are uninformed about the cost of attending college," claims a recent study by the National Center for Education Statistics, part of the U.S. Department of Education's research division.

Only 11% of high school freshmen could accurately estimate the cost of college tuition in their state. Of those that gave the wrong answer, 57% overestimated the cost, and 32% underestimated it. On average, students were off by $10,500, and parents by $8,800.

So, how much does college really cost? For the 2018-2019 school year, the College Board estimates that the average annual cost of tuition and fees was $10,230 for in-state students at public four-year universities — and $35,830 for students at private not-for-profit four-year institutions. These estimates don't include room and board, books, supplies, transportation and other expenses a student may incur.

Some students pay more than the average cost. But most end up paying much less than the sticker price. How? Tuition sticker prices don't factor in grants, scholarships and tax benefits that may be available. After adjusting for these cost-savers, the average cost of tuition and fees for the 2018-2019 school year dropped to only $3,740 for in-state students at four-year public universities and $14,610 for students at private nonprofit four-year schools.

Here's how you can take advantage of opportunities to lower the cost of sending a child to college — along with some other creative cost-saving measures to consider.

Fill Out the Financial Aid Forms

Financial aid can substantially reduce college costs, if you apply and qualify. The first step is to fill out the Free Application for Federal Student Aid (FAFSA) form.

One of the biggest mistakes a student can make is failing to fill out the FAFSA. Regardless of your family's income level or net worth, it never hurts to apply. You might be surprised by what you receive, especially from a smaller private university. Over a third of high school graduates didn't complete the form in 2018, personal finance website NerdWallet recently found, leaving behind roughly $2.6 billion in free college money as a result.

Another mistake you may make when applying for financial aid involves retirement income. If you've included it as an asset on the FAFSA or any supplemental financial aid forms, you've made a big mistake. For the purposes of financial aid, your retirement savings generally aren't considered when aid is calculated.

Depending on the school, a different methodology or combination of formulas may be used to calculate financial aid awards. Parents must fill out the FAFSA and generally fill out another form that asks for additional information.

Some private colleges and universities use the Institutional Methodology, which penalizes families with a great deal of home equity but permits more generous treatment of items such as medical expenses, elementary and secondary school tuition and child support. It also assumes the student will spend some time each year working to earn money.

Another methodology, called the Consensus Approach, is used by certain private colleges and universities, including Yale, Cornell, Stanford, MIT, Columbia, Wellesley and Duke. Among its principles: Students' assets and parents' assets are treated the same to discourage families from moving assets between generations.

To make matters more confusing, even if a college uses one of the formulas described above, it can still be flexible when awarding its own money. In other words, when awarding federal grants, loans and most state aid, the federal formula is used, but when awarding a school's own money, each school a student applies to may make calculations differently.

Important note: Before the 2019-2020 school year starts, consider asking about last-minute financial aid. Have your child check in with his or her preferred college's admissions office this summer, especially if your financial situation has changed. School officials may have offered scholarships or grants to students who declined the awards and chose another school. That leftover aid money may now be available to other students.

Borrow with Caution

The average student received $5,342 in loans in the 2017-2018 school year. There are several types of federal and private loan programs that your student may qualify for. Be sure to review the terms and conditions of each loan option carefully with your student.

Parents who fill out the FAFSA also may qualify for federal Parent PLUS loans. Or they may be eligible to take out private parent loans through a bank, or to co-sign with their children on private student loans. But beware: You don't want to compromise your own financial security — or your plans to save for retirement — to pay for your child's college costs.

Above all, never borrow more money than what's needed for legitimate college expenses. Some programs make it too easy to borrow extra spending money that the student can use for, say, travel or entertainment expenses, causing a hefty loan balance to accrue by graduation.

Apply for Scholarships

There are billions of dollars of scholarships available to students who put forth the effort to apply. In fact, many schools have upped the ante on scholarship offerings to attract students from a diminishing pool of high school graduates. And these scholarships are generally available no matter how high your income is. So even if you don't qualify for need-based aid, you may qualify for merit-based or other scholarships.

Every dollar your child receives in scholarships is a dollar you won't have to pay out of pocket. Finding scholarship opportunities requires research, however. Your student's high school guidance counselor can provide valuable assistance.

In addition to private merit-based scholarships, there are state-funded scholarships to explore. These are designed to keep the top students at in-state colleges and universities. It might convince you to reconsider the local university, instead of the pricier out-of-state option.

The Internet is also chock full of information about access to college scholarships. But beware: Some information that's published online is inaccurate, misleading or even fraudulent. For example, scam websites might charge a fee for the "inside scoop" on scholarships, or they might ask for personal information or credit card numbers that can be used to steal the identity of you or your student.

Most scholarships have hard and fast deadlines, with an application process that requires recommendation letters, transcripts, essays and other supporting documentation. Make sure to keep fastidious records of the process and read the fine print on each application, so you don't miss an item.

To improve your chances of qualifying for scholarships, you may need to complete the FAFSA as soon as possible. Many merit-based scholarships are offered through the colleges and universities your child applies to, and they may require the FAFSA and possibly additional supporting items. In some cases, funding is limited to a fixed number of qualified applicants — so, it's first come, first served.

Important note: It may not be too late for recent high school graduates to apply for late-deadline scholarships for the 2019-2020 school year. Some organizations accept scholarship applications throughout the summer and even into the fall.

Minimize Living Expenses

Living at home during college, or going to the local community college for the first two years, is another great way to save money. But it's not for everyone. If your student prefers to go away to college, room and board will likely be the next biggest expense category.

The College Board estimates that the average cost of room and board for the 2018-2019 school year was $11,140 for students at four-year public universities and $12,680 for students at private nonprofit four-year schools. However, living expenses can vary substantially depending on where the school is located, whether the student lives on or off campus, and whether the student is fiscally responsible.

Many students underestimate the cost of living expenses when they go to college. And some struggle with basic needs such as food and housing. Teach your student about the importance of following a budget before he or she leaves the nest.

A little frugality can go a long way. For example, your student can lower his or her annual room and board expenses by picking a more cost-effective meal plan while living in the residence halls, drinking home-brewed coffee rather than buying a daily Starbucks, or finding a few friends to share an off-campus apartment. In addition, a part-time job can be a great way for students to earn spending money, contribute to education costs and build their resumes.

Graduate on Time

When selecting a college, consider the school's graduation rates. The easiest way to control the cost of college is to graduate on time. Spending an extra year increases the cost of college by 20%. However, only 40% of college students graduate within four years, according to the National Center for Education Statistics.

Planning is key to on-time graduation. Students who drop (or fail) classes, frequently switch majors, or take a less-than-full course load each semester are likely to take five years (or longer) to complete their coursework.

Before starting college, take advantage of any advance placement (AP) classes and dual enrollment options while your student is a junior or senior in high school to accumulate college credits. Throughout your student's four years, he or she should meet with an advisor each semester to map out his or her coursework to ensure all the requirements will be met on time. And consider enrolling in less-expensive community college classes when your student is home during the summer months.

As college wraps up, your student should be mindful of what classes the school will offer in his or her final semester. Too often, a student needs a class in his or her final spring semester — only to find that it won't be offered again until the following fall.

Think Outside the Box

These are just a few ideas for ways to lower the cost of a college degree. Your financial advisors can provide additional guidance related to these ideas and help you brainstorm other creative alternatives based on your specific situation.

Uncle Sam Has Your Back

The federal government offers two sizable tax credits for higher education costs:

1. American Opportunity credit. This tax break generally provides the biggest benefit to most taxpayers. The American Opportunity credit provides a maximum benefit of $2,500. That is, you may qualify for a credit equal to 100% of the first $2,000 of expenses for the year and 25% of the next $2,000 of expenses. It applies only to the first four years of postsecondary education and is available only to students who attend at least half time.

Basically, tuition, course materials and fees qualify for this credit. Courses involving sports, games or hobbies generally don't count. The credit is per eligible student and is subject to phaseouts based on modified adjusted gross income (MAGI). For 2019, the MAGI phaseout ranges are:

  • Between $80,000 and $90,000 for unmarried individuals, and
  • Between $160,000 and $180,000 for married joint filers.

2. Lifetime Learning credit. The Lifetime Learning credit equals 20% of qualified education expenses for up to $2,000 per tax return. There are fewer restrictions to qualify for this credit than for the American Opportunity credit.

The Lifetime Learning credit can be applied to education beyond the first four years, and qualifying students may attend school less than one-half time. The student doesn't even need to be part of a degree program. So, the credit works well for graduate studies and part-time students who take a qualifying course at a local college to improve job skills. This credit applies to tuition, fees and materials.

It's also subject to phaseouts based on MAGI, however. For 2019, the MAGI phaseout ranges are:

  • Between $58,000 and $68,000 for unmarried individuals, and
  • Between $116,000 and $136,000 for married joint filers.

Important note: Starting in 2018, full-time students under age 24 (but too old to qualify for the child credit) may qualify for a $500 federal tax credit for other dependents under the Tax Cuts and Jobs Act. Contact your tax advisor to learn the eligibility requirements.

Multiple factors should be reviewed before determining which higher education tax breaks to claim. Contact your tax advisor for more information.

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