TRending Financial TOpics
College Planning in the Era of COVID: 6 Questions to Ask Now
Whether your child is just beginning the planning process, entering as a freshman, or returning after the summer break, getting ready to send them off to college is traditionally an exciting time for both of you. But with the current pandemic wreaking havoc on well-laid plans for the coming academic year, compounded by rising tuition and, in many cases, declining household income, that excitement has been clouded over by a host of questions you might be having trouble answering.
Here we provide some clarity into planning for college in a pandemic and offer suggestions to help you and your child decide how to proceed and how to pay.
For decades, the cost of a college education has increasingly grown to become a major investment for most families, more than tripling from 1971-72. And the march upwards will likely continue due to the devastating effects of the pandemic on college budgets. This now leaves many students, especially entering freshmen, looking for aid at exactly a time when many schools can least afford it.
There are a couple of silver linings that potentially brighten the current cost-of-college landscape, however. One is that interest rates on student loans, including Direct Loans backed by the federal government, are already low and expected to fall even more at the next rate reset this coming July.
Another is that, with enrollment at four-year colleges expected to see as much as a 20 percent decline due to the coronavirus, families that qualify for need-based financial aid gain the advantage of reduced competition. In fact, we are seeing a drop in Free Application for Federal Student Aid (FAFSA) renewals by about 5 percent as of early May. Among high-school seniors, FAFSA applications are also down, as are renewals for Pell Grants, a federally subsidized financial award for low-income students.
Add to this the simple economic fact that colleges, like airlines, are trying desperately to put as many “bodies in seats” as possible this coming school year. According to nationally recognized college expert, Lynn O’Shaughnessy, “there is no reason people should be paying full price for college right now.” She goes on to point out that, according to an annual survey of hundreds of private colleges conducted among members of the National Association of College and University Business Officers, the percentage of full-time freshmen that get some kind of discount from their school, whether through financial aid or merit aid, is roughly 89 percent—with the average discount slicing up to sixty percent off tuition.
As you and your child plan for college, here are six important questions to consider:
Although the pandemic should not be the driving force behind your child’s ultimate choice of a college, the all-around environment of college life will be difficult to come by this coming school year as colleges struggle with reopening strategies.
According to the Chronicle of Higher Education, 65 percent of colleges are currently planning for in-person instruction, but the way that will work is likely to look a lot different considering how social distancing restrictions will affect both classrooms and dormitories. Another 14 percent are proposing a hybrid model where large lower-division lecture classes, for example, will be conducted online while smaller discussion groups and labs might be in-person. At some schools, a “hybrid flex model” is being considered where classes are simultaneously held in-person and online, allowing students to choose.
University of California President Janet Napolitano has announced that every campus will be open and offering instruction this fall, most likely in some type of hybrid mode. But how much of that instruction will be in-person or online remains uncertain and will vary among the system’s 10 campuses. Drawing a harder line, California State University, the country’s largest four-year public university system, has announced that classes at its 23 campuses will be held online only.
For many students, especially incoming freshmen, the higher the percentage of online instruction, the greater the likelihood that more and more will elect to sit out the fall term instead of spending many thousands of dollars for an “armchair” academic experience centered on watching video lectures on a laptop. In fact, according to higher education market research firm, the Art & Science Group, this coming school year could be the biggest gap year ever, with roughly 1 in 6 high school seniors saying they definitely or most likely will change their plans for attending college this fall.
Although gap years traditionally involve travel abroad or full-time employment, these options are now pretty much off the table with international borders closed and jobs hard to come by. One good option, especially for first-year students, might be to attend a local community college to take some of the lower-division core courses they will need to graduate from the college they ultimately plan to attend. This way, your child is able to pursue their academic career without the risk of crowded lecture halls—or the disappointment of a diminished first-year experience.
The good news is that deferring admission for a year is not only acceptable, but encouraged, by more and more colleges. And although it is best to request deferral between April and mid-June, depending on the school’s gap year policy, students should be sure to send their requests before the first fall tuition payment is due, usually by July 1 or August 1.
For high schoolers just beginning the college selection process in earnest, it’s important to keep in mind that, despite any aspirations you had for your child to attend a particular college—like your father’s Ivy League school or your own alma mater—the ultimate goal is an education that leads your child to a successful and happy future.
To begin to map this out, it helps for both of you to create a list of objectives for the college experience. Objectives can range widely from size and cost of institution to strength in a particular major to how close the school is to home in the event flying across country, for instance, should remain risky due to a resurgence of the coronavirus. Then sit down together and go over your separate lists to see where they match up and where they differ. This helps prepare both of you for a more intelligent discussion about which colleges best match the majority of objectives on your respective lists.
Steve Sherline, Managing Director and Head of Private Wealth Management for Union Bank in Southern California, has decades of experience leading teams that advise clients throughout the college planning process. He debunks the popular myth that you can plan on your child graduating in four years—a reality that might alter your list of objectives from the outset.
“The current trend has at least half of students not graduating in four years, and a third not graduating at all,” warns Steve. “Families aren’t typically aware of these grim statistics—and colleges and universities appear to be just fine keeping them in the dark.”
In fact, CNBC.com recently reported that 2018–2019 data out of the U.S. Department of Education’s National Center for Education Statistics has just 41 percent of first-time, full-time college students earning a bachelor’s degree in four years, and a surprising 59 percent taking six years to earn one.
It’s important to keep in mind, though, that not every successful career needs to start with a degree from a four-year college. “Studies show,” says Steve, “that the most important factors for a successful education are related to how engaged the student is with professors, projects, mentors, and extracurricular activities and organizations. It can really pay off to find a school that provides an all-around environment where your child can be both motivated and comfortable.”
This might well include a four-year college, but alternate avenues to consider are two-year community colleges along with internships or apprenticeships. This track might be especially appropriate, for instance, if your child plans to defer acceptance to a four-year college this coming school year due to the coronavirus, or if they intend to ultimately join the family business and would most benefit from experience in the field. Alternatively, depending on your child’s career plans, a vocational or trade school might be more suited to both their needs—and your pocketbook.
“Bottom line,” says Steve, “there’s no advantage in paying for a four-year education when experience in a particular field might be all that’s required—or even desired.”
If your household income does not allow your student to qualify for need-based financial aid, one of the best ways to save early for college is a tax-advantaged account. Some of the most popular options for college savings include 529 plans, Coverdell Savings accounts, and Education Savings Bond Programs. As far as how much to save, you can use this gauge as a starting point: if you want to cover 50 percent of your child’s college costs, try to save at least $2,000 every year in your designated college fund. To cover 100 percent of college costs, you would need to double your savings each year.
As we noted above, you don’t usually have to pay the full price tag for a college education, and that is especially true now with the pandemic creating the rare circumstance of a “buyer’s market.” If you and your child are willing to devote the time it takes, it can be well worthwhile to search for scholarships, merit aid and grants to ease some of the sticker shock.
For example, there is a plethora of merit-based scholarships for particular majors, social group memberships, and other criteria. A great source is the Peterson Guide to Cash for College, which lists thousands of grants and scholarships for students of all types. The key is to start the application process no later than the early part of your child’s junior year of high school.
One easy way to put your child’s college education into perspective is to compare tuition with how much money they stand to make after graduation, and then factor how many years they would need to work to break even on the investment. This is also a good exercise to help them take at least a first cut at whittling down their list of candidate schools and fields of study.
Predicting your child’s future salary before they even graduate can be a difficult task, but it’s not impossible. Begin by talking about their aspirations and career goals, then estimate how much money they can realistically expect to make out the gate based on those projected goals. To research salary ranges for specific job roles in particular markets, you can refer to websites like Glassdoor.com and PayScale.com.
“Although there is little doubt that making an investment in higher education leads to professional opportunities with larger income potential,” Steve says, he cautions that, “with the cost of college rising faster than the rate of inflation, another widespread myth that doesn’t hold up well under closer scrutiny is that investing in an expensive, yet popular, school will pay off in the long run.”
“Studies show that post-graduate salaries can vary widely depending on major,” Steve points out, “but not so much on whether the graduate went to an elite private school versus a public state university.”
This is a big question to ask before the school selection process even begins. What role—if any—will your child play in financing their education? If you decide to have your child pay for part of the investment, there are plenty of ways they can help fund their college tuition.
One of the more common ways is taking out student loans, especially now that they are available at historically low interest rates. But you will want to think hard about whether your child will be able to realistically absorb and pay off any student debt in post-graduate life or be left with an anchor of debt for many years to come.
“I think from a responsibility standpoint,” offers Steve, “it is really important to have your kids assume some ‘skin in the game’ when it comes to the cost of their college education, especially given the statistics that a third of students won’t even graduate and nearly 60 percent will take up to six years to earn a bachelor’s degree.”
If you want to avoid loans, consider having your child contribute in other valuable ways that aren’t strictly monetary. Paid internships, for example, can help students gain relevant experience while attending school. Have your child talk to an advisor or sign up for job notifications on school-run job boards.
Alternatively, families that do not qualify for need-based financial aid can consider schools that provide merit-based scholarships for specific areas of studies. Families with higher incomes can also inquire about scholarships through websites such as scholarships.com and chegg.com.
The College Board is an excellent resource for parents hoping to gain a better understanding of what some of the ancillary expenses associated with college might be. For example, the estimate for books and supplies for an average full-time undergraduate student at a four-year public college is about $1,298. Food is also an essential cost to factor in since some estimates put college food costs at $4,500 for a three-meals-a-day dining contract that covers the traditional eight months of a typical academic year. Check with an institution’s bursar office or central billing office to find out how much it will cost to keep your child fed during the school year.
In addition to contacting your child’s school, try creating a budget with your child. This budget should not only include the essentials but also allot some amount of extra spending money. To be even more proactive, consider opening a joint checking account or a joint credit card with your child to ensure they will have enough money while away from home. Be sure to have a preliminary conversation with your child to make clear any expectations you might have for how they spend the extra money you plan to provide, so you both have the same understanding from the start of the school year.
Families who take the time to weigh all their options are more likely to make an educated decision regarding their child’s college selection both in and out of a pandemic, as well as the financial responsibilities that go along with it. These six questions are a good guide to begin navigating this next step in your family’s life. For further assistance, a Union Bank financial advisor can help you better understand and evaluate the many options that might be available to you and your child.
Wealth planning strategies have legal, tax, accounting and other implications. Prior to implementing any wealth planning strategy, clients should consult their legal, tax, accounting and other advisers.
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This is a publication of The Private Bank at MUFG Union Bank, N.A. (the Bank). This publication is for general information only and is not intended to provide specific advice to any individual. Some information provided herein was obtained from third-party sources deemed to be reliable. The Bank makes no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication and bears no liability for any loss arising from its use.