Funding the Costs of College

By Robert O. Weagley, Ph.D., CFP^®

Last night, our local newspaper, The Columbia Tribune, had an AP article that you might have seen. It focused on a study conducted by Sallie Mae, the student loan agency. The implications of the story are real, yet surprisingly little understood by the college “buying” public. The bottom line is that choosing a college and the means by which to pay for college are no different than any other purchase decision. One has to compare the perceived benefits to the costs required.

This logic is compelling but too often ignored. For example, if you plan to major in a career where the expected salaries are lower than in another field, why would you incur as much debt as someone with a degree in, say, engineering? For example, in 2006, bachelor’s degree recipients in Engineering from the University of Missouri earned, on average, $51,000, while those graduating in Arts and Sciences earned an average of $29,400. Clearly, the larger salary will support a greater level of debt payments and indebtedness. Sallie Mae’s research indicates that most families and students do not consider their child’s (or, their) expected incomes when considering the potential of using debt to pay for college.

Another startling finding of Sallie Mae is that 40% of all families do not consider the cost of attending a college as a factor in their college search. Most families consider the size of the mortgage when they purchase a home! An investment in the human capital of a family member is worthy of the same considerations. Many children, with great talent and a plan to attend graduate school, will be well served to go to the less expensive state university, for their bachelor’s degree, and to then pursue the finest graduate program they can afford – and oftentimes have a graduate assistantship to help.

Perhaps the most positive finding is that 53% of all families surveyed did not borrow any money to send their child to school. Middle income families, defined by Sallie Mae to earn between $50,000 and $100,000, had the greatest reliance on debt, while those with lesser incomes used more grants and scholarships. Speaking of scholarships, do not neglect grants and scholarships, regardless of your means. Many schools have scholarships that are left unused, due to a shortage of applicants. Moreover, local civic organizations often have the means to help with college expenses.

On average, the study found that parents paid for nearly half of all college expenses (32% from current income and savings and 16% from borrowing); students paid for a little over a third of all costs through borrowing, savings, and earnings; while scholarships and grants made up the rest of college expenditures.

For more information about funding alternatives for college, check out Sallie Mae at http://www.salliemae.com/ and from the National Association of State Treasurer’s, the College Savings Plan Network at http://www.collegesavings.org/index.aspx .

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211