Hangmans Noose Final (Photo credit: Wikipedia)

Maybe my needle is stuck lately, but facing the actual bill in the mail focuses your mind like a hanging (with apologies to Dr. Johnson). So, here’s some further tips and strategies on how to think about college costs.

If this is a present or future concern for you and your family, please do go back over my blog posts on this site for further information about estimating costs, and discussion of savings strategies.

First, don’t believe the costs that the College Board lists as “average”. They’re talking about some goofy number that has no relation to what you’re actually going to pay (just like the “average” cost of a nursing home stay or the “average” sale price of homes in your area.) So let’s do a little comparing. They state the average cost of attendance at a state university (including room and board) is $21,477. The University of Illinois is $29, 022 for in-state residents in 2012. Okay, maybe another $7,000 is chump change (over 4 years that’s a difference of $28,000), but my guess is it might make a difference to the plans of some people.

Now here’s where we get a little funnier. CB states that the average cost of a private four year college is $42,224. Which you might actually get close to, until you get into the “selective” range, where you’re in the $58,000 range (not counting flying your kid back and forth for fall break, Thanksgiving, Christmas break, spring break, and back home again for the summer).

Multiply those figures by 4, adding the average 6% inflation rate of college costs, and you’re looking at better than a quarter of a million dollars for one kid. I pity you if you were so unenlightened as to actually have more than one. And heaven forbid if they’re both smart. (Even there I have advice. If you think you’ll qualify for aid, have your kids close together. If you won’t qualify, have them far apart. Be sure you know the answer to this before you even get pregnant. As if.)

Think about it this way—it’s the equivalent of buying each of your children a house. But most houses are bought with 30 year mortgages—at best, you’ve got an 18 year “mortgage” on college funding. And do you currently save 47% of your income? Ahem, that’s what colleges think you can come up with when Junior is away from the home refrigerator.

Often I hear the criticism that colleges penalize savers by not only dinging income, but vacuuming up assets as well. However, if you are low enough income to be eligible for financial aid, in most cases I’d guess that you’re not really going to be able to save a whole lot, especially outside of retirement accounts. But there’s another wrinkle to this that I really, really wonder about: so-called need-blind admissions.

Most selective colleges say they have need-blind admissions. Seriously? For one thing, there’s a box on the Common App that you need to check if you’re applying for financial aid, so every admissions office can see that immediately. Given this year’s horrendously competitive application stats (20 to 1 chances at many selective schools), it defies reason to think that, given two EQUALLY qualified candidates, a school wouldn’t pick the one who won’t cost them anything. Maybe I’m wrong about this, but if I were evaluating 30,000 applications for 1,500 slots, I’d be looking for quick reasons to eliminate people.

Being “penalized” for saving is a lot less painful than having to pull $58,000 out of your paycheck, at least for most middle to upper middle class parents. Or put another way, say you make $120,000 a year. Bing, no financial aid, anywhere. Let’s say right now you’re saving 10% and struggling to keep the lights on and the (underwater) mortgage paid—you’re spending $108,000 a year. But, paying at Private U, you’re now going to be living on $50,000. Can you do it? If the answer is actually yes, then why aren’t you doing it now and saving the rest? I thought so. With no college savings, that $58,000 is going to come out of retirement accounts, a home equity line of credit (if you can get one these days) and a whole lot of loans. So, how much are you being penalized in that case?

I’m certainly not against striving for a fine education, but just like retirement savings, the earlier you start, the less you have to come up with at the last minute.

Is there anyone who doesn’t need to save? I can think of a few:

• people who are or expect to be professors at universities where their children can get tuition reductions or which have reciprocal relationships with other colleges;
• people who get a major inheritance early in life or have enough investments at a young age that the account can be expected to grow on its own
• people who expect to downsize their housing the moment the child leaves, and have significant equity that they don’t mind using for college
• people who are positive their income will remain at less than twice the cost of their child’s probable college and whose only investments will forever be retirement accounts

Not you?  Time for my favorite closing line: you need a plan.

Advertisement for the Mount Carroll Seminary from 1888, mentioning the available financial aid. (Photo credit: Wikipedia)

If you have a senior in high school, March is the cruelest month. And if you have younger kids, here’s a preview of what you’re in for—fasten your seatbelts.

Some colleges and universities are kind enough to do rolling admissions—you send in your stuff and within some reasonable time you get the thumbs up or thumbs down. I’m not going into all the details of early action, early decision, single application early action—really, what are they thinking? But lots of schools save their “good news” for the last two weeks in March, which leaves nearly every college bound senior twisting in the wind since the applications were submitted for early January deadlines.

I just watched an hour interview on the Wall Street Journal where some really high powered admissions directors were forced to admit that all the stuff they use as criteria has no real predictive power. Okay, so before I start foaming at the mouth, I’m going to try to get to the financial point of all this. Financial aid formulas? Well, really, there is no formula!

I’ve written other posts on estimating your college aid, but the most common misconception I hear is that there is one formula for state schools and those private schools that only use the FAFSA, and another formula based on the CSS Profile. Not true. Not entirely, at least.

State schools are processing so many applicants and have so little non-governmental money that yes, the aid you get is pretty much based on the FAFSA, and if you’re remotely middle class, you’re going to be footing the whole bill. Luckily, that bill isn’t yet in the stratosphere, at least not in relation to costs at private schools. In relation to your personal budget, you might feel a flutter in the ole’ ticker, because the FAFSA is going to expect that you can pay 47% of your income for college costs. For the 99% of families for whom saving even 10% of their income is a challenge, well, feel your heart pounding a little?

Now, every dumb college planning article I read gives the dumb advice that the cost of attendance can be lower at a private school than at a public, because maybe, just maybe, little Jack is a stellar quarterback or little Jill just published her first novel. What’s the truth? Yeah, maybe your kid will get an alluring financial aid package if 1)you’re pretty broke 2)the kid is a genius and 3) AND HERE’S THE IMPORTANT ONE: your kid is a contender for an Ivy-league type school but is willing to settle for the third tier. Even if your kid is a genius, ivy-type schools turn down tons of those kids every day—they don’t need to give merit aid because every kid who has survived the admissions gauntlet would qualify for merit aid (and a lot of the ones they turn down, too.) Confining aid awards to needs-only gives them a little economic and minority balance—they already have plenty of wealthy applicants who’ve been tutored since preschool and who have parents who can and will pay absolutely anything to get the fat envelope (or now, the congrats email). When your freshman class is 1,500 and you get 20,000 applicants for it, the admissions department isn’t exactly a buyer’s market. So if your college payment plan is that Jack or Jill is going to get scholarships, I hope their name is Christopher Paolini (oops, he didn’t go to college).

Next overlooked fact—there’s no CSS/Profile formula. Each private school is absolutely free to give away any money, or determine “need”, any way they want. Unlike Fed money (given away on the FAFSA formula), private schools can consider your home equity, your retirement funds, or the car you’re driving. Or not. So, to get a real sense of this, go to this page and type in the specific school your child is considering. Heck, you’re probably up all night worrying anyway, so type in a few and you’ll see quite a difference, even among very competitive schools. Plug in your specific information (get your tax return and investment statements) and you’ll see how differently the same assets and income will be treated.

And now you know the most important thing: it’s time to get a financial plan.