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President of Private College 529 Plan, a nonprofit prepaid tuition plan operated by hundreds of private colleges and universities.
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Sticker shock. It happens when we start checking list prices for a new house or car. And it’s what happens when we, or the employees we care about, read in the media about the high annual price tag for a college education today—then start worrying how much higher costs could go in the years ahead.
Fortunately, the sticker price or the total cost for one year of college, including tuition, fees, room, meal plan, books and supplies is usually not the actual price families pay for college. Unfortunately, when it comes to the cost of college, too many families aren’t aware of this. Unlike other big-ticket items, Americans saving for college think the stated price of undergraduate education is set in stone.
This can and should change.
We who lead businesses and teams can help change it by providing our employees with concrete information about the net price of a college education versus the sticker price—and about how the net price equation can work for them.
The definition of net price is straightforward. It’s the cost families or individual students pay after factoring in grants and scholarships. And these grants and scholarships can provide significant discounts. In 2019-20, private colleges, on average, awarded $25,800 in grant and scholarship aid. Families will not know the exact amount they receive until their child is accepted to college.
The good news is that families don’t have to wait until then to get an estimate for planning purposes. Each college must provide a “net price calculator” on its website that provides an estimated financial aid award based on factors such as family income. These tools can go a long way toward calming concerns about the cost of college. That’s why discussions of net price can offer much-needed perspective.
It’s also crucial that our colleagues, employees and team members planning for college understand the lengths colleges and universities go to defray costs and provide a range of services that maximize the experience for students, setting them up for success. For example, according to the 2021 NACUBO Tuition Discounting Study, 359 private, nonprofit colleges and universities reported an average 54.5% discounted tuition rate for first-time, full-time, first-year undergraduates and a 49% discounted tuition rate for all undergraduates in 2021-22.
These levels of discount were both record highs. Moreover, colleges spend significant resources to provide a rich academic experience, learning opportunities outside the classroom and services supporting student well-being. In 2019-20, four-year private colleges spent over $30,000 per student on instruction, academic support and student services. Teaching, including faculty salary and benefits, is the largest expense category at $19,670 per student. And there’s no doubt that colleges are facing the same issues as consumers today with rising costs due to inflation while, at the same time, trying to limit tuition increases.
When you consider the discounts many institutions are willing to offer in the form of grants and scholarships—as well as the availability of educational tax breaks and savings plans—you get a much more manageable net price for the average family and the student a much better chance to achieve their dreams.
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Yet, despite the more manageable net costs, families still need to determine how to meet remaining expenses, and unfortunately, many continue turning to student loans to cover those costs. In the class of 2019, over 60% of students had student loan debt owing an average of $28,950.
These are all excellent incentives, despite inflation and a falling stock market, for families to start saving as early as possible for college. And, the sooner families start saving, the better. Colleges are as invested in student success as families are and eager to work with them to help get past the sticker price to a workable net price.
There are a couple of types of tax-free tuition savings plans that those of us concerned for our colleagues and employees can consider—or take advantage of ourselves:
• You can consider contributing to a prepaid college 529 plan that locks in the cost of college tuition today, whether your student attends three years or 20 years from now. States and higher education institutions, including private colleges and universities, manage these plans.
• You can also consider contributing to a state-managed 529 plan, which works like a 401(k) plan. Investors decide how the state invests the contributions and earn interest. The money can be withdrawn for any qualified education expense.
Beyond 529 plans, families can save for college using additional methods.
Coverdell’s education savings accounts (ESAs) offer similar benefits to 529s (after-tax contributions and tax-free withdrawals if used for qualified higher education expenses), with some notable exceptions, including account owner income limits and contributions limits capped at $2,000 per year.
Roth IRAs are another option. Typically, if you withdraw funds from a Roth IRA before age 59 1/2, the earnings portion may be subject to tax and an early withdrawal penalty (contributions are made with after-tax dollars, so these can be withdrawn at any point penalty and tax-free). However, there are some exceptions, one of them being education. Early withdrawals are allowed from Roth IRAs to pay for qualified education expenses, allowing families to avoid the early withdrawal penalty (although you will still pay income tax on the earnings portion).
No matter what method you choose, treating college savings like a monthly bill can be an excellent way to make contributions to a college savings plan. It’s as much an investment in a family’s security as a mortgage, providing peace of mind that a college education is financially doable and, at the same time, ensuring the college graduate will join the working world with little debt and a very bright future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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