College tuition is rising faster than the inflation rate[i] and paying for higher education has become a major financial concern among many families and students. When coupled with the fact that wages remain relatively flat, and the cost of living continues to rise[ii], many families are stressed about education expenses and the possibility of incurring debt.
According to Pew Research Center, the earnings gap continues to widen between college-educated and non-educated individuals. As a result, the prevailing view is that higher education is still vital to securing a better paying job and a higher quality of life.
States are Taking Notice
The rising concern of the cost of higher education has become so prevalent that the state of New York recognized the hardship many families face putting kids through college, and instituted a free college tuition program that covers state school tuition for New York families with an annual household income of $125,000 or less.
While there are rules and regulations for those receiving assistance from the program, such as maintaining a specific GPA and remaining in New York following graduation, many families are relieved of the burden of paying for college.
Scholarships, Grants and Student Loans
The latest annual SallieMae How America Pays for College study shows that families are turning to a combination of scholarships, loans, and savings accounts to fund higher education. Fifty percent of families depend on scholarships and grants to absorb an average of 34 percent of costs.
Borrowing money through loans accounts for another 20 percent of college expenses. The terms ‘debt’ and ‘higher education’ have almost become synonymous. The total U.S. student debt stands at $1.41 trillion and the average student debt for a 2014 graduate is $33,000. (Source: newyorkfed.org)
Planning for the Future
Many factors should be taken into consideration when planning and paying for higher education. Here are three tips to keep in mind:
- Create a financial plan in advance that accounts for college tuition and living expenses. You can use tools available online to determine what tuition may look like when your children are ready to attend college. Based on that amount, establish a financial plan that will allow you to allocate savings to reach that goal.
- Consult with a financial advisor on investment options to create separate savings accounts for college funds. There are a variety of options including state-sponsored 529 plans, Coverdell Education Savings Accounts, and establishing trusts. A financial advisor can help map out the best path for you and your family.
- Keep an eye on all investment accounts, and re-evaluate your college savings plan when you get a raise or have changes in other life expenses. A change may mean that you can contribute to college funds more or less, each month. Knowing approximately how much money is in the accounts when your children enter high school and apply to college will bring peace of mind.