Strategies for Making College More Affordable

On this episode of The Long View, certified financial planner and author Ann Garcia discusses planning and financing an affordable college education.

Here are a few excerpts from Garcia’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

Ptak: You wrote that when it comes to college, no outside entity will protect you from making a terrible financial decision, and then you go on to note that you couldn’t get a mortgage for a house you could never afford, but nothing stops people from borrowing more for college than you can pay back. Why are there fewer guardrails around college outlays, do you think?

Garcia: It’s a great question. On the one hand, the federal student loan programs for students do have some pretty strict guardrails, but nothing prevents students from going and getting additional loans on the private market or parents from taking out parent PLUS Loans. And we as people tend to think that what our children want and need, and particularly the best possible version of that, is worthy of every penny that we have. And, unfortunately, no one will stop you from taking out these loans.

The way that the direct student loan, which is the loan that undergraduate students can take, is structured is, it’s the one loan that an 18-year-old can take without a co-signer, without any kind of credit history, and still get a very favorable interest rate. And so, that opens up all these other issues that don’t exist in normal loans. There is no qualification for that loan other than filing the FAFSA. I firmly believe that if there were less loans available to parents, the cost of college would be much lower than it is, because I think that making all those additional dollars available and having an audience that’s willing to spend that kind of money has a huge impact on driving up the cost of college.

Benz: We want to spend some time on deciding whether loans are appropriate and also the FAFSA that you referenced, the application for financial aid. But before we get into the weeds of college funding, I want to hear about your own experience with this. You wove that into your book. You went through the application and college-funding process not too long ago with your twins. So, I’m curious, what were some of the biggest surprises for you, a college-funding expert, as you went through that process with your two children?

Garcia: A great question. There were definitely plenty of them. As much as we can learn—we always learn there’s plenty more out there that we don’t know. So, I have twins who are currently college seniors, and they’re very, very different students. So, their two college application processes were very different. I think to me, one of the biggest surprises, given that I’m a really analytical person and I took a really analytical approach to college and encouraged my kids to see it the same way, I was surprised at how different the responses were that they got from different colleges.

So, for example, my son applied to two colleges. He applied early action to both, which is where you submit your application early, you get an answer early, but you have until the regular decision deadline to make a decision. One of the colleges replied instantly to him with an acceptance and a big scholarship offer and sent him stickers—put one on your laptop, put one on your phone. He was getting emails multiple times a week. Something would come in the mail periodically. And it was just crickets from the other school. And I thought we were going to receive two acceptances and two award letters on roughly the same schedule and be able to sit down and deliberate our way through them. But instead, he was getting this marketing onslaught from one of the colleges and hearing nothing from the other. And for a 17-year-old it was like, “Oh, somebody likes me and somebody else doesn’t.” And it was a very challenging, emotional side of the college application process to deal with.

I think one of the really important lessons for me in going through this with my own kids is that planning for college is equal parts financial planning and parenting. Making sure that your kids understand the process, understand the budget, understand the priorities and what they’re trying to do and that you’re putting some guardrails around their decisions and around their exploration so that you can help them and coach them to good decisions in that process.

I think another big surprise for us was the number of colleges that use unweighted GPA to award merit scholarship. As you go through high school, the schools really encourage students to take higher-level courses, AP/IB, dual credit, whatever it is that the high school offers. That tends to be presented as the best choice in every circumstance. We learned from my son’s experience, where he took a lot of those classes and really struggled in them, they weren’t a good fit for him as a student. So, we were disappointed to see that the college that he chose awarded scholarships on the basis of unweighted GPA. And if we had not pushed him into all these higher-level courses, he would have been eligible for about $12,000 a year more in merit scholarships. I’m not going to say you shouldn’t challenge yourself academically or you shouldn’t take the hardest courses that are available to you. He certainly felt well-prepared as a student when he got to college. But having an extra $48,000 left over because of bigger scholarships would have been a real difference-maker for our family.

Ptak: What role do you think a student’s anticipated career path, to the extent they have one, should play in determining how much to spend on college and whether to take loans to cover it?

Garcia: There’s that adage of don’t borrow more than your anticipated first-year salary. I would say 50% of students go into college undeclared, and about 75% change their major over the course of their college career. So, it’s a little bit risky to say, “I’m going in as an engineer, and engineers make $75,000 a year average starting salary. So, I’m fine to borrow that much and therefore, I’m going to choose XYZ college as a result.” You may end up being an engineer, but you also might not. And so, making a financial commitment on that basis is, I think, really unwise.

Again, this is me speaking as a parent. I feel like kids are under a lot of pressure when they’re in high school to know what they want to be and to know what their major is going to be and to treat college as a four-year pathway to a career versus an opportunity to really explore broadly. So, to the extent that we are coaching our kids that that’s what they should be thinking as a 16-, 17-year-old when they have very little experience or visibility to the world of careers and in particular, a lot of those initially higher-paying fields like engineering, where they, again, don’t have a whole lot of direct experience with what that job looks like, what those courses look like, I think that’s really quite risky.

My recommendation to parents is always that they stick within the limits of the federal direct student loan program for their borrowing. Students who take out that loan every year will graduate from college owing somewhere upward of $27,000, depending on interest rates and how much interest has accrued, and that translates to a monthly payment of around $325 a month for 10 years. That’s an amount that a college degree will almost always cover. In fact, very few students who earn a bachelor’s degree and take out federal direct student loans are among those groups of people who really struggle with student loans.