Spring is the season when high school students enjoy proms, look to graduation, and make decisions about their plans for next year. For those students fortunate enough to have college in their future, there comes the real challenge of how to pay for it.
I grew up in a family of educators and my mother often stated that school was a priority for our family because, “No one can take away your education.”
My parents made decisions all along the way that prioritized saving for the education of their children. They did everything from putting off buying a new car to deferring reupholstering our worn couch so we could go to school. It was easier to make spending trade-offs, like these, to fully fund college expenses when I was younger.
My grandfather used to joke that his tuition for a year of college was $600. The deposit we sent a few weeks ago to secure my son’s place in his incoming college freshman class was almost that much! According to the College Board, the average cost of tuition with room and board for a year at a public out-of-state university is $37,430, while the cost of a year at a private school averages $48,510.College costs have risen nearly 200% over the past 20 years, according to the American Enterprise Institute, far outpacing the increase of all other spending categories (except hospital services).
Worse, the cost of tuition has outpaced household income. Consider: in 1971 Harvard's $2,600 tuition amounted to about 13 weeks' worth of the median household's annual income of $10,285, according to CNBC. Today, however, the median household would need to work for almost a year to pay the $45,278 cost
Many have blamed the amenities arms race for the pace of tuition increases. This is where colleges “invest” in more and more unique experiences for their students to increase their position on the various college rankings.
You would expect colleges to be ranked on the quality of their academic experience, the caliber of their sports teams, and the cost (or value) of the education, but colleges are increasingly being ranked on the lifestyle experiences they provide their students.
During college visits with my sons, we saw schools boasting a highly ranked dining hall, showing off the new student gym (which was separate from the gym used by varsity athletes), and highlighting the suite-style living for students. While these amenities may be wonderful, they have little to do with the quality of the education students will receive. Families should consider the overall value of the college experience as well as the cost and return on their investment.
There are a number of ways to cover tuition. Grants, scholarships, and merit-based aid provide money that families don’t have to pay back, and savings and loans are available to cover what’s left. According to Sallie Mae, in 2018, 47 percent of tuition was covered by family income and savings; 28 percent was covered by scholarships and grants; and 24 percent was covered by borrowing.
Most parents want to set their children up for the most success possible and many will consider tapping into their own assets to prevent their children from starting their adult life in a financial hole. While it’s not a great idea for families to use retirement accounts to pay for college, there may be another option to help pay for tuition: home equity.
Taking out a loan against home equity has some advantages – and some considerations. Generally, secured loans – i.e., those that are backed by an asset, such as a home – charge lower interest rates than unsecured loans. This can even stand true when looking at student loan rates. Of course, if the home equity loan is not repaid, the lender can take possession of the home, while a lender cannot repossess the education of a student.
For families who have lived in their home long enough to see their equity grow, taking a loan against that equity to cover the gap in tuition costs may be a smart strategy.
My parents made trade-offs to help me and my three sisters go to college, and for that, I am forever grateful. My college education gave me a set of tools and frameworks that I continue to use many years later in dissecting and solving current business problems. It also gave me a lifelong love of learning that I hope to pay forward and share with my own children.