Doing the Math on College Planning

January 06, 2015

During the holidays, I had so much fun visiting family as did many of my colleagues. So as we all got back into the groove of working, we shared stories of those sometimes amusing family encounters. Tania, our Atlanta-based CFP, talked about how it was wonderful seeing her cousins, who only a few years ago she was bouncing off her knee, now that they are all taller than she is (which isn’t a stretch since she is barely above five feet tall).  Here’s her story:

As I was talking to my teenage cousins, I asked them about their plans after high school. They all gave me their wonderful plans and with bright smiles, their colleges of choice. As the wheels started turning in my brain and I started doing the addition, something was not adding up.  The math in my head looked something like this:

$60K a year dream college for 4 years + career averaging $50K = broke until 50

Feeling a sense of obligation but not wanting to curb their enthusiasm, I asked them about their game plan to pay for college. Much to my shock, I got nothing but blank stares, with a few mumblings about “scholarships.” Some said student loans.

I then asked them what the math looked like to them since it obviously did not match my math.  Their math looked something like this:

dream college at $???  for 4 years +  dream career paying $???= lots of $$$

A little confused, I asked them how student loan payments fit into the picture.  With heads tilted and blank stares, they re-did their math. It looked something like this:

dream college at $??? + 4 years of college= student loan debt repayment of $0

(Apparently as they receive their diplomas, the loan department shredded their loan obligations.) I realized at that moment that there is a huge missing link between what they think the true cost of college will be, what their future careers will pay, and how much they will owe monthly to repay their debt.

First we looked up averaging starting salaries – before and after taxes. For most of their majors, it came out to be about $50,000. They got so excited until I gave them the after-tax amount of about $3,000 per month in take-home income.

I gently asked my cousins would they like an idea of what their student loan payments could be when they graduate from college. As they said yes, I pulled out my iPad and went to https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action. This website has a calculator that can give an estimate of what their loan payments could be. After they nearly passed out over the payment, which came out to about $2,664 per month over a ten year period, the math to calculate how little money they would have after paying their college loan was done quickly, and they started to ask about their options.

Here are some of the strategies they discussed. Tania’s cousins were all 16 years old or older. Their parents were not in a financial position to help them save for college, so the strategies focused on actions her cousins could take to reduce their college expenses:

  • Enroll in a dual enrollment program that allows high school students to take classes at a local college.
  • Sign up for AP classes to “test out” of college classes.
  • Enroll in a community college for the first two years and then transfer to a four year college.
  • Research scholarships at the College Board’s Scholarship website.
  • Join the Peace Corp or AmeriCorps. This suggestion came from a cousin that said she was hopelessly undecided about her college major.
  • Do a work/study program at their college of choice.
  • Work a part-time job while going to school.
  • Understand the numbers that go into calculating how much they would get for financial aid. The Federal Student Aid website has great resources to help people with this.

This was an eye opener not only for her cousins but for their parents who were listening to this exercise. They all realized that with some pre-planning their kids can go to college without compromising their financial futures. What’s your game plan?