It is no secret that the cost of college is rising like crazy. Average tuition increases are anywhere between five and eight percent annually. Plus, room, board, books, and fees are subject to the same increases and more. But did you know that there are hidden costs of college too? If you aren’t aware of these, they can have the most damaging financial impact if the wrong decisions are made. In this post, I’ll go over these and give you some criteria on how to deal with these wisely.
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I get asked from time to time the difference between subsidized versus unsubsidized student loans. While my overall opinion of student loans remains the same (I don’t like them), it is a worthwhile discussion to have. In this post we’ll look at the commonalities and major differences between the two.
The most important difference to students in school has to do with repayment of interest…
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Student loans have a much wider impact than you might expect. Even if you’re making your payments, you may find it tough to borrow more money. Even for a mortgage.
Imagine that you’re a newlywed couple. You’ve been married about eight months and life can’t be better. Both you and your spouse have steady work and a good income.
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Who doesn’t like freebies? Especially ones that really have some value to them.
Over the weekend my son called and had been to the doctor. As I’ve talked about before he’s a college student so any unexpected expense can be a challenge. He had a couple of prescriptions and I happened to remember that Publix provides some free antibiotics. Turns out that one of his antibiotics was covered. While it wasn’t much, it was a freebie he could take advantage of when he needed it most.
My wife found this list of freebies from Kiplinger Magazine.
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So what does it cost to raise a child? The experts have a wide range of answers on that question. I’m sure you do as well.
A couple of weeks ago, MSN published an article from CNBC writer Colleen Kane on the most expensive states for raising children. You’ll find the full text of the article here. The article opened with the following statement:
It now costs $234,900 to provide a child with 17 years of food, shelter and other necessities, according to the U.S. Department of Agriculture’s (USDA) most recent annual report. For 2011, that broke down to an annual cost for two-parent, middle-income families of $12,290 to $14,320, depending on the child’s age.
In fact, the USDA has created a neat little calculator to estimate these costs. I played around with the tool for awhile and found some interesting results. Granted, this is just a planning tool and they give you the ability to refine your personal amounts. But the USDA’s results on what it costs to raise a child were interesting nonetheless.
For starters, I put in my two kids that are still living at home at ages 9 and 17 and used the South region. I also put in the lowest income range and the highest to see the differences.
In summary, it told me that I’m going to spend approximately 40% of my income on two kids, regardless of which income bracket I used. I love my kids, but I sure hope that’s not the case.
The highest cost in all scenarios is housing. I understand where they are coming from. But, if you consider the real percentage of space that your child occupies in your home, I don’t think it adds up. They do say that basic utilities and furnishings are included in these costs but I still don’t get the amounts. You’re already spending money on your home, utilities, and furnishings. You might argue that you could live in a smaller home without kids. But if money was an issue, you could also have kids share rooms. I know that goes against the grain, but they could.
They keep food relatively stable at about $200 per child per month. On the high end, it’s only about $250 per child per month. I do think that’s reasonable. But again, families who cook from scratch and eat at home can do better if money is tight.
The child care and education category raised an eyebrow. The folks who put together this calculator may think so, but I don’t believe it costs upper-income families almost three times as much in this category as lower-income families. Maybe it’s because more of these families send their kids to private schools. But this one will vary widely. I think for public education this cost can be driven down considerably. Could it be child care? For younger kids yes, but the model said that I would spend over $6,000 per year on my 17-year old in the top earner category. He really doesn’t need a babysitter.
Transportation is another big piece of this pie. I also think it’s overestimated. We do spend a lot of time shuttling our kids back and forth, but not this much. The calculator factors in monthly payments for cars, repairs, and insurance. Why does a portion of those costs belong to a child? Just like housing, you’re going to have a vehicle anyway. And don’t give me the sad story that you need a new vehicle to transport your precious cargo safely and reliably. Many quality used cars, without payments, can do that just fine.
The other categories are clothing, healthcare, and “other.” Those make up a smaller portion of the estimate and on the surface they seem reasonable. The amount allocated for clothing and “other” rises with income, and healthcare is relatively flat at $100 per month per child.
I’ve tracked our spending for years in Quicken. I can safely say that we’ve never spent more than 25% of our household income on all three of our children in a given year. That includes making child support payments to my boys’ mother. Our tips for keeping these costs low are:
We use a budget. We know how much we plan to spend for each major category and we stick with it.
We buy consignment. There are great used clothing stores where name brands can be had for a fraction of the new cost. And we take and give hand-me-down clothing for our kids. They simply grow too fast to buy new, except for underwear and shoes. We do have a limit.
We use coupons. When we go to a movie, go out to eat, or do some form of entertainment, it almost always involves a coupon. The older kids have also caught on and will use coupons too.
We drive used cars. And we keep them forever. My 2004 Toyota Tundra has 143K miles on it. My wife’s 2008 Toyota Camry has 75K miles on it, and her last one was fifteen years old with 250K miles on it when we sold it. There is simply no need to buy a new car.
We send our kids to public schools. While private schools may be attractive, our kids have an acceptable public option.
So while the cost to raise a child may seem astronomical, it doesn’t have to be. Nor do you have to go into debt to raise them either. While there are associated costs, a child should never be looked at as an economical burden, or for that matter any sort of burden. The emotional benefits far outweigh the financial cost of raising a child.
Discussion Question – What are your thoughts on how much it costs to raise a child? Better yet, what are your tips on keeping these costs in check? Join the conversation!
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As college went back in session this fall, a story by Chris Taylor of Reuters news service bemoaned a sobering statistic. There appears to be a scholarship shortage developing in America. Long hailed as the last free money source for college education, the number and amount of merit-based scholarships awarded seems to be on the decline. If this is true, and the trend continues, this spells troubles for prospective college students and their families. But let’s take a look at the report, and the data, and see what this really means.
Taylor cited statistics from the report titled “How America Pays For College 2012″ commissioned by Sallie Mae. From Taylor’s article, he states “The percentage of students reporting winning scholarships dropped markedly, to 35 percent in the 2011-2012 school year, from 45 percent the year before…” In the report on page 18, one could interpret this because the table shows that from 2011 to 2012 the use of scholarships dropped from 45% to 35%. That’s a subtle difference in wording – Taylor states it in terms of those winning scholarships but the report states it as those using scholarships.
One might argue that they are the same. After all, if someone wins a scholarship, why wouldn’t they use it? I can think of a couple of reasons. First, what if the student was awarded multiple scholarships from competing schools? They can only choose one, so those other scholarships go unused although they were won. Another reason might be that the total scholarship award isn’t enough to compel a student to go to college, so they don’t enroll anywhere. Finally, other programs, such as employer reimbursement or GI Bill benefits, may reduce or eliminate the need or eligibility for scholarship money.
Taylor goes on in his report to point out some meaty data that reflects the declining availability from state and government-based scholarships. Some programs have been reduced or cut altogether. For example, several states like Georgia and Florida are tightening the rules on their lottery-based scholarship programs. And Michigan has eliminated a program altogether that provided up to $4,000 per year to qualifying students. States can simply no longer afford to fund these programs as they face looming budgetary issues. But nothing in the report indicates that colleges are reducing their scholarship awards or changing the criteria to earn those scholarships.
In light of this information, how should parents and students respond? In short, I don’t think any of my advice changes. Here are my best tips to maximize your child’s scholarship chances, taken from the posts:
- Start early. Waiting till the junior year is no time to begin thinking about scholarships. Preparation begins today.
- Know the deadline. All scholarships have a deadline for application. Miss it and you’re sure not to get that scholarship.
- Understand merit scholarships. In most cases, grade point average and entrance exam score are the only two criteria used. Aim to maximize both.
- Follow the application process. You’d hate to miss out on a scholarship due to a technicality.
- Look everywhere. The best summer job a student can have is to seek and apply for as many scholarships as possible.
- Score high. Improve your award with a great score on your entrance exam. If necessary, take it two or three times.
- Take charge. Don’t rely on guidance counselors, colleges, or anyone else to do your scholarship legwork.
One last bit of advice is to check out this information for yourself. This kind of article that Taylor writes, though well-intentioned, can scare parents and students into a doomsday scenario where the only solution they see is to get student loans. Don’t rely on me or any other source to interpret data for you. Find out the truth and make your own objective decisions. I think there are plenty of scholarship opportunities still available today. Not everyone will earn a scholarship, but taking the steps listed above will greatly improve your chances of success.
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Public school systems, by and large, struggle with money. I don’t think that’s a great mystery to anyone. And it’s why the schools seem to lag behind in technology. Relying on government school funding alone inevitably leads to problems. Do any of these sound familiar?
- Schools in disrepair
- Dangerous, broken playground equipment
- Classrooms with high student-teacher ratios
- Antiquated technology in classrooms
- Badly-worn textbooks
- Reduction or elimination of programs
- Temporary classrooms
- Teachers without supplies
- Teaching to the test
It’s the reason parents are asked to provide donations and supplies. It’s why the PTA/PTO holds fundraisers. It’s why schools have started using less paper. The basic school funding is really just enough to keep the school open, provide required staff, and pay the utilities.
Parents are concerned, and they complain. They want better things for their kids. They want the best of technology and engaging content. They want new, brightly-colored classrooms. They think that nothing is too good for their kids.
Until they’re asked to pay for it. (Here’s where I begin to step on some toes, so proceed with caution)
Case in point – my kid went to school registration this week. The school did a creative thing, in my opinion. Returning students with unpaid fees were serviced in one line. Three lines were open for kids with zero balance. Guess where the majority of parents were standing? You guessed it – in the one line with unpaid fees from the previous year. So my wife sailed through without waiting. And the sob stories were poured out at the single desk.
Raise property taxes to provide additional school funding? Not in my district. And probably not in your district either. Voters continue to go to the polls and vote down property tax hikes across the country. Then they wonder why they can’t sell their home. Parents don’t want to move their kids into substandard schools. Home prices suffer and little by little the student population declines.
Yes, there are incidents of waste in every school district. There always will be. And many folks feel that administrators are overpaid. They want the school board to trim its budget. But it isn’t enough. When the money runs out, school systems don’t have a magic wand. The schools themselves will have to suffer.
Public school doesn’t mean free school. Parents have to do their part. And those that live in the surrounding communities have to as well. Teachers cannot be expected to cover the deficiencies. Your contributions, through paying taxes and associated fees, help to close the school funding gaps.
I’ll also admit – it’s tough to cough up $250 to register a kid for school, then maybe another $100 in supplies and so forth. And you might look at the expense categories and raise an eyebrow – after all, $20 for a student ID card? So it costs $350 to send your kid to school. Then school lunches might cost $3 per day. It can be a daunting number, especially if you’ve got more than one in school.
But is it unreasonable? Well, just do the math. Your kid probably spends 180 days in school. The $350 turns into just $2 per day – that’s two dollars. Add another $3 for lunch, and your kid goes to school for $5 per day.
How many of us spend $10 per day for lunch and don’t think anything about it? You can’t get daycare for $5 per hour. Now how unreasonable does the cost of school seem?
So parents, if you want to affect your school funding, there are several common sense steps to take. Pay your fees. Contribute your donations. Join the PTA. Vote. Get involved at school. Attend board meetings. Your child, their teachers, and the community at large will all benefit.
Discussion Questions – Do you think that it costs too much to send your child to school? What alternatives would you offer instead?
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Mention the college freshman budget and you get a wide variety of responses. Most students really have no clue, and no plan to do one. Some think this is something for adults. Others know they should be doing it but aren’t sure how to start. Who’s left with the fallout of these responses – the parents, in most cases.
College is, for many, the first place that monetary responsibility is required. Mom or Dad won’t be around to tell you what to spend your money on. This newfound freedom can quickly spiral out of control. That’s why your son or daughter needs a budget.
That word makes people cringe. But it shouldn’t. A budget is simply a plan for your money. When you have a plan, your money seems to go further. The college freshman budget is no different.
I’m going to assume that college itself is paid for. I know that’s a huge assumption but is one that I’ll make to level the playing field. When I say this, I mean tuition, books, fees, room and board. They can go to school, have a place to stay, and are being fed. I’m also going to assume that the student is unmarried and has no kids. Thus, their only financial obligations lie with themselves.
To prepare a budget, regardless of age, priorities need to be established. This separates the needs from the wants. All possible expenditures need to be listed then categorized by need or want. Then, the list needs to be reordered with needs first, then wants. Needs are to be provided for first, just like in real life.
Let’s begin with necessities. I’ll classify necessities as required or unavoidable expenses. In Dave Ramsey world, he calls these the four walls – the basic building blocks of the house. Here are some of the big items that fall into necessities (again, beyond the basic college expenses):
- Toiletries
- Snacks
- Supplies
- Car Gas
- Car Maintenance
- Car Insurance
- Car Registration
- Cell Phone Bill
- Medical Co-Payments
- Fraternity/Sorority Dues
- Clothing
- Emergencies
As for wants, there will be a lot of those. Entertainment opportunities are plentiful. This is an area where the budget can quickly get away from your son or daughter. Without the college freshman budget, there is nothing to keep them from saying yes to all of these things. Here are just a few items:
- Sports Tickets
- Starbucks
- Restaurants and Dining Out
- Weekend Trips
- Parties
- Summer Study Abroad
- Social Events
- Dates
- Gifts
- Unnecessary Clothing
Those expenses that don’t occur at least monthly can blow a budget. For those items, an amount needs to be saved each month (or each payday) to plan for them.
We’ve been focusing on the spending side. Remember that a budget can also be balanced by adding to the income side. This means work. In my opinion, a college student, even a freshman, can work and go to school. It comes down to managing time effectively. Check out my article “Time Management For The College Student.” And here’s a little secret – the more your student works, the less time they have for social life. This manages the expense side of the budget as well.
Never let credit cards fill the shortcomings in the college freshman budget. Though credit card issuers have new rules for college, these still make their way on campus. It is a dangerous precedent to begin covering expenses with credit cards. These kids have little to no income so they don’t need a way to get into financial trouble.
I believe that the well-maintained college freshman budget can make a huge impact on your student’s freshman year. When a young adult learns how to take control over one area of their life, it often translates into the other areas. And, when one area is out of control, it takes the others along for the ride. Teach your child how to do this and talk to them regularly about it.
Application Question – Does your son or daughter realize these upcoming expenses? Have you talked with them about a budget? What is the first step you can take to introduce this topic to them?
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College savings is a big question for many parents, and rightfully so. After all, it is a daunting task. Today, the cost for one year of college and expenses at a public university is a whopping $19,000. Nationwide, college tuition increases an average of 7% per year. Everyone can get student loans. Perhaps my kids will get a scholarship. And what if my children decide not to go to college?
When I graduated high school, my parents had no college savings. Although my grades were good, I had no plan. Because of this, I started college without any scholarships. My parents made too much money for grants yet too little to pay for my school. My first tuition payments were made with student loans.
Generally parents fall into one of three categories in saving for college:
- They save for college. These parents have made the decision that their children will go to college. Having the money set aside removes the biggest obstacle and objection to going to college.
- They want to save for college but cannot. College savings plans are too far down on the budget right now. These parents hope that someday they can begin to save. Or, they hope to pay for part or all of college when their children reach that age.
- They will not save for college. Since college is not a requirement, their children will pay their own way. Perhaps these parents paid for their own college. Or , they believe that their children will get loans, grants, or scholarships.
If you are saving for college, that’s great. Just be sure that you are saving enough. I have a neat little spreadsheet that you can use to help you calculate your college savings needs. Should you find that your savings are lacking, take a look at my post “Ten Tips To Add $650 Per Month To Your Budget.” Use a 529 plan or an Educational Saving Account (ESA) to save in a tax-free plan.
Also make sure that you’ve placed the right priority on college savings. The best approach is to first save for retirement each month, then save for college. Nobody will be funding your retirement so you must take care of that first. If you aren’t planning to pay the entire college bill, make sure your children understand that.
If you believe that your children can get student loans, you are right. According to USAToday, over $100 billion was loaned to students in 2011. Outstanding student loan debt now exceeds $1 trillion and exceeds the total outstanding credit card debt. Student loan default rates are on the rise. Many graduates find that they cannot earn enough to live and repay their loans.
A better option than loans is for your children to work their way through school. Of the $19,000 mentioned earlier, approximately half of that goes to living expenses. If your child lives at home, then they can work to pay for their tuition, fees, and books.
You might be ready to save but the college savings plans mentioned above may not be appealing. In this case, you could save outside of these plans. This will cause you to lose the tax advantage, but you can spend the money in whatever manner you choose.
Scholarships are plentiful, but they aren’t automatically awarded. An intentional scholarship search can be the best defense against the lack of college savings. Take a look at my two-part series on scholarship secrets every parent should know.
There are no right or wrong answers on this. For transparency’s sake, we do not have college savings set aside for our kids. My wife and I believe that our kids will work harder and value their education more if they pay for it. We do support them in other ways but paying for college belongs exclusively to them.
Whatever your approach, be sure that you discuss this early and often with your children.
Application Question – What is your position on saving for college? Do your children know this position?
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I’ve got a Thursday bonus post for my readers. The good folks at Your Teen’s Money Skills asked me to submit a guest posting which appeared on their site yesterday. Does your child spend all of the money that they get? Do they always want more? This post on contentment in children will help you with the problem. In it, I explore the impact of marketing and advertising on our society and I give some shocking figures on what our teens spend each year. I also give you several actionable steps to help break this cycle in your home and build contentment.
If you like this post, I’d appreciate you sharing it with others. If you haven’t already, shoot me your email address using the Subscribe form below and you’ll be the first to know when new content and bonus offers are available.
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Application Question: Do you struggle with contentment? Are your children beginning to display the same characteristics?
