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Wednesday, April 2, 2014

Acceptance Letters In Hand, Students Wonder How To Pay

College acceptance letter (silversnake852/Flickr)

Exponentially more complicated than applying for college is figuring out how to pay for it. (silversnake852/Flickr)

It’s that time of year again — when college acceptance (and rejection) letters find their way into the hands of nervous high school seniors. But that’s the easy part. Exponentially more complicated is figuring out how to pay.

The average cost of four-year-private college in 2013 was $30,094. The sticker price at in-state public colleges is close to $9,000 or $22,000, if you’re coming from out of state. And those jaw-dropping estimates don’t include room and board, books or even an apple to give the teacher.

So what should families do? Here & Now’s Jeremy Hobson turns to Dan Caplingter, director of investment planning at The Motley Fool and he’s written extensively about the highly fraught issue.

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JEREMY HOBSON, HOST:

It's HERE AND NOW.

And we have reached the time of year that causes a huge amount of anxiety for parents and their high schoolers. It is college acceptance season, when those acceptance or rejection letters arrive at the house and it becomes decision time. Now, what makes that decision even more complicated is the cost. At last check the average annual price tag for a four-year private college was $30,094. The sticker price at in-state public colleges is close to $9,000, or 22,000 if you're coming from out of state.

And those estimates, of course, do not even include room and board, books or a computer. So what should families do? Dan Caplinger is director of investment planning at The Motley Fool. He's with us now. Dan, welcome.

DAN CAPLINGER: Hi, Jeremy. Good to be here.

HOBSON: Well, let's start with the most basic question here, which is when you're trying to decide which schools to apply to, how much should you think about cost?

CAPLINGER: Well, you know, there are so many issues involved in picking a college. They have to do not just with the kind of education that you want, but what your career aspirations are long term. But one thing that a number of families have discovered in recent years is that with economic conditions the way that they are, it's really something that you have to take into account the financial impact of the college choice that you make.

And as many students have discovered after graduation, when things didn't pan out career-wise the way that they had hoped, it really makes those financial decisions that you make as you're entering college that much more important so that you can anticipate potential problems and avoid things that are difficult to deal with after the fact.

HOBSON: Well - and I guess it matters what career you're expecting to go into how much you should expect that that salary you'll get will be able to pay off those loans.

CAPLINGER: That's definitely right, Jeremy. And I mean one of the problems that has come up often is that a lot of people don't necessarily know what they're going to do career-wise. That's a hard decision to make, you know, as a high school senior. But the other thing that is difficult to understand is just what the job market is going to be like because you're basically taking on the responsibility of being an economic forecaster. You're trying to guess what jobs are going to be plentiful and well-paying four years into the future. And that's a hard enough job for professionals to do, let alone someone who's just going off to college for the first time.

HOBSON: Well, so if you're looking at, let's say, Oberlin and Ohio State University, a private school and a public school, and mom says don't even think about applying to the private school because it's too expensive, would you say that's a good way to look at things right at the outset? Or should the kid say back to mom, come on, let me at least apply to this?

CAPLINGER: You know, I think that in general I would recommend going ahead and giving it a shot. So a parent in that situation might want to say something like, look, Oberlin is a lot more expensive that Ohio State would be. It's something that we might not be able to swing. But maybe Oberlin will have a program for you that will help reduce the amount of cost and make it manageable for us. Giving colleges and universities a chance to make it affordable for you, I think, is a better solution than just ruling things out on day one.

HOBSON: Well, let's talk about giving those institutions a chance to make it affordable for you. It is possible sometimes to bargain with them, right, especially when you've already got a financial aid package or a scholarship from another school.

CAPLINGER: It is. It's important not to treat this as like a used car sales opportunity. It's definitely not something where you're going to be able to go in and say, well, you know, this other school gave me 1,000. Can you give me 1,100? It's not going to be like an auction process. But the thing that you should do is take into account the information that each college has about you. All the colleges are going to refer to the FAFSA form, the financial aid form that you submit that holds - you know, it's sort of the tax return of financial aid. It has all the basic information.

But a lot of schools ask for supplemental financial information. And in those cases you might have a situation where one school knows more about you than another and has tailored a financial aid package differently because they're taking into account these different circumstances. And so you have an opportunity to kind of fill in the other college, the college that you're looking to negotiate with and say, look, I really want to go your college. I'm wondering, have you had a chance to take this aspect of my finances into account? And if you did, would that change the amount of aid that you could give? It never hurts to give that a shot.

HOBSON: What about scholarships? Because we read that there are often scholarships available at schools that are not publicized.

CAPLINGER: Well, that's certainly true. There are a number of sources of funds, both within the schools' control and offered by third party independent organizations that want to offer support to students. Often it's the financial aid office at the college or university that's going to have the best information about those things. But they're not necessarily going to do all the work for you and incorporate all that work into that initial financial aid offer that you get as part of your initial acceptance process.

HOBSON: Well, and there are also some tax advantages available to people that they can get if they use some of their money for tuition.

CAPLINGER: That's right. It's important to understand the federal government has many ways in which it assists with college education. For instance, tax credits like the American Opportunity Tax Credit can give undergraduates for the four years of their education as much as $2,500 a year that they can use as offsetting the costs of their education.

In addition, for people who are beyond undergrad, whether it is just a normal graduate study program or if it's non-traditional students who are just going back to school to get some additional training, there's something called the lifetime learning credit. They can give you 20 percent of the money that you spend up to $10,000, so that max credit of $2,00 a year towards expenses even if you're beyond that undergraduate level.

HOBSON: Although $2,000 a year may not be much if we're talking about, what, 30,000, 50,000 dollars a year for college. Dan, what about student loans? How much is too much to borrow?

CAPLINGER: Well, it really depends a lot on making this economic assessment of what your prospects are after school. If you think about it as an investment, basically what you have to think of is you're going to pay a certain amount upfront, you're going to have to pay that back over the years following your graduation. And so it requires you to think about what kind of income you're going to have and what the demands are going to be on that income.

Now, in general, when you're a bank and you're thinking about giving someone credit for whatever purpose, one rule of thumb is that you generally don't want people to have more than 30 percent of their monthly income going towards debt repayment. So when you're thinking about the loans that you're taking out, you sort of have to make a guess about how much income you plan in order to use that rule of thumb and also give you a sense of how much wiggle room you have if economic conditions aren't as good after you graduate and you have to consider taking a lower-paying job just to make ends meet.

HOBSON: Or just going to grad school and then maybe another grad school and just staying a student for as long as you can so you don't have to think about it.

CAPLINGER: There you go.

HOBSON: Dan Caplinger, financial analyst with The Motley Fool, who writes frequently about paying for college. And we'll out some of these tips that he's given us up at hereandnow.org. Dan, thanks so much.

CAPLINGER: Thank you, Jeremy.

HOBSON: And, by the way, Robin, there are some very interesting scholarships out there. There's one for tall students, one for those who are short, a foundation pays high school grads whose last name is (unintelligible), and there is one for students who are willing to promote beef. We've got links if you've got a good candidate at hereandnow.org.

ROBIN YOUNG, HOST:

And by the way, I should go back to school. In our conspiracy theory segment, I said the government gave men syphilis in a Tuskegee experiment. Of course they let men who had syphilis go untreated, which is bad enough, so I don't want to add to that conspiracy theory.

HOBSON: HERE AND NOW is a production of NPR and WBUR Boston in association with the BBC World Service. I'm Jeremy Hobson.

YOUNG: I'm Robin Young. This is HERE AND NOW. Transcript provided by NPR, Copyright NPR.


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Robin Young and Jeremy Hobson host Here & Now, a live two-hour production of NPR and WBUR Boston.

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