Paying for School

The Problem.  Paying for the education is one of the largest financial outlays that most families face.  I went to Washington & Lee for undergraduate and law school in the 1960s for $2,000 a year.  The sticker price is now over $60,000 a year.  The cost has gone up 30-fold in 50 years.  According to the College Board, the average cost of attending a state university is $25,000 for a resident and the average private college cost is approximately $49,000.  These costs increase at approximately 3% per year.  What the College Board and the colleges do not talk about is that the cost needs to be grossed up for the state and federal income taxes that need to be paid on earned income that is used to pay for tuition.  For example, if you need to pay $50,000 a year for 4 years of college, the payments going to the college total $200,000; but if you are in a 40% tax bracket, you need to divide $200,000 by 0.6 to get to the cash flow of $333,333 that will be required.  It gets worse if we need to factor in interest on long term loans.

The Princeton Review in Paying for College describes making the grades and building the resume required for acceptance into prestige schools as a “savage puberty right”.   Parents understand that education is the key to success in our world and they are motivated to spend to get it for their children. They need to do the best for their children without bankrupting themselves. The family needs to make the education planning a collaborative project with realistic goals.

There is a lot of uncertainty in the planning process.  Income in future years is uncertain.  At 16 students don’t know too much about where they want to go to college or about where they will be admitted as they finish high school. Planning needs to be flexible. The target moves.


Sources of Funding.  Funding sources include family, scholarships, and loans.


Adversarial Relationship. Schools are run by faculty and administration for their financial benefit. The mission of their financial aid officers (FAOs) is to minimize the portion of the sticker price that is absorbed by the school and to maximize the amount paid by the families.  The family objective is to maximize scholarships and to avoid loans.

Negotiating with a FAO is like buying a car.  We start with a “sticker” price.  This is what the school dreams about getting.  And there is a net price, which is what the parties agree to at the conclusion of their negotiation.  There is a wide range of net prices. The financial aid publication of one elite prep school shows a sticker price of $45,300 but average family contributions of:

Family Gross Income

Over $180,000


Average Family Contribution



There are big discounts from the sticker price. There is strength in financial weakness: a well-endowed school can give full rides to financially poor students with attractive records.


The Problem with Student Loans.  In 2016 there was in the U.S. $1.5 trillion in outstanding student loan debt.  That is up from $500 billion 8 years earlier.  The average undergraduate leaves school with $35,000 owed in loans.  Of 2005 graduates, 63% were delinquent by 2010.  The total number of delinquent borrowers in 2016 was 8.1 million and that number continues to grow.  And these figures understate the problem because they do not reflect family loans.  The schools do little, if anything, to control their costs.  The Department of Education makes profits on its lending operations and stands with the banks and their lobbyists to maintain the status quo. Student loans are a mortgage on the student’s future; they should be used only as a last resort.


The Application Process.  The application process is complicated.  In addition to the underlying applications for admission to the schools there are two different methods that are used to evaluate eligibility for financial aid.  There is the federal convention that starts with the completion of the FAFSA (Free Application for Federal Student Aid) and there is the institutional format used by most private schools with their own forms.  Both approaches are tied to income tax returns.  Starting early is important: scholarship funding is limited and late applicants may miss out.

The financial aid application is not something that just needs to be done once:  the forms need to be completed the aid package negotiated for each year in which financial is needed.  The process is complicated, but the time and money invested can pay for itself many times over if it results in the right package.


Beating the Four Year Plan.  The traditional college pattern is to be a campus resident for four years.  There are a number of techniques for reducing time on campus and managing the costs.  One is going to a state school where the costs are less.  Residency matters.  In state tuition requires residency.  In California we are blessed with many excellent public universities.  The Economist says that six of the best universities in the world are in California and all but Stanford are public.  Another is going to a junior college and then transferring after 2 years.  The Wall Street Journal on 01/25/2017 commented on small, private colleges aggressively courting community colleges for the last two years of a bachelor program.  I am told that upon graduation from Santa Barbara City College with a 3.0 average, there is a guaranteed admission to the University of California Santa Barbara.  This trend may spread.  A third is to find a school that will accept credit for online coursework.  Steve Kinsley in a 06/18/2012 editorial in Barrons calls for government support of programs to develop online coursework to expand opportunities and reduce costs.  He suggests cash incentives to students for online work.  Universities will resist anything that reduces their revenue base.  Harvard, MIT, and Stanford all have excellent on line courses that give a certificate of completion but not degree credit. Schools resist giving degree credit for online work that will erode their revenue base; however, the existing financial model is unsustainable and increased use of online coursework is an obvious way to control costs.  AP courses in highs school can allow you to place or test out basic college courses.  All of these need to be considered.


Selecting the Best Value in Schools.  Lend Edu compiles a college risk-reward indicator that ranks colleges according to the ability of its graduates to repay student loans.  It does this by comparing early career pay of graduates with average debt per graduate.  For 2017 it evaluates 752 schools.  This compilation gives us current history on how successful graduates from school should be in repaying student loans and helps give us a realistic assessment of the risk associated with loans we may be asked to make to finance an education.

Another useful statistic is that of endowment per student. Some of the Ivy League schools are well endowed and can offer full scholarships to applicants meeting their admission standards.  Rich schools are better able to award scholarships than poor ones.  Understand the ability of a target school to give scholarships.

Also explore athletic, state, and other scholarships not awarded by the school.

The military academics are free but subject to a service obligation after graduation.  The Army and some of the other services have generous scholarship programs for their members.  With the service programs you can be assured of employment after graduation.


Collaborative Education.  Many private sector employers have continuing education programs for employees.  In these programs an employee works on a full or part time basis and completes a part-time degree program often with the costs being underwritten by the employer.


Work Study.  Many schools offer campus work as part of the aid package.  I got my meals for waiting one meal a day.


Apprenticeship Programs.  There are apprenticeship programs along the German model in which the employer trains workers to the skill level needed to fill the needs of technically demanding jobs.


529 Plans.  Every state has set up a Section 529 Plan, which provides for earnings within the plan to be free from income taxes if distributions are used for education expenses.  The tax advantage probably does not outweigh the loss of investment control and the reduction of financial aid eligibility that comes with having money in a 529 Plan.  Having money in a 529 Plan will reduce what the FAO awards.


Long-Term Planning.  Planning should start well in advance of the time application for colleges are due.  Financial analysis needs to be long-term and needs to include the cost of college, cost of graduate school and the cost of financing education for multiple children. When estimating costs, look beyond the sticker price to the costs of computers, books, spending money, and travel.


Problems of Taxation and Capital Formation. As noted above, paying for education with earned income (whether to pay tuition and costs currently or to repay loans for many years in the future) has huge income tax costs. How do we reduce the costs? Scholarships are tax free and they reduce the sticker price so our first priority is to maximize need and merit scholarships. Inherited assets take as their tax basis fair market value at date of death; multigenerational estate planning may position older generation assets to pay the education costs of younger generations with less tax cost and invisible to the FAO. Do tax deductible gifts to schools result in better scholarship terms?


Our Services.  We can be of general counsel to the family to bring them together in this important planning process.  We can analyze tax returns and financial aid forms to suggest changes that will maximize financial aid.  We can develop a long-term strategy to maximize financial aid. We can explore the use of older generation assets. Our objective is to serve as an advisor in the application process to give the family the understanding and confidence to successfully conclude their financial aid campaigns.  We evaluate each case and the extent of our involvement and quote a fixed fee.