Funding the Costs of College

By Robert O. Weagley, Ph.D., CFP^®

Last night, our local newspaper, The Columbia Tribune, had an AP article that you might have seen. It focused on a study conducted by Sallie Mae, the student loan agency. The implications of the story are real, yet surprisingly little understood by the college “buying” public. The bottom line is that choosing a college and the means by which to pay for college are no different than any other purchase decision. One has to compare the perceived benefits to the costs required.

This logic is compelling but too often ignored. For example, if you plan to major in a career where the expected salaries are lower than in another field, why would you incur as much debt as someone with a degree in, say, engineering? For example, in 2006, bachelor’s degree recipients in Engineering from the University of Missouri earned, on average, $51,000, while those graduating in Arts and Sciences earned an average of $29,400. Clearly, the larger salary will support a greater level of debt payments and indebtedness. Sallie Mae’s research indicates that most families and students do not consider their child’s (or, their) expected incomes when considering the potential of using debt to pay for college.

Another startling finding of Sallie Mae is that 40% of all families do not consider the cost of attending a college as a factor in their college search. Most families consider the size of the mortgage when they purchase a home! An investment in the human capital of a family member is worthy of the same considerations. Many children, with great talent and a plan to attend graduate school, will be well served to go to the less expensive state university, for their bachelor’s degree, and to then pursue the finest graduate program they can afford – and oftentimes have a graduate assistantship to help.

Perhaps the most positive finding is that 53% of all families surveyed did not borrow any money to send their child to school. Middle income families, defined by Sallie Mae to earn between $50,000 and $100,000, had the greatest reliance on debt, while those with lesser incomes used more grants and scholarships. Speaking of scholarships, do not neglect grants and scholarships, regardless of your means. Many schools have scholarships that are left unused, due to a shortage of applicants. Moreover, local civic organizations often have the means to help with college expenses.

On average, the study found that parents paid for nearly half of all college expenses (32% from current income and savings and 16% from borrowing); students paid for a little over a third of all costs through borrowing, savings, and earnings; while scholarships and grants made up the rest of college expenditures.

For more information about funding alternatives for college, check out Sallie Mae at http://www.salliemae.com/ and from the National Association of State Treasurer’s, the College Savings Plan Network at http://www.collegesavings.org/index.aspx .

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

You Can’t Purchase Financial Freedom with a Credit Card

Cynthia Crawford, Ph.D.[i] and Robert Weagley, Ph.D., CFP^®

University of Missouri

A few years ago we did an informal survey of students at the University of Missouri and Missouri State University. We asked them what three things they would recommend to a student that was just graduating from high school and beginning their time at college or university. The “hands down” most popular warning was to encourage young people to avoid credit card debt. Many mentioned that they had not understood that it was not “free money”.

Some days it feels like we’re the only people in America cautioning people in their use of credit cards. Yet, if many of your peers could speak to you about it, they would join our chorus.

First, we would be wrong to say that all credit is bad. Credit fuels much of our economy and, if the debt is being used to create wealth through investments in one’s human or non-human capital, it is a tremendous tool. Credit is convenient. Credit cards are much safer to use than carrying a pocket full of cash. It can be the key to solving many emergencies. As such, credit is not bad.

Unfortunately, however, financial problems are the main reason students exit college before earning a degree. Major universities report (and MIZZOU is no exception) that more students report considering leaving school due to credit card debt than due to their grades!

What causes this? Oftentimes, students report to us that they are anxious to build their credit history and to rush into indebtedness. We have to ask them, “What’s the rush?” Credit is easy to access in today’s marketplace and, most importantly, the “good” credit you might seek to purchase a home or to pay for graduate school will depend more on your ability to demonstrate the businesslike management of your personal finances. What you do not want is a bad credit history. A bad credit history is worse than no credit history.

The National Endowment for Financial Education (NEFE) points out there are five steps for building good credit:

1. Pay your bills, such as rent and utilities, on time.

2. Make loan/credit card payments on time.

3. Pay your loan payments first. Then, spend money on other purchases.

4. Apply for only the credit you need. Do not apply for all the credit you can. Each new credit card counts against your credit score.

5. Never overdraw your checking/cash account.

Using a credit card is spending your future income in advance so, when it is time to pay the credit card bill, you need an income that exceeds your current spending. This is not the usual description of a college student. Consider the following, if you think you need a credit card, discuss it with your parents - not the bloke from the credit card company that is offering you a free T-shirt. Then, when you get a credit card, get only one credit card, use it wisely, and pay it off every month. Better yet, avoid credit cards altogether until you get a full-time job. We know that many people with full-time jobs can’t pay off their credit card balances each month. One has to ask, as a full-time student, what are the odds you’ll have better success?

Financial patience is not a bad thing. In fact, financial patience depends on personal discipline a key ingredient to financial success.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211