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College costs are going through the roof. The average four-year private college now runs nearly $44,000 a year, including tuition, fees, and room and board. For many people this will be the biggest investment they make and, for some, the one with the highest return — if planned for carefully.
Before making any investment, you should always evaluate the costs and risks it involves. Answering the following three questions will help you evaluate your education investment and determine the potential return.
What is the initial cost?
Like any investment, the price you pay will impact your future return. In terms of your education investment, this is where college selection comes in to play and why it’s one of the most important pieces of your college planning strategy.
To figure out what you can expect to pay, first begin researching schools to determine where you will be a good fit and how your academic profile compares with those of current students. The College Navigator site is a great resource to use in assessing this. The more desirable you are to the school, the more likely it is that you will be accepted and receive financial aid in the form of grants and scholarships. Don’t exclude community colleges in your search, as they can offer a good education at a fraction of the cost of private schools.
Once you receive your award letters from the schools, you will be able to determine your net price. This is the difference between the school’s sticker price minus any grants or scholarships. Student loans should not be subtracted since they will ultimately increase your total college costs. But before committing to any loans, calculate the interest over the entire term and add it to your sticker price. At this point you will be able to determine your initial investment cost.
Beyond financial aid, there are other ways to reduce the initial cost. For instance, taking advantage of the American Opportunity Tax Credit can reduce your tax burden, effectively helping with college funding. Provided they qualify, students or their parents may claim this education tax credit, which can provide up to $10,000 in tax credits over a four-year education. And if your parents use tax-favored savings vehicles such as 529 plans, this can provide years of tax-free growth for your college expenses.
What are the risks?
Every investment has risk, and a college education is no different. One of the greatest risks is that you extend your stay beyond four years (increases your initial cost) or don’t graduate at all (diminishes your return). This is another reason the college selection process is so important.
To address these risks, you may benefit from working with a college admissions professional who can help you determine where you might fit in best, select a major you will stick with and increase your odds of graduating on time. In addition, resources such as College Scorecard can show you the graduation rates at each school, which can be an indication of the amount of guidance and support students receive and the likelihood that you will complete your degree. You can also research the tutoring, academic advising, counseling and career development services provided by the schools you are interested in.
However, there’s also the risk that the school reduces your grant or scholarship aid, which would increase your out-of-pocket costs. If you have an aid package, be sure to talk to the school’s financial aid administrator about what award amounts you can expect each year and any factors that might alter that amount.
Of course, there are other risks you can’t plan for. For instance, your future employment potential could be affected by changes in the economy or technology, family obligations or other unexpected events. You cannot control such risks, but you should consider them as you evaluate your options.
What is the potential return?
Not all gains can be measured in dollars, but for now let’s focus on the financial aspect of the return on your investment in your education. Research shows that people who go to college earn substantially more over their lifetimes than nongraduates. Decades of higher earning power can make a college degree an excellent investment that pays you back exponentially.
When selecting your potential school and area of study, estimate what you can expect to earn after graduation. PayScale offers salary projections for specific majors and offers a return-on-investment calculation based on future income and college costs. Of course, such calculations won’t be exact, but thinking realistically about what you can expect to earn later in life can help you make decisions about how much you can afford to invest in your education today.
The last thing on my mind when selecting a college was the return on my investment. I remember opening the Barron’s college ranking book and choosing a few recognized schools in the area that offered business degrees. Then I subsidized what I couldn’t pay with student loans. But knowing what I know now, it’s clear that this lack of planning cost me thousands of dollars in missed financial aid opportunities and excessive student loan debt.
Don’t make the same mistake — be proactive! Start by choosing your college wisely and exploring financial aid opportunities. Learn how to take advantage of tax aid and figure out ahead of time how your degree will impact your future earning potential. With a sound planning strategy, your college education can be the best investment you ever make.
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