Be prepared for sharp increases in tuition at colleges across the country starting next year and for the trend to last for years! The cost of higher education is one of the most significant costs that families face. Without a plan, Out Of Pocket Savings (OOPS) can be reduced faster than for any other expenditure and have a devastating affect on long-term financial vitality or even viability. College Tuition set to increase The American Council on Education, made up of university presidents, and The College Board, a non-profit association, are both warning of higher tuition costs in the future. Current reports show about 6 percent increases in recent years for both Private and Public colleges. And current reported increases do NOT take into account the significant changes that the current economic downturn and credit crisis are causing! The impact on colleges will probably force them to increase tuition and pass on other costs to students and parents. Family Net Worth Family Net Worth is the total value of assets minus total of liabilities; that is, net worth for the whole family, including all family members. For most of family life, it is the same as the parent's net worth because young children do not usually have any assets, or liabilities. That starts to change as college gets closer because older children may have income, savings, and loans or debts. Certainly during and after college there can be a dramatically different outlook for Family Net Worth because of the significant costs of college tuition and other related costs. Net worth is a good indicator of overall financial health. Family net worth can be an excellent indicator not only of a the ability for a family to financially handle significant events, such costs of higher education, but also of how healthy they will be after college. College Funding Sources are Falling There are several broad categories of external funds that families can use to pay for college. Each of these has a major factor that is already pushing the supply of those funds down or very likely will reduce the supply in the near future. - Grants and Federal Aid: potentially lower due to economic pressure on state governments - Loans: dramatically lower due to credit crisis - Aid from Colleges: lower due to lower revenue - Private Scholarships: lower due to down economy and lower business profits College tuition keeps rising faster than inflation and therefore the need for external funds increases. Families need external funds more than ever to pay for increasing costs. Increased Demand and Decreased Supply So the Demand will likely be higher for these same funding sources and the Supply will likely be lower. The competition for grants, scholarships, and other forms of aid will increase among students and college bound families. Families that develop a plan to pay for college, and implement it, fare significantly better than families that have no plan at all. The reason for this is simple - many aspects of college financial planning take time. Competing for financial aid and scholarship money takes time, preparation, and expertise. Impact on Family Net Worth The impact of the current trends in tuition costs and the underlying causes is additional strain on current and future costs, and more importantly, current and future Net Worth. More money may need to come from savings and other assets to pay for higher education as the other sources of funds become harder to get. Inadequate planning and preparation usually means fewer external funding options, which means using internal funds. - Savings - Retirement - Home Equity - Extended Family Assets These are all assets, the very things that make up Family Net Worth. Using these sources almost always means Reduced Family Net Worth, and that is directionally incorrect. It is family net worth that is the critical factor in long term financial health. Plan for Success One comforting piece of news is that political support for higher education is strong in both parties so the outlook is for financial aid from government sources to at least maintain and possibly grow. The key is to be able to get your SHARE of the financial aid that is available. Plan to succeed, plan to start early, plan to get the help you need, plan to protect your Family Net Worth. Include these items in your plan: - Get educated about the process of financial aid - Evaluation of all sources of funding - Reallocate assets to maximize financial aid - Understand which assets get counted in college evaluations - Forecast Family Net Worth before, during, and after college costs - Define parent and child financial roles that work for your family As many as 80% of the families we work with don't know how they are going to pay for college. The very fact that some families take the time to develop a plan is a key to their success in being able to pay for a college education and keep their head above water through the college years and after. Families should evaluate their strategy to pay for college costs and ensure that they are well positioned to obtain available financial aid. Family Net Worth can be a valuable tool to help develop a plan and also to compare several different plans for shooting the financial rapids of college costs. It may be even more important to recognize the financial challenges for family members after the college experience. The college graduate needs to be financially stable in order to start their independent life successfully. The parents must be financially healthy enough to make it to retirement and well beyond.
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