If you have children, you have probably thought about how you are going to pay for college. And maybe you have taken it a step further and are hoping to not burden your children with crushing debt when they graduate and thus, you are wondering how to pay for college without loans.

You might find yourself in the middle of the barbell, that is, you make too much money to qualify for need-based aid, but you don’t make enough money to afford paying full tuition. As such, you are trying to figure out how to pay for college without financial aid.

There are a number of ways to pay for college ranging from college grants, to college scholarships, to paying cash out-of-pocket, to saving through different types of 529 plans, to even more exotics options such as using Capital Appreciation Bonds (we will discuss this strategy a little later).

The cost of college is also a big factor. It can range based on the school selected, the amount of financial aid and grants available, household income, high school academic performance, and other skills which might earn you a scholarship.

So before we dig into how to pay for college, let’s look at the cost of college and whether it’s really worth it.

How much does college cost?

According to the College Board, for the 2015-2016 academic year, the average cost of attendance (including tuition, fees, room, and board) at a public in-state university is $19,548 per year while the cost of attendance at a private university is $43,921 per year.

In comparison, ten years ago, for the 2005-2006 academic year, the average cost of attendance was $12,115 per year at a public in-state university and $28,743 at a private university. Over this ten-year period, this reflects a 61% total, or 4.9% per year increase at public in-state universities and a 53% total, or 4.3% per year increase at private universities.

Also keep in mind, these are average costs. For fun, I took a look at the all-in cost for my alma mater, Southern Methodist University. For the 2015-2016 academic year, the cost of tuition, fees, room, board, and books is $64,840.

Assuming the same rate of increase, ten years from now, the average cost of attendance at a public in-state university will increase to $31,541 per year while the average cost of a private university will increase to $67,114 per year.

Remember that these costs are paid for using after-tax dollars. So assuming a 30% tax rate, you will need gross earnings of $45,059 per year (or more than $180,000 over four years) to pay for one child attending a public in-state university. If you plan to send your child to a private university, you will need gross earnings of $95,877 per year (or more than $385,000 over four years).

Obviously most households are not going to be able to afford this for one child let alone more than one without some amount of financial aid.

Back to my alma mater, SMU. I looked at the financial aid awards on their site. For the 2014-2015 year, 70% of the first-year undergraduate students received financial assistance in the form of a scholarship or grant ranging from $500 to $70,383 with an average award of $26,774. And 66% received scholarship and grant packages of more than $20,000. Need-based loans and student employment averaged $3,685 and $3,695, respectively.

So for 70% of the first-year students, net of scholarships and grants, and not including any need-based loans or student employment, the all-in cost of one year at SMU is approximately $38,000! Multiplying that by four years, and you will have spent over $152K for that degree. Expensive, but better than the $260K the degree would cost without the benefit of financial aid.

It appears that universities have started following the same path of healthcare pricing. Gone are the days when there was one rate that everyone paid. Now, only a few of the wealthiest individuals pay full retail cost. Just as most people use insurance not just to pay for healthcare, but also to get access to significantly lower pre-negotiated rates, most attending college receive some form of assistance whether through scholarships, grants, or loans.

Is a college degree still worth it?

As you can see from the Bureau of Labor Statistics chart below, your earning potential is greatly improved with a degree. But whether that benefit outweighs the cost somewhat depends on the type of degree earned and your grades.

Economists at the New York Fed have been studying the benefits of a college degree. Their study indicates that in 2015, holders of an undergraduate degree earned a median income of $43,000, up $3,000, or 7% from the prior year. And as could be expected, performance in college drives earnings potential. The top 25% of college graduates earn a first-year salary of $60,000. In addition to grades, your field of study also dictates earnings. While recent engineering graduates command the highest salaries of up to $70,000 per year, the lowest salaries from graduates in anthropology, mass media, and environmental studies earned less than half that amount at $30,000 per year.

The other benefit of an engineering degree, besides commanding higher salaries, is employability. As of September 2015, the unemployment rate for recent engineering graduates was 4.9%, down from 7% in 2010. At the same time, the unemployment rate for young workers without a college degree was 10%, more than twice as high!

So back to whether the cost of a college degree is worth it. The $40,000 in additional earnings that the engineering graduate will earn making $70,000 as compared to the lowest earning graduate making $30,000 per year will pay back the cost of their education in less than 4 years. And this doesn’t even include the upside potential that having a degree gives you. Studies indicate that you increase your lifetime earnings potential by $1 million with a college degree and up to $3 million with an advanced degree.

How to pay

When my oldest child was about five years old, we invested in a 529 plan. Between working, raising the kids, and moving, I actually “almost” forgot about the money. You still wonder why the site is called Financial Slacker? By almost forgot, I mean we invested the money in a target date 529 fund and left it alone. During the next 5 years, it more than doubled.

What’s the point of the story? If you start early, paying for college by investing money today and letting it grow is a much better approach than waiting until the kids are in college to pay. The horizon is shorter than retirement, but the concept is the same.

If you have children and you want them to go to college, open a 529 plan today. At a 4% to 5% inflation rate, you need all the help you can get to keep your money growing with the cost of college tuition.

In looking at the 529 plan we established, depending on the cost of the school my children attend, and other factors, I expect we will have saved approximately 50% of the total cost to attend college. That being said, the balance will need to come from another source. One of the options that I am considering to cover the shortfall is the use of laddered capital appreciation bonds (CABs).

CABs are zero coupon bonds issued by municipalities to fund public expenditures (primarily school districts). You purchase the bonds today at a discount to par value. Because CABs are structured with zero coupon, you do not receive any cash interest payments until maturity. At the maturity date, you are paid the face value of the bond plus the accumulated interest. One of the real benefits to this bond structure is that not only is the interest payment deferred until maturity, it actually capitalizes – meaning you benefit from the compounding effects over time.

The other benefit of funding college with this instrument is that you know the exact future value of the instrument and exactly when it will be paid. This makes it ideal for funding specific expenditures at specific points in time – for example, college tuition. Also, in the event you don’t need the full amount, the funds can be used in any way you choose unlike funds in a 529 plan which must be used for educational expenses. This could be especially valuable when it comes to paying for things such as housing while attending college. The tax rules are specific about how much of your housing expense can be paid for by a 529 plan. Proceeds from the sale of a CAB portfolio do not have this same limitation.

To be honest, I am far from an expert in bonds. A friend who has made a good career in muni bonds suggested this strategy to me. I would like to investigate the viability more fully and welcome any feedback from others who have experience in this area.

I’ll leave you with this parting thought:

 

The cost of a college education may rival purchasing a house as the largest expenditure you will make in your lifetime

 

The cost of a college education has become such a significant expense, that no longer can you count on using earnings from a part-time job to pay for school. As such, it requires planning and research to find the best approach for you.

Please let me know your strategies for financing a college education.

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