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Financial Planning for College Expenses and COVID-19

Financial Planning for College Expenses and COVID-19


On the cover of the July 2021 Journal of Accountancy (a publication of the Association of International Certified Professional Accountants or AICPA) is an illustration of a few multi-colored college graduation caps along with the headline and subtitle: “Education expenses – Expert discusses student loans, savings tips, and making plans in a changing environment.”

The cover article, a question-and-answer interview of college planning expert Ross Riskin by senior editor Dave Strausfeld, seems timely given that many college tuition bills are sent out around July 1 each year. At the same time, financial planners and most parents know that effective financial planning for the costs of college offers more options if you start around the time that your children are born.

Mr. Strausfeld’s introduction notes that there are two items that have disrupted parents’ financial planning for the costs of sending their children to college. Item number one is the election pledge of President Biden and other Democrats to provide a tuition-free education to all community college students, and item number two is the shift to online education made by many traditional colleges during the pandemic.

The first question posed to Mr. Riskin, an associate professor of taxation at the American College of Financial Services, was “Has the COVID-19 pandemic created many education planning issues?” Not surprisingly, Mr. Riskin responded that the pandemic “acted as both an accelerant of changes in higher ed and also brought about unique challenges that affected so many different constituents in an almost uniform manner.”

Mr. Riskin states that the rising costs of college were a popular discussion topic among many policymakers, researchers, and families prior to the pandemic (note: it was a topic I frequently addressed over the past two decades and in many of my posts, I commented about the writings of others).

When colleges shifted to online education in the spring of 2020, the inconsistent way they addressed their revenue model (some schools reduced fees, some schools increased fees to cover costs of the online shift, and many made no changes at all) drew attention to the fact that many students and their parents believe that there is an education element and an experience element bundled in the cost of a college education.

Mr. Riskin writes that given that the average cost of an online three-credit-hour undergraduate course ranges between $800 and $1,200, is it a surprise that many families balked at paying $2,000 to $3,000 for an online undergraduate course in English? (Note: there are a number of colleges whose tuition per undergraduate course is actually higher than the top end of Mr. Rifkin’s range.)

The substantial number of families who asked for refunds and discounts is evidence that many parents and college students value the experience element of higher education more than the education piece. Mr. Rifkin observes that the ratio of families valuing the experience element more than the education piece is 2 to 1. He further notes that CPAs and other financial planners need to focus on understanding which element their clients value most when discussing financial planning for college.

Other than providing informal financial planning advice to friends and relatives, I have never been a professional financial planner. If I were a planner, given the variability of the costs of attending college, I would provide more information about the costs and experiences of online college programs, public two-year colleges, public four-year colleges, and private four-year colleges.

Some parents will be in the enviable position of being able to afford to pay 100% of their children’s college costs, regardless of what school their children choose to attend. It’s likely that those parents graduated from college and want their children to have the same experience that they did.

It’s also likely that most parents are not able to afford to pay $300,000 to cover the costs of sending their son or daughter to one of our nation’s most elite colleges or universities. In that case, I think it’s important to have an open discussion about the costs and experiences of the options I previously mentioned. After having that discussion, it may be easier to focus on the most effective way to save for the costs of college.

When our children were born, my wife and I updated our wills. I also thought about what I would need to save in order to send them to private four-year colleges like Lehigh and Duke, which my wife and I attended.

The state of Maryland, where we lived, offered a state-sponsored, pre-paid 529 tuition plan that would cover four years of in-state college tuition or four years of college tuition at a private institution paying the Maryland average in-state rate whenever our children used it. We purchased two of those plans because we believed that the Maryland’s legislators would cover the funding needed if Maryland’s tuitions grew by a rate higher than the initial estimate. We also believed that the state of Maryland would be able to achieve a higher investment return than we could by managing a substantially larger portfolio, and that any tuition increases by Maryland colleges higher than planned would be covered by the state as well.

Eighteen years later, one of our daughters chose to attend an out-of-state, public four-year university, and her sister chose a private four-year university. Their 529 plans were still viable and would have covered all the costs except room and board had they chosen to attend a state university or college in Maryland.

Our investment in those plans provided my wife and I with the assurance that our daughters would have the right amount of money saved to cover four years of college even if something happened that prevented us from saving money to cover higher cost choices. As it turned out, we were able to cover all their college costs, regardless of the college that they chose.

Financial planning and paying for college are different for every family. I chose to provide a personal example to outline some of the choices that my wife and I made. For a much broader perspective, I accessed student loan company Sallie Mae’s annual survey, How America Pays for College.

The most recent survey covers the college academic year of 2019-2020. On average, American families spent $30,017 on college that year. Parent income and savings covered 44% of that amount and free money – scholarships and grants – covered 25%. Money borrowed by students and parents paid for 21%; 13% of those costs were covered by loans borrowed by students; and 8% of costs were covered by loans borrowed by parents.

Seventy percent of parents paid their portion of the average costs from current income while 37% used money from college savings plans. About 14% used money from their retirement savings plans, and 35% used money from other savings and investments. Mr. Riskin and his fellow CPAs must have been working overtime, since 52% of all families reported that they created a financial plan to pay for all years of college before the student enrolled.

There is a significantly different cost reported by the type of school a student attended. Students attending a two-year public institution paid $15,794; students attending a four-year public institution paid $25,094; and students attending a four-year private institution paid $47,010.

Parents play an active role deciding which school their child will attend. Forty-five percent of families reported that the parent and the student made “paying for college” decisions together. In 36% of families, it was the parents’ responsibility, and in 19% of families, the student decided which school he or she would attend. Cost continues to be a significant factor as 77% of families said they eliminated a school from consideration based on cost.

Notably, the most recent survey revealed a disparity between the opinion of parents and students about the value of college if all the classes are online. Most parents (66%) agreed that college is still worth the cost if classes are all online, whereas only 48% of students agreed that college was still worth the cost if all classes were online.

The final question posed to Mr. Riskin in the Journal of Accountancy article was “Should parents consider modifying how they save for their children’s education, given the changes that are underway or expected to happen in higher education in the next five or ten years?” Riskin replied that parents should continue to save money to pay for their children to attend college in order to provide them with options. He is not a fan of only considering 529 plans (tax-incentivized savings plans) but recommends a combination of 529 plans, taxable accounts, and Roth IRAs for maximum flexibility.

Mr. Riskin’s last comment is that regardless of the savings vehicle, it is important that parents set the appropriate target to meet their goal. Some parents set a target of $4,000 in savings per year because it is the maximum amount of state income tax deduction they can receive when the appropriate target should be $10,000 per year. Obviously, these savings targets are influenced by how many children you have, how much money you earn, and when you start saving for college.

There are several notable takeaways from the Journal of Accountancy article and the Sallie Mae survey. The first is that averages rarely represent the individual situation of a student and his or her family. While it’s a safe assumption that college costs are irrelevant for students whose families are fortunate enough to be in the highest (top 1%) income brackets, it’s not necessarily the case that students whose families are in the lowest income bracket (lowest quintile) are able to afford to attend college despite Pell grants and scholarships.

Second, the importance of items in the decision matrix change when the student attends part-time versus full-time and is a full-time employee versus a part-time employee.

Third, students who are no longer dependents of their parents are likely to be responsible for all the costs of college attendance and will likely have a different decision matrix as well.

If legislation is passed by Congress and signed by President Biden that pays tuition for community college students, it’s more than likely that not all expenses will be paid and not all students will receive the benefit. There will be a family income cutoff.

It’s clear from the Sallie Mae survey that a surprisingly high percentage of students and parents are not aware of many of the ways in which they can pay for college. It’s also clear that many families cannot afford to pay a CPA to assist them with their college savings strategy. The initiatives in many states to provide financial literacy to families should include the costs of college if they don’t already do so.

Colleges with a mission of providing an affordable education should consider the Sallie Mae survey results as they publish their costs of attendance data and provide information about the financial aid process. According to the survey, when it comes to the final decision about which institution to attend, 38% of families point to financial considerations while 36% point to academic considerations.

If the student is making the final decision, the percentages are very similar. It’s only when the parents are the primary decision maker that academic considerations are much more heavily weighted.

With financial planning considerations weighing so heavily for most prospective college students and their families, it will be interesting to see if those percentages change if a national free community college initiative is rolled out or if alternatives to college such as apprenticeships become more viable choices than in the past.

Wally Boston Dr. Wallace E. Boston was appointed President and Chief Executive Officer of American Public University System (APUS) and its parent company, American Public Education, Inc. (APEI) in July 2004. He joined APUS as its Executive Vice President and Chief Financial Officer in 2002. In September 2019, Dr. Boston retired as CEO of APEI and retired as APUS President in August 2020. Dr. Boston guided APUS through its successful initial accreditation with the Higher Learning Commission of the North Central Association in 2006 and ten-year reaccreditation in 2011. In November 2007, he led APEI to an initial public offering on the NASDAQ Exchange. For four years from 2009 through 2012, APEI was ranked in Forbes' Top 10 list of America's Best Small Public Companies. During his tenure as president, APUS grew to over 85,000 students, 200 degree and certificate programs, and approximately 100,000 alumni. While serving as APEI CEO and APUS President, Dr. Boston was a board member of APEI, APUS, Hondros College of Nursing, and Fidelis, Inc. Dr. Boston continues to serve as a member of the Board of Advisors of the National Institute for Learning Outcomes Assessment (NILOA) and as a member and chair of the board of New Horizons Worldwide. He has authored and co-authored papers on the topic of online post-secondary student retention, and is a frequent speaker on the impact of technology on higher education. Dr. Boston is a past Treasurer of the Board of Trustees of the McDonogh School, a private K-12 school in Baltimore. In his career prior to APEI and APUS, Dr. Boston served as either CFO, COO, or CEO of Meridian Healthcare, Manor Healthcare, Neighborcare Pharmacies, and Sun Healthcare Group. Dr. Boston is a Certified Public Accountant, Certified Management Accountant, and Chartered Global Management Accountant. He earned an A.B. degree in History from Duke University, an MBA in Marketing and Accounting from Tulane University’s Freeman School of Business Administration, and a Doctorate in Higher Education Management from the University of Pennsylvania’s Graduate School of Education. In 2008, the Board of Trustees of APUS awarded him a Doctorate in Business Administration, honoris causa, and, in April 2017, also bestowed him with the title President Emeritus. In August 2020, the Board of Trustees of APUS appointed him Trustee Emeritus. In November 2020, the Board of Trustees announced that the APUS School of Business would be renamed the Dr. Wallace E Boston School of Business in recognition of Dr. Boston's service to the university. Dr. Boston lives with his family in Austin, Texas.


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