Those Who Save for College Subsidize Those Who Do Not
One of the best-kept secrets about college expenses is that those who save for years to pay them may wind up subsidizing those who choose not to do so.Here is how it works. Assume two identical families -- the Smiths, the Jones and their children -- who are absolute clones in age, intelligence, and income. When the Smiths have their first child, they immediately scrimp and save every possible penny for college. They stay at home, rarely eat out, and drive a used car.The Jones, in contrast, use the exact same dollars to travel around the world with their child, eat out often, and buy a new car every couple of years. When the time comes for college, their assets are so low the child qualifies for financial aid.Who pays? You guessed it -- the Smiths. Thanks to their savings, their children may have a broader range of college choice, may not need as much paid employment during school, and may even with little or no debt. But if they pay full tuition, part of their savings will be transferred through college financial aid to help the Jones. At some private colleges, as much as 40 percent of tuition revenues now go to financial aid. Few, if any, will deny admission to equally talented 17-year-olds -- clones, remember? -- simply because one's parents were spendthrifts, while the others saved.Those who pay full sticker price increasingly subsidize those who get discounts.Historically, the biggest discounts have gone to athletes. Outstanding quarterbacks, basketball stars and top-ranked tennis players get full-ride four-year scholarships, even if their parents have six or seven figure incomes -- as some do.Over the past decade, colleges eager to recruit the cream of the crop academically have offered more and more merit-based scholarships, that is, scholarships awarded without regard to financial need. "It's easier to make butter when you start with cream," one administrator noted. Higher student test scores figure prominently in college rankings. At highly select private institutions, the sons and daughters of faculty and staff may receive half their institution's tuition wherever they choose to enroll. The money goes straight from one college to another. That subsidy helped seven of my own children and step-children decades ago.At institutions like Harvard and Stanford, nearly three out of four undergraduates now receive some form of financial assistance. Except for Harvard, few institutions can meet 100 percent of the demonstrated financial need through a combination of scholarships, loans, and jobs. Many middle and upper income families save tens of thousands of dollars by encouraging their children to enroll in flagship state institutions, such as the University of California at Berkeley, which have far lower tuition and no family means test. In f act, several studies have shown that parents of students at these schools have higher incomes, on average, than those attending all the private colleges in the same state. That is one strategy for the Jones to consider, provided their child qualifies for admission to a flagship public institution. Alternatively, they could suggest their child attend a state college or a community college, keeping their savings for graduate school -- or for a business of their own.Another strategy is to lighten up a bit before college. Consider sending a teenager abroad to study and travel, instead of saving every penny. Princeton Admissions Dean Fred Hargadon did just that for a year between high school and Swarthmore.A third, even less costly alternative is to help teens find an adult mentor. One of my stepdaughters, talented in drawing, spent one high school summer helping a professional artist in return for a critique of her work. With a recommendation from the artist she was admitted to both Yale and Stanford with boards scores of 500 in English, 350 in math. Today she's an artist in residence at UCLA and Cal Tech. Starting a tiny business, volunteering, working minimum wages jobs, and keeping a daily journal are other creative approaches to college and career. One stepson in high school started a typing service that was swamped, but eventually became an independent global trader, working out of his home with a phone, fax and e-mail. Volunteering to conduct apartment discrimination surveys led directly to business school for a former colleague. Restaurant dish washing, pumping gas, and fixing Fords provided incentives for one of my sons to progress from community college through a master's degree. Keeping a journal while her son had heart surgery launched my wife's career in journalism. These and other mundane, entry-level tasks help develop personal skills -- and adult relationships -- that may count for more than financial savings alone in looking ahead to college.