The Price of College: Part 2
This month's newsletter is a continuation of last month's discussion of college prices.
As you may have learned already from one of my seminars or previous newsletters, it's important for parents to remember this simple truth:
College price tags are meaningless.
Most students do not pay full price for college. That said, paying attention to sticker prices can be extremely helpful in making college more affordable. Here's a simple example:
Getting a $20,000 per year merit scholarship from a school that has a published price of $48,000 will obviously make a college much more affordable than receiving the same award amount from a school priced at $65,000.
Sorting Colleges by Price
Today, I'm excited to share with you a helpful tool that The Chronicle of Higher Education rolled out last fall that will allow you to sort through 3,000 schools by price.
With the tool, you can identify schools by price in these categories:
Nation's most expensive colleges and universities
Using The Chronicle's database, I generated the list below of the most expensive private colleges and universities.
Not surprisingly, the nation's most expensive schools are nearly all elite institutions with all but one of them located on the east coast.
Using the database to find bargains
Dig a little deeper with this database and you'll find valuable pricing trends that would otherwise be hard to identify.
To demonstrate what you can find, I checked prices here in the state of California. Here are the most expensive private colleges and universities in California:
Contrasting with Rankings Lists
Now if you look more closely at this list, what's fascinating is the price rankings of these colleges are correlated with the U.S. News & World Report's college rankings of best schools. The U.S. News rankings categorize by best National Universities, best National Liberal Arts colleges, and best Regional Universities (West Coast). Here are the school rankings in order of highest cost:
Looking for good buys
I'm not going to get into a discussion of college rankings here, but the reason I share the above is there has been plenty of evidence that the U.S. News' college rankings are horribly flawed. These rankings, for instance, don't measure the education that students receive at a college or university nor take into account their career outcomes.
What this little exercise suggests is that we often are paying for schools based on these rankings. There are wonderful education opportunities at many schools regardless of what U.S. News might think of a school. Here are just two examples.
Marietta College has an impressive program for petroleum engineers—the only college that offers this—that enjoys an awesome placement rate. Baldwin Wallace University, an Ohio school (its tuition is $30,776 before aid or scholarships) enjoys 100% placement for its highly regarded music therapy programs.
There are many hidden gems out there, and if you are seeking to cut the cost of college, I'd encourage you to help your students explore possibilities beyond just the most highly rated schools.
If grandparents pay off a college loan directly to the loan source, can they consider that a gift and go up and above the $14,000 annual gift tax exclusion amount for tax purposes, similar to paying the school direct for tuition?
If a grandparent sends a payment to the lender, it is treated like a gift to the borrower for gift tax purposes unless the grandparent is a cosigner or otherwise legally obligated to repay the debt. There is no gift tax exclusion for this sort of direct payment, unlike for college tuition.
The gift tax exclusions are just for tuition paid directly to an educational institution and for medical costs paid directly to a doctor or medical facility.
The next logical question, of course, is whether the grandparent is able to claim the student loan interest deduction if the grandparent helps the student with the loan payments.
A cosigner on a private student loan may claim the Student Loan Interest Deduction on interest paid by the cosigner. Generally, to claim the deduction, a taxpayer must be legally obligated to repay the debt. A cosigner is conserved legally obligated to repay the debt.
If a taxpayer makes payments on a student loan but is not legally obligated to repay the debt, the borrower can claim the student loan interest deduction on those payments. It is treated as though the taxpayer gave the money to the borrower who made the payments.
Note that a taxpayer must not be claimed as an exception on someone else's federal income tax return to be eligible for the student loan interest deduction.
Borrowers and cosigners who file tax returns as married filing separately are not eligible for the student loan interest deduction.
See IRS Publication 970, where it says:
Generally, you can claim the deduction if all of the following requirements are met:
College Enrollment Drops 1.4% as Adults Head Back to Work (Wall Street Journal)
The Wall Street Journal reports that college enrollment has dropped for the fifth year in a row for three major reasons.
College enrollment reached a peak in 2011 with 20.6 million college and graduate students. Today that number has slid to 19.01 million.
Federal Reserve Study Linking Increased Federal Loan Amounts with Higher Tuition Prices (Federal Reserve Bank of New York)
A recently revised study from the Federal Reserve concludes that there is a link between greater availability to federal subsidized student loans and the price of private colleges. Controlling for all other factors, the researchers estimate that for "every additional dollar of subsidized loans made available to students, institutions increased their sticker tuition about 60 cents."
Michael Howell is a registered representative with, and securities offered through LPL Financial, Member FINRA/SIPC.
This research material has been prepared by Horsesmouth.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.