How High Earners Afford College: Let the Kids Pay

By Sharon Epperson, CNBC.com

Bank of Mom & Dad has tightened its lending practicesBank of Mom & Dad has tightened its lending practices As the cost of college continues to rise, many students are finding even the Bank of Mom & Dad has tightened its lending practices.

A new study reveals parents aren't footing as much of the college bill as they have in the past, shifting a greater portion of the financial burden to their children.

Parents funded only 28 percent of college costs from their savings and income in the 2011-2012 academic year, down from 37 percent in 2009-2010, according to a joint study released Monday by Sallie Mae, the nation's largest student loan company, and market research firm Ipsos.

Meanwhile students covered an increasing share of college costs, paying 18 percent of those costs through borrowing and 12 percent from income and saving, according to the study.

The shift has been even more acute in affluent families. Two years ago, parents reached deeply into their savings and investment accounts to meet the higher costs of college. But that level of spending proved to be unsustainable.

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"Parents don't have the same income and savings that they had then. Students are borrowing more. This is particularly emphasized in families with higher income levels over $100,000," says Sarah Ducich, senior vice president for public policy at Sallie Mae.

Three years ago, the study found, the typical high-income parents (making $100,000 or more) paid for 61 percent of college costs. This year, the parents' share dropped to 52 percent, while the students' portion jumped 5 percent to 23 percent (with more than half of their portion coming from student loans).

How the Typical High-Income Family Cover CostsHow the Typical High-Income Family Cover Costs

College-finance expert Mark Kantrowitz says that more middle and even upper income families now face a double whammy. Job losses and turmoil in the financial markets is largely to blame, says Kantrowitz, publisher of Fastweb.com and FinAid.org. At the same time, college costs continue to rise.

"Due to the stock market crash in 2008, a family that was in the wrong asset allocation could have seen their college savings plan lose 40 percent of their value," he says. "One in six 2011 high school seniors had at least one parent lose a job in the last year. So even a family that is still wealthy may have felt a financial pinch and may be less willing to pay for college."

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Some parents also argue students need to have some "skin in the game," believing their kids won't appreciate college unless they are responsible for the bill.

Many families are finding ways to lower college costs to meet their shared financial responsibility. A growing number of students are eliminating college choices based on cost, and parents are saving by asking students to live at home. Students are also slashing overall costs by adding a roommate and reduce other spending (including meal plans).

The Sallie Mae study found that, overall, families paid 5 percent less for college compared to one year ago. Yet total college costs for the typical family in 2011-2012 still topped $25,600!

So how can you cut the overall college bill? Financial experts I talked to offer these tips:

Create a four-year payment plan.

The majority of families have no financial plan for college before enrollment, according to the Sallie Mae study. Even among higher income parents, only 43 percent had a plan. Experts say the best way to save is to figure out the whole bill for the student's four years in college. "Tuition payments and borrowing for one year can obscure the overall cost," says Kevin Walker, CEO of SimpleTuition.com. "When they start to weigh the overall cost, families start to feel compelled to make alternative decisions," including choosing a less expensive college or relying less on parents' borrowing.

Make choosing a college a family decision.

Gone are the days when students pick the college and parents just say, "We'll make it work." In 2012, families continued the shift toward lower-cost community colleges, with 29 percent enrolled compared to 21 percent two years ago, Sallie Mae's study found. Students are factoring costs as well. Fastweb's most recent College Decision Impact Survey found high school seniors are increasingly sensitive to the net price and to the return on investment when choosing a college. "There's also been an increase in 'switchers'," says Fastweb's Kantrowitz - high school students who start off preferring one type of college and end up enrolling at the other, usually for financial reasons.

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Match your loans to the graduate's expected starting salary.

On average, 2012 graduates were offered starting salaries of $42,569, according to the National Association of Colleges and Employers. The Sallie Mae study found visual and performing arts, followed by liberal arts, have the highest percentage of borrowers. Yet, for the Class of 2012, the major in highest demand among employers was engineering, followed by business, accounting, computer science and economics, according to the NACE report.

Borrow only what you need and pay it off along the way.

If you or your child plans to borrow money, you'll need to fill out the Free Application for Federal Student Aid (FAFSA) (www.fafsa.ed.gov). Choose federal loans first, then private loans. Also, make interest payments while in school to shorten the length of the loan and reduce the total cost. A typical freshman paying $25 a month towards interest can save as much as 30 percent in interest charges over the life of the loan and pay off five years faster (than an interest-deferred loan with a 15 year term). Pay a little now and save a lot later.

Apply for scholarships and grants. Grants and scholarships declined from last year's peak, but were still higher than previous years, financing the largest portion of college bills, according to the Sallie Mae study. Search free online scholarship websites, including Fastweb.com and ScholarshipAmerica.org.

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