Is College Worth it?

With the cost of college increasing; students acquiring significant debt; and the sluggish job market, is it worth getting a college degree? Based on all the comparative data, the answer is a resounding “yes”.

The expense of attending college continues to rise. A by-product of this is the continued growth in student debt. With the stories in the news about the negative impact of this debt on graduates, people are starting to question whether college is still worth the cost.

In short, the answer is “yes”.

Less Unemployment. One reason is college graduates have consistently enjoyed a lower unemployment rate than high school graduates. The most recent government data shows that the unemployment rate for those with a college degree is half that of someone with only a high school diploma.

Higher Earnings. In addition to a lower unemployment rate, those with college degrees also earn more on average than high school graduates. Average earnings for those with a bachelor’s degree are more than 1.5 times the earnings for a high school grad. For those with an advanced degree, the multiple increases to over 2.5 times.

An organization called The Hamilton Project (www.hamiltonproject.org) recently posted a paper discussing the college decision and attempting to quantify the benefits of attending. They found that a college degree is worth $500,000 more than a high school degree in today’s dollars. They also argue that even factoring in the cost of college, the rate of return realized from “investing” in a college degree is “two to three times higher than those from alternate investments including stocks, bonds, gold, treasury bills, and the housing market.”

Though college remains a very desirable goal, the negative impact of a large student loan balance is unmistakable. A high debt burden puts additional pressure on a new graduate’s budget and can take away from other important uses of cash, like saving for a house or for retirement.

Funding College

How to fund college? While hoping for a scholarship is one option, you may want to have a backup plan. In order to reduce the amount of money borrowed to pay for college, starting early to save for this expense is the best solution.

529 College Saving Plans

Because legislatures became concerned about the rising cost of college, several states created prepaid tuition plans in the late 1980’s. We’ll spare you the details, but after much wrangling the federal government agreed with the need and included 529 plans in the Taxpayer Relief Act of 1997.

Opening a 529 account for a child is one of the greatest gifts you can give. Money invested in a 529 grows tax-free, and funds can be withdrawn tax-free if they are used for qualified higher education expenses. Indiana offers a further incentive. A state income tax credit up to 20% of your contributions, with a maximum annual credit of $1,000, is available when you use the Indiana College Choice Plan.

Establishing and growing an account is easy. An account can be opened with as little as $25. Additional investments can also be as small as $25. You can establish an automatic investment plan that pulls money from your bank account monthly. The earlier you start investing, the longer the money has to grow.

For investments, Indiana offers a one-stop age-based plan (which automatically adjusts its investments as the beneficiary gets older) or eight fund options with which you can build your own portfolio. The fees charged by the investments are reasonable. The age-based plans charge between 0.50% and 0.60% annually, while fees on the individual portfolios range from 0.29% to 0.93%.

What if we get a scholarship?

Getting a scholarship is a wonderful windfall and the 529 plan allows you to withdraw an equivalent amount from the account. You owe income tax on any earnings (not contributions) that make up the withdrawal.

If your student graduates college with money left in the 529 plan, you have a few options. You can leave the account in place and potentially use it for graduate school. Or, you can change the student beneficiary on an account to another family member. If you choose, you can withdraw the money for your own retirement or other uses; however, in addition to paying taxes on the earnings portion, you will also pay a 10% penalty.

Summary

College is expensive. However, the benefits derived over a lifetime are unmatched. Better job prospects and higher earnings go a long way in helping a family become financially independent. Saving in a 529 plan is an easy and effective way to help reduce the financial burden.

Full details on the Indiana 529 plan can be found at www.collegechoicedirect.com.