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College Savings Tips: Interview with Gary Hoover

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Gary HooverOne of the big personal finance topics of the last year has been the skyrocketing cost of higher education. It’s a big topic because we’re talking enormous sums of money. Students are graduating with an absurd level of student loan debt, very little in savings, and with the recent failure of a motion to extend low cost loans, costs are probably not coming back down anytime soon.

We reached out to some experts to try to gain greater insight into these issues. Today, we have the pleasure of speaking with Gary Hoover, Professor of Economics/Assistant Dean of Faculty and Graduate Student Development, Ph. D. at the University of Alabama. He’s the William White McDonald Family Distinguished Faculty Fellow and has published papers in the American Economic Review P&P, Southern Economic Journal, Public Choice, Journal of Economic Literature, International Tax and Public Finance, Applied Economics, and the European Journal of Political Economy. We reached out to him to get a better idea of what parents can do to help their kids save for college.

Q: Once a child gets accepted into college, the thought of paying for it can be frightening. What can parents do beforehand to help their chances at getting financial assistance?

A: Parents should be willing and able to wade through a mountain of paperwork. In the end, it might not help but has to be attempted. Certain types of funds are available until the source is extinguished. In which case, it is best to get all necessary forms in early. These will definitely include income statements. Making direct contact with personnel in the financial aid office is always a good idea. You cannot address an issue that you are not aware of and who better to know the ins and outs of financial aid better than people working in the area?

Q: How best can a prospective student contribute to their college savings plan?

A: The best thing that a student can do to help with college costs is to get good grades and be an engaged and active high school student. When academic scholarships are available, there is no reason that the decision of administrators should be an easy one. By getting good grades and being actively engaged in high school activities, students make themselves more attractive for partial or full scholarships. If there are more students than money, good. Make administrators do their jobs. However, if grades are set and no scholarships are coming, savings habits (which will last a life-time) can be set by contributing monies from after-school or summer jobs.

Q: Agree or disagree: 529 college savings plans are the way to go.

A: I mostly agree but not entirely. A 529 plan offers parents great advantages in that they can be used nationwide. In fact, you need not be in the state you invest your funds in and send your child to school at an entirely different state. Given that these plans are typically either something like an IRA or 401k (which can go up or down in value) or a prepaid plan, I would probably think the latter is a better option than the former. However, my hesitancy to fully endorse these plans is because all plans are not created equally. Some are well managed while others are facing difficulty. As a result, parents need to do their homework and investigate their plan.

Q: Are parents eligible for any college-savings tax deductions?

A: There actually are. The details are complicated to explain but the tax benefits vary if the funds are kept in certain Education Savings Bonds or the various state 529 plans. Special attention should be paid to maximum contribution limits which allow initial contributions to be larger. In addition, parents should be aware that funds for only “qualified” education expenses can be withdrawn without paying taxes but that varies also.

Q: Bachelor’s degrees are quickly becoming a baseline necessity and not a perk; should parents include post-graduate education costs into their savings plan?

A: No. Good performance in undergraduate learning can help to defray costs of advanced degrees. By helping to pay for an undergraduate degree, parents have allowed their children time to concentrate and hopefully receive grades that will allow them to receive advanced degrees at reduced or no costs.

Over the next two days, we’ll bring you more of Dr. Hoover’s answers along with another expert we spoke to, Professor Warren Smith of Palm Beach State College.

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23 Responses to “College Savings Tips: Interview with Gary Hoover”

  1. Lisa says:

    Something has to be done about education and how expensive it is to go to college. The annual cost of some colleges is many multiples of the average salary, which means parents and kids will have to take out huge loans to even thinka bout pay for college. God help the parents of someone who gets accepted into a private school!

  2. Tom says:

    What I’d really be interested in is why the cost of college goes up every year even though the federal government is giving all these colleges federal aid…..or whatever you want to call it? Supposedly the money given by the federal government is supposed to keep the costs from going up….what gives? Greedy schools most likely!

    • freeby50 says:

      Tom, states have been cutting college funding gradually for a few decades. With reduced state money the schools end up increasing tuition more gradually to make up the difference. For example U. Texas Austin got about 50% of its money from Texas in the 80′s and now they only get about 25% of their money from the state.

      “Supposedly the money given by the federal government is supposed to keep the costs from going up”

      Who said that? I don’t remember anyone ever claiming that.

  3. Sean says:

    High schools have to be blamed for the complete and utter lack of common financial sense many kids enter college with. They spend a majority of their time prepping kids for these useless standardized tests instead of teaching them practical, real-world tools/information they WILL use everyday.

    They barely cover the basics and then we are left with a generation of financially brain-dead Facebookers.

    • Michael says:

      Sean, High School is not responsible for your children. You Are.

      • Sean says:

        Did I say they’re solely responsible? No. No I didn’t.

        Of course it’s up to the parents, but unfortunately (or fortunately, depending on your view), our children aren’t with us all day, and they have other stimuli and influences in their lives — one of the primary being the public school system environment.

        So yes, I do hold high schools *partially* responsible and accountable for the lack of real-world preparation many kids seem to suffer from.

        • Michael says:

          Hi Sean,

          I will assume you are a father. If so, you are 100% responsible for your children regardless of outside influence. It seems that you are aware of the deficiencies that public school provides. It that statement is true, then as a father you are responsible to mitigate those circumstances, and not allow excuses for your children to not succeed.

          You made a statement above “I do hold high schools *partially* responsible and accountable”

          Please tell me how you hold them accountable? I don;t think they care, as long as they hit certain numbers.

          Thanks
          Michael

  4. Ryan says:

    My wife and I are saving in a 529 plan for our daughters. They are both a long time away from entering college, so we have their funds in a balance of stocks and bonds, and we will allocate them more toward fixed income as we get closer to the time they enter school.

    Filling out the FAFSA is also a requirement for parents of children entering school, as it can help determine their financial aid. Scholarships are always a good way to reduce costs, as is attending an in-state school, doing a work-study plan, or working a part-time job (provided the last two don’t interfere with studies).

    I also took the non-traditional route, and joined the military, which paid for a large portion of my bachelor’s degree. Admittedly, this is not for everyone!

  5. Jeremy says:

    Parents should also encourage their student gets a job while in school. Especially campus jobs, they often pay fairly well and work around class schedules. This can go a long way in helping bridge the gap and rely less on funding from parents or student loans.

    I know when I was in college I got a campus job in my first year and kept it the entire time I was in school. It was great. During the school year I could work just 10-15 hours which allowed me to still concentrate on my work (even do homework while on the job) and make some money. Then in the summer they would let you go to full-time and I’d regularly work 40+ hours a week and bank that money for expenses.

  6. Nigel says:

    Thank you posting these articles regarding college costs. My son is 4 years away from college and the costs are scary. Look forward to reading the rest of Dr. Hoovers and Dr.Smith’s articles regarding College Savings.

  7. Educate4Less says:

    It may make sense to get input from college financial planning consultants in addition to folks within the college industry.

    The reason costs continue to rise is because they can; as long as government keeps subsidizing the college industry, costs will keep rising: According to research from the Goldwater Institute, from ’93-’07 administrator hires (read “brother-in-law”) have outpaced enrollment increases by 300%! At Boston College for instance, enrollment is largely unchanged but there are now 78% more administrators. Wake Forest has 370% more administrators now than in 1993 but only 22% more students.

    I’d amplify Dr. Hoover’s comments as follows:
    Q1: If eligible or close-to-eligible for FREE money (not loans that are available to everyone), consider shifting assets to un-assessable areas, similar to the way high income families shift assets to tax-free bonds. Avoid private student/parent loans. Choose colleges with high 4-year grad rates.
    Q2: Agree! The better the student, the cheaper the education. Families in many states whose income is ~ $100k will spend less on Harvard or Notre Dame than on their state’s college. But Step One is “get into Harvard or Notre Dame.”
    Q3: No on Prepaid plans; they are going under and being stopped/dropped by states (WSJ 2/12/11). Ten year performance for ALL options in the largest 529 Plan (VA) is negative; is that a good way to save for college?! Shifting to bonds in high school does nothing to lower principal risk when rates are at all-time lows. 529s = another Wall St. sales product (mutual funds with a “college” wrapper).
    Q4: 529 withdrawals of earnings are tax-free ONLY if the family receives no financial aid; otherwise, there is a formula to determine taxable amount. Funny, Wall St. never mentions this. College loan interest is deductible subject to IRS Pub. 970.
    Q5: Most good companies will pay for employees to get their MBAs but for med or law school, parents may want to consider spending less on undergrad and saving more for later.

  8. Randerson says:

    I am getting close to finishing school, and so far I have worked to be able to pay tuition. The only problem is that it will take 6 years to get a 4 year degree. It is very fulfilling however.

  9. Unfortunately, the US college system is broken. Universities continue to raise their rates because students can easily access loans with little to no underwriting.

    Would you loan money to a student to go to a mid level private school and major in history? Hell no! But that’s what the government is doing(taxpayers footing the bill). Student loans should be looked at like investments IMO.

    The bubble will be bursting soon though..

  10. NoCleverName says:

    Im a well-educated (over educated?) individual who went to average to below-average ranked schools to achieve my goals. I did this for two reasons. One, I was not the 4.0 student so “top of the line” schools wouldn’t even consider me. Two, it was significantly cheaper. Now I work with people who went to prestigous schools and I have the same position and same pay. Bottom line, going to an expensive school will not improve your lot in life. However, it will decrease your bottom line.

    • Michael says:

      I agree, Went to school part time at night for 8 years. My Company paid for my College. I now teach MBA’s from Harward, Wharton, North Western.

    • Educate4Less says:

      Absolutely! The second employer cares only about one’s performance at the first. With rare exception, graduating college is what matters, not which college. But graduating is far from all that matters.

      As 318,000 bachelors-degreed waiters/waitresses, 107,000 janitors and 19,000 parking lot attendants attest.

  11. Merchant account says:

    The use of 529s is quite debatable, in my opinion. The fact is that you’re never even sure if your children are going to make it to college. If they don’t, you lose 10% of all the money you invest into a 529 plan.

    Gary Hoover makes a good point about looking into financial aid and scholarships earlier than others. The fact is that only a limited amount of money is available for the purpose of financial aid, so you need to put in time explaining why you deserve it over others.

    The worst thing about college saving is that there is a vicious circle of debt prevalent in the world right now. Students who are graduating currently are too overwhelmed by their own student loans to even think about saving up for their children.

    Sincerely,

    James.


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