Paying for college 101: Do your homework

Parents may need a crash course in the ABCs of paying for college.

That’s mainly because new data indicate that the cost of higher education is becoming increasingly crushing, leaving students more indebted than ever before. And yet, the value of a college education has never been greater.

The median income of college graduates is now 62% higher than that of high school graduates -- a disparity that has grown increasingly stark over recent decades.

In the 1970s, a male college graduate earned 19% more than a high school graduate; in the ‘80s, he earned 37% more.

The median income of adults ages 25 to 34 with a bachelor’s degree is now $13,900 higher than for a high school graduate -- and that difference widens with age.

“We think it’s important to emphasize the tremendous value of a college education,” said Sandy Baum, a professor of economics at Skidmore College and a senior policy analyst at the College Board, which released data last week about rising college costs and financial aid.

So what are parents to do?

* Recognize the differences.

Although the cost of all types of higher education -- public and private -- have risen steeply, there are vast disparities in what it costs to go to school.

The average annual cost of attending a four-year private university is now $30,367, according to the College Board’s study. The average cost of attending a public university is almost two-thirds less: $12,796.

And the price of a two-year public college is less than one-tenth of the cost of a private four-year: $2,272. These are overall costs and include books, tuition, room and board.

As far as graduation rates go, there’s little downside to choosing the least expensive option. Wilfredo Nieves, president of Middlesex Community College in Connecticut, said his institution had agreements with a number of top-notch universities in the state, virtually guaranteeing admission for successful community college graduates.

Some four-year universities send counselors to their “feeder” community colleges to ensure that students are able to transfer the maximum number of units, added James Moeser, chancellor at the University of North Carolina at Chapel Hill.

Want to know the cost of attending a particular school? Check out the College Board’s website at www.collegeboard.com. Type in the school name on the home page and then click on “cost & financial aid” on the results page.

* Watch “net,” not “gross.”

College sticker prices rarely reflect the prices that students pay, said Catharine B. Hill, president of Vassar College in Poughkeepsie, N.Y. Scholarships, grants, aid and tax benefits are likely to reduce the cost substantially.

The average net cost is $3,100 less at public universities and $9,000 less at private universities than the sticker price would indicate, according to the College Board.

But the averages tell only a portion of the story, Hill said. Schools such as Vassar are looking for smart, low-income students and have the aid to make the school affordable. In some cases, the net cost of attending an expensive private school can be less than attending a community college.

But to get a net price, students and their parents must fill out financial aid forms and have them forwarded to their targeted schools. Don’t assume you can’t afford a school based on sticker price, Hill said. Wait to see what the college’s aid office offers.

* Prepare your student.

One troubling fact that the College Board’s study uncovered this year is that a four-year degree rarely takes four years. The average student in a public college spends 6.2 years getting a four-year degree, Baum said.

The board doesn’t know why and doesn’t have comparable statistics to figure it out. However, the board did note a significant pickup in the number of remedial classes taken by college students in recent years.

More than one-third of first- and second-year college students now take a remedial course, most commonly in math, according to the College Board. Those courses do not count for graduation credit and would increase the time it takes for students to graduate.

This not only increases tuition costs, Baum said, but students also lose money by missing extra years in the workforce.

On the other hand, highly prepared students can take Advanced Placement courses in high school. Many colleges will accept these courses for college credit if the student receives high marks on an AP exam. It currently costs $83 to take an AP exam. Comparatively, USC charges more than $1,100 per course unit.

* Investigate tax breaks.

There are a number of tax breaks available to those who pay for college -- or pay off loans that financed education. Some are highly valuable, providing thousands of dollars in tax savings.

Unfortunately, the tax breaks can be complicated, and many are limited to people earning below certain amounts. Still, for those financing higher education, it pays to ask a tax accountant whether your college costs qualify for a tax deduction or credit.

* Save.

For those who have time, saving -- even a little -- can make financing college far easier. There are dozens of tax-favored ways to save too. One of the best options are so-called 529 plans, which allow individuals to set up investment accounts for the future benefit of a student.

Those accounts are ideal for several reasons. First, until the account is tapped, the assets remain the property of the donor. If Grandma decides she no longer wants -- or can afford -- to send Suzie to college, she can get her money back.

The only catch: If the funds are not eventually used for college, the investment earnings that have built up in the account will be subject to income tax and a 10% tax penalty. That’s not usually a crushing tax burden, however.

Other benefits of saving through a 529: Income earned in the account is not taxable until it is withdrawn. If it’s withdrawn to pay education expenses, it’s not taxed at all.

From a financial aid standpoint, a 529 account belongs to the donor. If the donor is Grandma, who doesn’t appear on aid forms, the money in the account often doesn’t get considered when determining how much aid the student should receive.

Many 529 programs -- there are more than 50 to choose from -- allow monthly contributions of as little as $25. Those who want to save vast amounts can do that too. Several of those plans allow contributions of as much as $300,000.

For more information about 529 plans, check out Joseph Hurley’s college saving book, “The Best Way to Save for College,” or visit his website, www.savingforcollege.com.

Hurley is an accountant who has opened about two dozen 529 accounts to save for his own children and to test the plans for his book.

College Board President Gaston Caperton said, “If we want this great country to remain competitive with other leading economies, we must make it possible for more students to benefit from an excellent higher education system.”

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Kathy M. Kristof welcomes your comments but regrets she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.

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Rising costs

Average tuition, fees, room and board at U.S. colleges and universities

(In thousands)

4-year private school

1996-97: $23.8

2006-07: $30.4

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4-year public

1996-97: $9.3

2006-07: $12.8

2-year public

1996-97: $1.9

2006-07: $2.3

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Source: College Board