Previously in these pages we’ve witnessed the high costs of college, the increasing rate at which for student/family contributions cover these expenses, and the all-too-common specter of fund shortage induced dropout levels. So how do we not fall short ourselves? Here’s what I recommend:
How Much You Got?
We’ve addressed the important task of determining what, exactly, we want to get from a college experience. Now it’s time to determine how much we can reasonably put toward one. How do we know the price at which a degree would tip from bearable to burdensome? In other words, how can we know ahead of time how much college expense we can handle?
In order to pass the Resource filter, a potential purchase needs to cost less than what we have available. Big, long-term costs like housing or colleges are a bit more complex than items like clothes, where we simply add up the cash in our wallet and find something on the racks costing less than what we have. With big, long-term expenses we need to move beyond simple counting to accounting. As accountants do, we’re going to utilize some very simple spreadsheets to keep everything squared away.
Exercise 1: Identify “What”
To begin, identify all the money you can reasonably expect to generate over the course of your college career. Write each money source into a grid similar to Grid A below (pdf here), naming them and noting the amount, and the “per” (per hour, per semester, per year, or one-time) you can expect for each.
Resource “What” Grid
|Other Financial Aid:|
For example, if your grandparents told you to expect $1000 per semester from them, then in the gift row put “name: grandparents, amount: $1000, per: semester.” If you expect to pick up part time work while attending school, then determine a reasonable wage, and in the employment category put “part time job, $7.25, per hour,” for example. Continue to do so until you have listed and explained every asset available. When you finish, your grid should look something like this:
A Cautionary Note
Do not fudge your numbers by saying something along the lines of, “Oh, I think I can probably come up with $20,000 in scholarship awards by the time my first semester rolls around.” Only account for the items you have 90% or better certainty of, or in the case of employment, account for a wage you’re 90% certain you can actually obtain. Our purpose here is to develop a budget based on what we know, not to count our chickens before they hatch. Should an unexpected source of income come through, you have a framework whereby you can adjust your numbers and expand your filter at any given point.
Exercise 2: Determine “When”
Now that we’ve categorized the “what” of your resources, we need to re-account for them with specific timing in mind. In other words, we need to know when they will be available. We have seen the dismal statistics regarding premature college dropout rates in this country (according to the New York Times, more than one-third of students enrolled in a four-year university drop out before graduating). While much of this can be explained by disinterest or failing grades, quite often students are forced to call it quits after they’ve burned through their resources in the first year or two. If instead we can start out assured we have can cover the entire course of our education we will avoid the specter of half built towers.
Let’s anticipate and alleviate this pain up front by setting up another grid, similar to Grid B below (pdf here). Your individual circumstances may vary, but it should suffice for the typical student who anticipates a four-year career at a college on the two-semester system.
Resource “When” Grid:
|Semester 1||Semester 2||S1+S2 Total|
Entry 1: Per Semester Income
We can now plug in the numbers from Grid A according to either a) when the money will become available or b) when we want to utilize it.
Let’s start with the easiest step. Look at your Grid A resources and identify any which had a “per semester” schedule. Then into each semester column on Grid B place the amount you can receive from that asset in that period accordingly. For example, that $1000 gift per semester your grandparents told you about: You would write “grandparent gift, $1000” into the year 1/semester 1 square, the year 1/semester 2 square and all the other year/semester squares all the way around.
Entry 2: Per Year Income
Now look at any asset from Grid A you identified as available on a per year basis. Assuming the money would be available at the start of the school year, you now have a choice to either utilize it all up front in semester one, or over the course of both semesters. Let me suggest that you spread it out through the year. For example, if you obtained a grant which pays $4,000 per year, then place $2,000 into each of the two semester squares for each year.
Entry 3: Future Employment Income
When accounting for any asset from the employment category from Grid A we must be very careful. For one, the money from a job will be spread through the course of a semester while the bills for that semester may be due at the beginning. Thus, let me suggest that you account for your wages in the semester after which they were earned. This obviously leaves a hole in the first semester of the first year, but we can address that hole with money from work done in the summer before your first college semester, with savings, or with other assets expected to be available at that point.
For two, this is our most speculative category in that we are speculatively counting assets before we know they will actually come to fruition or in the amounts we guesstimate. However, let’s go ahead and take a crack at it and try to reasonably determine the availability and amounts of employment income.
If you plan to work during the summers, then do your best to estimate how much net money available for college you can set aside for the next semester or two. If you’ve already held a summer job, then you already have a reasonable idea. If not, take a likely hourly wage, multiply that figure by how many hours per week you will work, then multiply that by the number of weeks you can work in the summer. This would be your gross income. From your gross you will need to determine a net allocate-able income, which will usually lie somewhere between 50-75% of your gross after taxes and expenses, depending on how much you plan to hang out at the mall. My suggestion would be to play it safe, allow yourself to live a little, and use the 50% figure. However you decide to do it for this exercise, remember to stick yourself to saving at least that much as the checks come in.
Algebraically stated, (A x B x C) x D% = Net Summer Savings, where A = hourly wage, B = hours per week, C = # weeks worked in the summer, and D = discount percentage.
Now you must determine whether you want to allocate your summer work savings to the first semester of the school year or spread it over both (or further if you wish, of course). Either way, plug the numbers into the chart.
If you plan to work during the school year, use a similar methodology to determine how much you can expect to earn and set aside each semester (which is typically a period of about 18 weeks) and plug that number into a space or spaces at least as far out as the semester following.
Entry 4: One-Time Assets
That one-time scholarship you earned: do you want to use it entirely to get your first semester underway, allocate half of it to each semester of your first year, or spread it even further, maybe to the point of utilizing 12.5% (1/8) of it for each of your eight semesters?
In the case of each and every one-time resource from Grid A make such a decision and plug the appropriate numbers into your Grid B spaces.
Entry 5: Calculations
Now, all the Grid A assets should be accounted for in Grid B according to the timing of your choice. If so, total everything up. Run the totals across the semesters to come up with your annual (S1 + S2) total for each named asset. Run the totals down each semester to derive a semester by semester subtotal. Then run the numbers again to arrive at an annual subtotal.
By the time you’re done, your Grid B should look something like this:
You Now Have…
You now have a customized resource filter, which you can use to further screen your options. This filter is less static than the Rank filter because your numbers are always changing, so as you fight for scholarships, plead with Mom and Dad, and implement various income strategies keep these grids handy for updates. At any given moment you can review your resource grids to determine which assets you have available to pay for tuition and living expenses each semester, each year, and overall. Thus you know how much you can pay for school in any given period without incurring debt, a target to shoot for which most students lack. This will go a long way to filtering out options which exceed your tolerance to pay for them.
We now can better choose available colleges based on our Rank and Resources filters. But at what price point will college yield a positive return on our money? To determine that, stay tuned for a primer on calculating your ROI.