Academic Assets

Tuition Remission to the Rescue

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By John Vineyard

Parents of a newborn baby, class of '22, can expect to face a sticker price of something like $315,000 ($120,000 in today's dollars) for four years at a top private college. So if you're not scared by what college costs, you probably should be.

Academic parents, however, can expect relief in the form of tuition remission. Most colleges provide some level of tuition discount for employees and their immediate family members. A glance at the different offerings available shows a range of such benefits. The most generous of them include free tuition if the dependent attends the college where the parent is currently employed, and a reduced tuition benefit, such as one-third off, at any other colleges that have some reciprocal arrangement. And it's generally tax free, at least for undergraduate study.

This benefit dates back to the days when professors were severely underpaid compared with other professionals, and colleges offered it because it didn't cost them much out of pocket. Just to give an idea of the potential value of tuition remission, imagine that you work at Old Ivy, where tuition is currently running around $20,000 a year, and total costs are about $30,000. Old Ivy offers full tuition to all employees' children. If you had four kids who, by some miracle, all decided to attend Old Ivy, the total cash value of the benefit would be something like $320,000 if they're all close to college age now.

In recent years, colleges have tended to reduce this benefit, so that newer employees don't receive as much. It's simply getting too expensive. Stingier institutions may offer a certain discount per credit hour that nevertheless may amount to a significant leg up on the horrendous cost of college.

So if you haven't done so already, call and find out exactly how the tuition-remission policy at your institution applies to you.

Facing the Truth

The problem with tuition remission is that you can't put it in the bank. You don't know which, if any, of your kids is going to attend your institution. After all, isn't college all about cutting loose, leaving the nest, and proving yourself in a new clime?

Choosing a college that's only a so-so fit just because of the tuition benefit is not likely to seem very wise, either to parents or kids, although it can make a difference if the choice between two institutions is close. So maybe tuition remission should be tucked away as a benefit that might come along, but one you're not going to count on.

One computation everyone needs to make is to project how much he or she would have to set aside to pay for a standard four-year education. One handy financial calculator is available online from Sallie Mae, the country's largest financer of student loans. Running an online calculator is easy, even if choosing the correct assumptions isn't. The advantage of such a calculator is that you can try out the many different scenarios, varying the level of inflation and the amount of earnings from your investments.

We estimate that if attending Old Ivy now costs a total of $30,000 a year, and tuition is $20,000 of that, if college costs escalate at 5 percent a year, and your investments earn 7 percent after taxes, you would need to save about $7,000 a year for the next 21 years to have enough to pay all the bills. If your child goes to Ivy and you get all that tuition remitted, you only need to save about $2,300 a year to cover all the costs other than tuition.

The Financial-Aid Game

Having considered just what it takes to save enough for the full cost of an education, the great majority of parents end up putting together some combination of loans, jobs, scholarships, and other sweeteners to pay the bill. Some financial-aid offices suggest paying a third of college costs directly, a third through the student's own earnings, and a third with loans and grants. This breakdown will be skewed more and more toward grants and loans as tuition continues to rise faster than mean family income and the competition between colleges remains white hot.

Institutions have offered more and more discounts as tuition has risen -- a trend that has had a huge unwritten effect on the landscape of college finance. It means that costs may be negotiable and that you can save a bundle if you do your homework. But the reality is, some of the colleges offering the best deals are institutions that people don't boast about in the faculty lounge. If getting a good deal is important to you, you might have to disabuse yourself of the snobbish notion that it is essential for your child to attend a premium-priced college.

Many outstanding state schools with tuition half the price level of Old Ivy are out there and worthy of every consideration. This course of action may also have the significant benefit of allowing your youngster to lead a sane life in high school, without having to worry that every second is optimally spent polishing her high school record to the exact luster that will appeal to her "top" choice.

No short column like this can cover more than a few aspects of the game as it is coming to be played. Mastering the rules of this game would seem to require as much work as a semester of calculus. But you're going to have no choice if you want to take advantage of it.

The whole process is loaded with ironies. If you save up prudently over the years, you reduce your eligibility for financial aid. One could even make the case against saving up for college on the basis that there always will be a good college somewhere that would be glad to take any well-motivated kid with decent grades. A carefully designed plan may simply allow your kid to make some other choice than you expect.

My daughter has just gone off to a top college. I carefully fed and nurtured an account to pay for her college, which, thanks partly to the boom of the 1980s and 1990s, grew sufficiently to pay her whole bill. But I was a bit chagrined to find that she elected to attend the one school that didn't offer her financial aid. As college costs climb into the stratosphere, there are certainly going to be a lot of cases where needing less financial aid is going to make your kid a stronger candidate, whatever the admissions office may claim about its policy being need-blind. Or financial wherewithal may allow your son or daughter more and better choices than they would otherwise have had.

Strengthening Your Hand

The tough fact is that unless your child is close to college age, it's pretty difficult to estimate what the value of the tuition remission might really be. Therefore, it's smart to balance that prospect with some concrete plans for savings that can be fairly predictable in their ultimate value.

Let's consider three different approaches to savings plans.

The most traditional approach is to establish an account for the benefit of your minor child, with you as guardian. The tax advantages of such a plan are less than they used to be, although it can be used as a way to move some dollars out of a parent's taxable estate and to ensure that some money will be transmitted to the next generation. Your child can be taught some financial responsibility as you show her how the fund is managed and how it grows. The hazard is that at age 18 the money becomes the property of the child, so you have to be prepared for the possibility that your child might prefer to buy a Harley-Davidson and tour the country, rather than go to college. As you gaze into the eyes of a newborn you simply can't tell if you're looking at a future saver or a future waster.

A second approach is to establish a separate account in your own name for the purpose of financing college costs. That way you retain control of the money and could dispense it to your child for some other purpose, or not, depending on circumstances. On a behavioral basis, however, this approach is weaker, because it makes it easier for you to lose resolve along the way and raid the account for some other purpose.

A third approach (and there's no reason you can't combine all three of these) is to use some of the state tuition-savings plans. The virtue of these plans is that they grow, tax-deferred, until used for an educational purpose. They generally feature high-quality money management, operating at low cost, that takes into account how many years lie ahead until college begins.

What really matters, as with any savings plan, is getting started soon. The powerful logic of compound interest means that a few dollars compounded for 18 years is worth more than a great many dollars put away for just one or two. Any number of books and Web sites are available to help keep you motivated and on track. Dig in.