Financing College: An Expense, But More Importantly, An Investment – An Interview with Murray Baker

Q: I looked at the cost of a college education and trying to come up with that kind of money seems overwhelming. I don’t know where to start.

A: Yes, education is an expensive investment. Student loan debt can be daunting, but that is why, like with any investment, you need to plan and research it well ahead of time. What is critical to remember is that funding your education ahead of time will cost you far less than trying to come up with the money to pay for it afterward.

The most important step is to sit down and figure out a strategy as to how to tackle this upcoming student loan debt. Your first action should be to determine who will be helping to pay for school. Will parents, a guardian, or a spouse be helping out, or will you be doing it all on your own? And if others are helping, how will they be assisting? Too often a student assumes that parents will be paying for most of college, while parents may assume that their son or daughter is covering most of it.

Also consider expectations. A student may be eyeing a private school on the other side of the country, while their parents are perhaps assuming that they’ll be attending a state school and living at home. While education goals may change as you near high-school graduation, it is far better to over estimate and keep these options open than to underestimate and have your college goals be determined based strictly on your financial situation when it comes time to apply.

You’ll then need to establish some commitment as to how each person will contribute. Perhaps parents will pay for tuition, books, and supplies, while their son or daughter will pay for room and board, transportation, along with entertainment and extra expenses. Also get a sense of expectations on saving. Perhaps parents expect a son or daughter to save a certain amount of money from their summer and part-time employment, while they themselves commit a specific amount of their earnings each month.

Then figure out a strategy to implement this plan. For example, parents may agree to match dollar for dollar the amount that their son or daughter saves from summer and part-time jobs. Thus, buying that $100 pair of jeans all of a sudden becomes a $200 expense! You may choose a variety of investments with which to invest this money so it increases in value as you move closer to the time you head off to college.

Q: Are there special investments specifically for saving for college?

A: There are specific methods to save for an education. The advantages of using these types of investments are usually in the way the earnings that these generate are taxed. Some plans allow earnings to grow tax free until money is withdrawn for college, others allow money to be tax exempt provided the money is used for qualified educational expenses such as tuition, fees, books, etc., while other savings plans will even allow some tax deduction for your contributions. For any of these investments it is important to ask the following questions:

  • What sort of fees are associated with setting up and maintaining this type of plan?
  • Are there any restrictions on the schools that can be attended using the plan’s proceeds?
  • What happens to my investment if I don’t attend college by a certain time and/or don’t attend at all?

Q: What are some specific options I should look at?

A: There are a number of options available, each with distinct advantages and disadvantages. For example, Education IRAs (now called Coverdell Savings Accounts) are a good option for student loan debt in that you are not taxed as the money grows in value, however they are limited to an annual contribution of $2,000 per year (up this year from the previously paltry $500 contribution cap). These plans are also good in that once they are set up, family members or friends can contribute to them provided that their income level does not exclude them from doing so. In addition, rules have been relaxed so that earnings can now even be used for elementary- and secondary-education expenses.

Q: Are state tuition plans a good option?

A: Many of these plans used to be more restrictive than a pair of undersized briefs out of a hot dryer. However, many restrictions have been relaxed, making these plans much more appealing.

The plans basically allow your parents (or other generous friends or relatives) to save money for your education at a state school, sheltered from the bite of taxes as it grows. These plans are basically composed of two options: Prepaid Education Arrangements (PEAs), whereby you prepay your tuition at a state school, and Educational Savings Accounts (ESAs), which allow you to set up accounts for saving for future qualified education expenses. Both have various advantages and disadvantages, so it is worth considering each option carefully. The prepaid tuition option has the advantage of letting you “lock in” a certain tuition years from now at a state’s eligible school — an often appealing prospect in an environment where tuition has been rising faster than the rate of inflation.

Educational savings accounts, on the other hand, allow you to save for future education-related expenses beyond tuition, such as room and board, books, etc.

Q: Are all state plans the same?

A: No. Each state plan has its own investment style along with its own rules. Like any investment, some perform better than others, so that you may find the plan of one state (all states will this year have these plans) is more to your liking than another. Watch carefully, however, as there may be certain extra benefits of investing in your home state’s plan, such as extra tax breaks. You can access the various state plans at:

Regardless of which plan you choose, the important point is to start investing as early as possible in order to maximize the benefits of compound, tax-free earnings.

Q: What if I don’t go to school right away?

A: An important point to consider since not everyone goes directly from high school to college. With these plans, you can use the funds to attend later — much later — since unlike education IRAs, which have to be used by age 30, there are no age limits on most state-education savings plans.

Q: What if I want to go to a school in another state?

A: Plans have even gotten more flexible in terms of where you can use them. Thus, if you want to go out of state to study or attend a private institution, you are not limited, although there may be some stipulations on a particular plan, so check these out ahead of time.

Q: I’ve been somewhat leery of investing when I see what is happening in the stock market. Where should I be investing money for college?

A: That is an important point that you raise in that there is no one investment for everyone. How comfortable you are with risk, what your expectations are for returns, and most importantly, when you will need to access the money for school, will all be important factors in determining which is the best investment for you. Generally the closer you move toward needing the money for college, the more conservative you will want to be with all or a large part of your investment.

With state savings plans, you now have the option of shifting your investment once a year — an important feature in that it allows you to shift to safer and more conservative investments as you approach the time when you will need the money for school.

Q: I’ve heard that there is more funding available for college?

A: Funding has overall been increasing. The only problem is that most of this funding increase has been in the form of loans (which have to be paid back — usually with some sort of interest on top of the initial loan amount) versus grants, which don’t have to be paid back. This, along with the fact that education costs have been rising faster than the general rate of inflation, is a big reason why student debt loads of graduating students have been rising steadily.

Q: What about scholarships? Won’t they cover the cost?

A: Scholarships are a good source to avoid student loan debt, however they shouldn’t be relied on as the only source of funding, rather as an extra source to combine with what you have saved ahead of time. Definitely all students should explore the scholarship options that are available.

Q: I sometimes hear about friends getting scholarships that I have never even heard of. How do I find out about them?

A: This is where it is particularly important to do some digging to uncover these sometimes “hidden gems.” There are some very obscure scholarships around, many of which are not well publicized and which you have to apply for separately from the scholarships that you apply for through your college.

Q: I’ve heard about scholarship search services that charge a fee to help you find scholarship money? Are these worthwhile?

A: You could use paid scholarship search services, however it is best to not waste your money on these. There are enough free search engines on the Web, such as Fastweb, Peterson’s, and Mach25, that you can save yourself the cost. Here’s a list of these search engines along with links. Many of these search engines will require you to fill out a personal profile (i.e. intended major, interests, marks, affiliations, etc.) and then provide a list of the scholarships that you are most likely to qualify for.

Q: Are there scholarships that go unclaimed?

A: Every now and again you hear of scholarships that are never claimed, however these are likely in the minority. However, what is more important is that there are many scholarships that are “under applied” for, meaning that competition for these may not be all that great. For example, a donor or organization may create a scholarship, but not have a big budget to publicize it. These are definitely worth tracking down since you may be one of a handful that apply, versus one of hundreds or even thousands that apply for some of the more well-known scholarships.

Q: But aren’t scholarships only for the very top students?

A: Not necessarily. Yes, it is true that having top marks opens up the number of scholarships that you may be eligible for, however there are many scholarships that look at more than just the highest marks. Some will look at other factors such as community service and involvement, leadership experience, and contributions you have made in a particular area. Thus it is to your advantage to look at what is out there and zero in on the ones that you may be a good candidate for.

Murray Baker

Murray Baker is the recognized North American authority on student financial planning and author of the best seller, The Debt Free Graduate, a financial survival guide for students, published by Career Press, and in Canada by HarperCollins. Since its release, The Debt Free Graduate has received an overwhelming response, has made the Toronto Star best-seller list, and has now gone to a fifth printing. Murray has now brought many of the tips and strategies of this bestseller to the Web via

Since the first release of The Debt Free Graduate, Murray has done over 200 interviews in major-media publications across the U.S. and Canada. Murray has also made frequent television appearances on MoneyMatters, On Your Side, A to Z, and Canada AM, as well as many other national and regional television and radio programs.

He can be contacted at

To order Murray Baker’s book, The Debt Free Graduate, go to: