Maybe my needle is stuck lately, but facing the actual bill in the mail focuses your mind like a hanging (with apologies to Dr. Johnson). So, here’s some further tips and strategies on how to think about college costs.
If this is a present or future concern for you and your family, please do go back over my blog posts on this site for further information about estimating costs, and discussion of savings strategies.
First, don’t believe the costs that the College Board lists as “average”. They’re talking about some goofy number that has no relation to what you’re actually going to pay (just like the “average” cost of a nursing home stay or the “average” sale price of homes in your area.) So let’s do a little comparing. They state the average cost of attendance at a state university (including room and board) is $21,477. The University of Illinois is $29, 022 for in-state residents in 2012. Okay, maybe another $7,000 is chump change (over 4 years that’s a difference of $28,000), but my guess is it might make a difference to the plans of some people.
Now here’s where we get a little funnier. CB states that the average cost of a private four year college is $42,224. Which you might actually get close to, until you get into the “selective” range, where you’re in the $58,000 range (not counting flying your kid back and forth for fall break, Thanksgiving, Christmas break, spring break, and back home again for the summer).
Multiply those figures by 4, adding the average 6% inflation rate of college costs, and you’re looking at better than a quarter of a million dollars for one kid. I pity you if you were so unenlightened as to actually have more than one. And heaven forbid if they’re both smart. (Even there I have advice. If you think you’ll qualify for aid, have your kids close together. If you won’t qualify, have them far apart. Be sure you know the answer to this before you even get pregnant. As if.)
Think about it this way—it’s the equivalent of buying each of your children a house. But most houses are bought with 30 year mortgages—at best, you’ve got an 18 year “mortgage” on college funding. And do you currently save 47% of your income? Ahem, that’s what colleges think you can come up with when Junior is away from the home refrigerator.
Often I hear the criticism that colleges penalize savers by not only dinging income, but vacuuming up assets as well. However, if you are low enough income to be eligible for financial aid, in most cases I’d guess that you’re not really going to be able to save a whole lot, especially outside of retirement accounts. But there’s another wrinkle to this that I really, really wonder about: so-called need-blind admissions.
Most selective colleges say they have need-blind admissions. Seriously? For one thing, there’s a box on the Common App that you need to check if you’re applying for financial aid, so every admissions office can see that immediately. Given this year’s horrendously competitive application stats (20 to 1 chances at many selective schools), it defies reason to think that, given two EQUALLY qualified candidates, a school wouldn’t pick the one who won’t cost them anything. Maybe I’m wrong about this, but if I were evaluating 30,000 applications for 1,500 slots, I’d be looking for quick reasons to eliminate people.
Being “penalized” for saving is a lot less painful than having to pull $58,000 out of your paycheck, at least for most middle to upper middle class parents. Or put another way, say you make $120,000 a year. Bing, no financial aid, anywhere. Let’s say right now you’re saving 10% and struggling to keep the lights on and the (underwater) mortgage paid—you’re spending $108,000 a year. But, paying at Private U, you’re now going to be living on $50,000. Can you do it? If the answer is actually yes, then why aren’t you doing it now and saving the rest? I thought so. With no college savings, that $58,000 is going to come out of retirement accounts, a home equity line of credit (if you can get one these days) and a whole lot of loans. So, how much are you being penalized in that case?
I’m certainly not against striving for a fine education, but just like retirement savings, the earlier you start, the less you have to come up with at the last minute.
Is there anyone who doesn’t need to save? I can think of a few:
- people who are or expect to be professors at universities where their children can get tuition reductions or which have reciprocal relationships with other colleges;
- people who get a major inheritance early in life or have enough investments at a young age that the account can be expected to grow on its own
- people who expect to downsize their housing the moment the child leaves, and have significant equity that they don’t mind using for college
- people who are positive their income will remain at less than twice the cost of their child’s probable college and whose only investments will forever be retirement accounts
Not you? Time for my favorite closing line: you need a plan.