College is a word that strikes fear into the hearts of most parents (and would-be parents). Not only do parents have to deal with their precious children going out into the real world (filled with all that scary stuff that’s on the news), but they also have to deal with the extraordinary costs of college.
If you’ve been watching the news headlines in recent years, you’ll have heard that college costs are rising faster than inflation — since 1990 tuition grew at a rate of 6% annually.
As it turns out, colleges are not immune from the laws of economics. (Never fear parents! Economics to the rescue!)
As college prices have risen over the last few decades, human behavior has changed: Enrollment has dropped and tuition growth rates have stabilized. College costs are now rising in-line with inflation again. Colleges still need to fill those seats with warm bodies (or some tenured professor might need to take a paycut).
Clearly they’re not just going to keep raising prices until students stop attending. According to reports, many colleges are now lowering prices and offering discounts. Apparently, the price of a university degree is not inelastic — as prices rise, demand also drops.
While this means that some students may have been priced out of a 4 year university, this might not actually be a bad thing. Back when I attended college, the number of drunken apes who never attended class was a large percentage of enrolled students.
If rising prices push out some of the not-so-serious students, that’s not necessarily a bad thing. Real students will ultimately find a way to attend, and dedicate themselves to their studies.
So how much does college cost these days anyway? Heading on over to CollegeCalc.org, I can quickly find a list of rated colleges in my state (Washington) and do a quick price comparison:
Clearly the price range is huge. Tuition can be as low as $5907 per year, or as high as $47,490. Talk about a big range!
For the moment, let’s assume my boys will go to the second best rated school in the state, the University of Washington (Seattle Campus). The school sits roughly in the middle of the tuition range, and is the best overall value.
Tuition at UW was $9,694 for the most recent school year. Clicking into that link, I can see a complete set of estimated costs:
That’s $25,948, which includes Room and Board. If we still live in the area, it’s unlikely our sons would be paying for Room and Board. So we’ll remove that from this calculation. This leaves us with an annual cost of $14,257 for one year of college.
Assuming college costs rise with inflation each year for 4 years, the total for one child is $58,761. Then, I need to do this calculation for two kids, so we multiply that by two — and the total is $117,522.
Clearly they won’t be starting college for a few years, so I’ll also have to adjust for 14 more years of 2% inflation — the cost of college for my two boys becomes $152k.
That’s a lot of money! I can understand why this might give most parents financial migraines.
Fortunately, I’m not worried. To understand why, you first have to understand something of my own college experience.
My Undergrad College Experience
Growing up in a lower-middle class family, I was given lots of options in life — After I graduated from highschool my loving father directed me to either “pay for rent and food, or move out”.
It was nice to have such good options… my parents could have just slid my stuff out the door and changed the locks.
I consider myself privileged.
That said, I was expected to pay for college on my own, with no help from my parents. So I did — I applied for dozens of scholarships, I took out student loans, and I also worked as many hours as the university would allow a full-time student to work. Like most college students, I also worked and saved during the summers.
By the time I graduated from college in 2000, I was $50k in debt. (Out-of-state tuition costs are typically 75% higher)
Unlike many students, I was not given a “free ride” to party for four years. Despite my $50k in debt, I considered my lack of a free ride an asset. Why?
I learned a lot — I learned to work hard for what I wanted. I also learned to be self-sufficient and frugal (both traits that serve me well today). I took my studies very seriously, and I practically lived in the library (it was the quietest place to study). As a result, I was usually at the top of my class.
Our College Plan: No Free Lunches
For my own children, I hope to replicate something of those positive learning experiences. I want my boys to learn that same self sufficiency that I learned in my college years. No, I won’t be kicking my kids out of the house, but I do expect them to take college seriously! They’re going to be adults after all!
I like to call the college plan for our two boys the “No Free Lunch Plan”:
Skin In The Game
Like my own college experience, I expect my boys to have a lot of skin in the game. It should be their own hard earned dollars they’re spending. College should not be about all partying and spending a parent’s money on pizza delivery and alcohol. (Which is all too common!)
When they get old enough, I plan to tell my boys “You’ll be paying for college on your own.”
My expectation is that they’ll do what I did — work hard, save, and borrow when necessary. Secretly though, I plan to pay for a big chunk of it when they graduate (see the section below entitled The Happy Ending Bonus). But don’t tell them that!
When it’s their own money and their own debt, I expect my kids will take their studies seriously….at least more so than the sea of drunken college brats who spend Mummy and Daddy’s money on partying.
The 529 Savings Plans
While I don’t often talk about 529 savings plans here on this site, both of our boys do have 529 plans. While these tax advantaged college savings accounts are primarily funded by the boy’s Grandparents, I do occasionally throw in a few hundred dollars.
(Anyone see the irony here? — My own parents, who wouldn’t fund my college education, are helping pay for my children’s education.)
These savings plans are 100% invested in a low cost S&P 500 index fund, and management fees are reasonable.
As I’m not the main contributor to these funds, I can’t say how large they’ll ultimately become. When the boys need to pay college tuition, the funds will be available for them.
Optimize For The Right Degree
Every parent’s nightmare must be a child who plans to major in Romantic Literature, or some similarly useless major. A major with no hope of repaying their student loans. Clearly that’s a financial disaster in the making.
While we might not be able to control what career paths our children find interesting, I can counsel them against these poor financial choices.
College is afterall an investment in yourself. If that investment isn’t going to pay-off with larger paychecks, it’s simply not worth the massive expense.
After graduating college, if my boys can’t find a career that doesn’t involve saying “Do you want fries with that?”, I’ll strongly counsel against attending college. Or, they could simply find a major that has a better ROI.
Optimize For The Right College
Based on the huge range of tuition prices, where they attend college really matters. Out of state colleges clearly bump-up the costs, and private universities also tend to be more expensive (but sometimes are higher ranked). I plan to council my boys against these more expensive options.
They should be attending public universities that are in-state.
As I type this, the family is packing our bags for a road trip across Washington — we’re going to check out the state’s college towns. We think moving to a college town could be an ideal location for our retirement home, but there’s another added advantage…
If our boys end-up attending college in that same town, we’d be happy to let them continue living at home while attending college. At most reasonably priced public universities, removing ‘Room and Board’ almost cuts costs in-half.
This is a huge financial win!
Transfer To A Full University
Another cost-saving option, is the possibility of attending a 2 year community college to cover early coursework at a fraction of the cost of a full university.
While community college isn’t glamorous, it is definitely a cheap way to get some college credits under your belt. Once the 2 years of coursework are completed, the student can then transfer to a full four year university to complete a degree… and finally get that “College Experience”.
Clearly this method of attaining a four year degree is a smart and frugal way to go. If my boys end-up being at all financially astute, I will definitely recommend this option to maximize the ROI on their college investment.
The Happy Ending Bonus
Despite all my tough talk about making them pay for college, I’m a giant softie (Octopus joke)! Secretly I plan to pay for half of their 4 year college degree, under a few conditions:
- They must actually graduate with a four year college degree.
- They should attend a reasonably priced public university (in-state), OR attend a community college and then transfer to a public university.
- If they take 5 or 6 years to graduate because of poor grades or lack of focus, we’re still only paying for 2 years worth of college.
- If they decide to attend an expensive private school, we only plan to redeem them for the cost of an in-state college.
The idea here is that they won’t get a free ride, and they won’t act like they have a free ride either. As young adults, they get to make their own choices (and the debts associated with them).
If they take one of the more frugal routes, they won’t graduate saddled with those large student debts. I like to think of it as a graduation gift.
I understand our “No Free Lunch College Plan” won’t be for every family. Some families believe in fully paying for their child’s college. I get that.
Clearly we could do it too. We’ve already saved more than we need to pay the necessary $152k. Assuming college costs rise at rates lower than the average returns of the stock market (historically about 6%), we should be fine. In 14 years, our $2.5 million net worth will grow to $3.67 million (assuming we continue to live off 3% and reinvest the other 3%).
We should be able to pay that entire $152k, but I won’t. Why?
You can’t just tell a young adult to take money seriously and to use it wisely. They have to learn those lessons for themselves. They need to learn the feeling of a crushing debt load, and the personal triumph when it finally gets paid off!
Think of it like teaching them to fish, instead of giving them a fish.
Yes, my boys might not get the full “leg-up” that other free-ride students get. In the long run though, I think the lessons learned are powerful enough to take them far beyond the little bit of debt that will remain.
I certainly didn’t stop when I paid off my $50k in student loans. I kept going.