Saving For College After Financial Independence
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.
The Costs
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.
Final Thoughts
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.
I really like your “I’m not paying” but providing an “entitlement bonus” (pending the stipulations outlined). I worked throughout college + had some student loan debt ($18k or so), and I really appreciate the work ethic that the job and loans help me form.
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I’m so impressed with your hard work and dedication in college. It’s not easy to be out in the world alone and be able to resist all the temptations in order to focus on your studies and pay for college.
Mr. FAF and I don’t want to pay for our kids’ education AT ALL. We hope they will get some kind of scholarships that cover everything or take out loans and work part-time to learn. My neighbor has been warning me that if our income goes above a certain level, our kids won’t be able to take out loans. The way I see it is they can go to an in-state university and get a marketable degree like Computer Science or Engineering. I’ve been many people who go to an ok school but end up successful because they studied the right major and they studied HARD!
Yeah, the means test is a huge pain for students who are basically on their own like I was. I’m hoping FIRE will help in that regard, because we’ll show a low “income” from our dividends those years.
The cost of college is a major economic problem for families. For me, I saved thousands by going to a community college for my first 2 years. I worked while I went and paid cash for those credits. I went to a private university for my second 2 years of college. I came out owing around $18k. I found that to be manageable.
$18k is very reasonable! Congrats! The community college route for the first few years seems to be a very smart way to do it.
While not included in your lists I’m pleased you mentioned Community Colleges. I’d like to add that many students are not ready for the full blown live away from home style of “university life” at age 17 or 18 and that if access to a community college allows that transition to be a little slower that is really a wise investment and a better likelyhood of overall success.
Completely agree. Community colleges don’t get the same respect on ranking websites like the one I showcased, but they still have significant value that shouldn’t be overlooked!
I’d add that the time to start cutting college costs is in kindergarten through grade 12. By demanding good study habits, homework completion and getting to know their teachers you can get your kids to perform better and learn more. My wife took that job on and all three of our millennial kids got completely free rides through engineering and business degrees at our state university, including housing and fees. We did insist they work to provide spending money but scholarships paid the rest. I was a high income earner but there are plenty of scholarships that aren’t means tested. Free is good even if we could have easily cash flowed all three degrees. All went on to get advanced degrees but those were on their own, we didn’t help. But they all worked through their second degrees just fine. All are self sufficient, well employed and living in cities away from ours.
Congrats Steveark! Having all three kids get through school completely with scholarships is pretty amazing!
Another thing I’d add is college courses in highschool (AP/IB/community college courses)…many students can come out of high school with an associates degree (or extremely close to it). While they still cost money, it’s certainly much cheaper than even the complete community college track.
I had a few of those college credits when I graduated from high school also. I probably should have invested more time and effort into those classes, but hindsight is always easier.
I’ll definitely let my kids know about those credit options!
I like your tough love approach to college!
I did something different when both of my sons were ready to apply for colleges. I had saved $100K for each of them. I told each if you spend more than $100K that is your problem – go work, borrow, whatever. But if you spend less than $100K, I will give you the difference.
Son #1 got a partial academic scholarship to University of Miami and hit the $100K. He didn’t have to borrow money, but he had to work every summer and part-time at school.
Son #2 got clever. He also got a partial academic scholarship at Temple University – an in-state school. But then he joined ROTC and got a scholarship from them as well. I ended up writing him a check for about $50K when he finished college.
Son #2 originally wanted to take a year off. I told him that is fine, but he will have to pay $500 per month for room and board. And I told him that the $100K was only for college. I would keep the money if he never went. He wisely decided to go straight to college.
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Wow, that’s a great example Mr. Freaky Frugal! I love the part about how your son #2 ‘wised up’ and went straight to college.
They sounds like a great couple of boys! You should be proud!
Thanks! I am indeed proud!
But writing the check for $50K to Son #2 was a bit painful, since he’s already Freaky Frugal. He’s a 24 year old Army Officer who already has a net worth over $100K.
It is crazy to see how expensive college has become. I know that I didn’t have any concept about tuition rates when I was college age, but now that have become engulfed by the FIRE flames, I have a whole new understanding. I also agree that the ROI for the degree is extremely important.
Yep! I find that there is a couple categories of people in this world:
1. Those who focus on a college degree as an investment in their future. For them ROI is important.
2. The people who focus on college as some kind of incredible “experience” that shapes adulthood.
Both ideas have interesting merits.
As an immigrant myself, I had to work hard and apply for financial aid/scholarships to get through school, my parents paid for part of the school and the rest I have to get loans. No undergrad loans, I went to 2 years of community college then transfer to 4 yr state school to save money. I have about 35k from my doctoral degree, which get me a pretty decent paid job, and I paid off all the loans after 1 year of full time working.
As for my (future) kids, I believe they should also work hard, I will give them some financial help, but not the whole amount, and I believe they should just pick a good state school and get as many scholarships as possible. My significant other, however, believe it is better for kids to go to Ivy league school to get the “experience” and connection. We both attend State schools, but somehow he has this idea that Ivy league schools are way better for kids’ career. Mabye, maybe not. Depends on the kid’s major, I think if the kid is going to major in finance/business/law etc, then maybe an Ivy league school can offer that experience and “connection” ? but if the kid is majoring in math/science/engineer/medicine, then I don’t believe it makes a huge difference to go to Ivy league schools. what do you think ?
It’s a complicated question. I attended both a public university for my undergrad and a expensive private college for my master’s degree. I wouldn’t call the private college “Ivy League”, but it was plenty ‘snooty’. Both colleges were great experiences. Both had beautiful campuses and great professors.
Did I take away long lasting connections that shaped my future career? Not really. The connections I made at the public university were actually longer lasting and had a far bigger impact on my career than the private college.
I think the value of an ivy league education might depend on the personality of the student involved. If they’re great at networking and building solid friendships, an ivy league ‘experience’ might hold some value. If they’re not a “super networker”, a public university might be a smart way to go.
Mr. Tako,
I LOVE this post. I recently published a similar one “How to Save Money for College with Other People’s Money” a week ago. My daughters’ grandparents funded nearly 100% of our $18,000+ in the 529 I set up for them. Bottom line, the 529 might not be the best investment vehicle for you to invest in your children’s college education but it is the best way to get other people to invest in your children’s college education. 😉
Personally, I think UW Seattle is the best known and often is considered the best in WA depending on the program. If we’re still in the area, my daughters are going to do the Running Start program at Olympia High School. They’ll graduate from high school with a high school diploma AND a 2-yr associate’s degree (free minus textbooks & fees) at the same time!?
#WIN-WIN
I’ll pay for my kids to go to an in-state school for their last 2 yrs or they can pay their own tuition. It’s their choice.
That sounds like a great plan Darren! Graduating from high school with an associates degree is fantastic!!
This post is so full of win! I love the “no free lunch college plan”. When it’s your OWN money, you definitely work harder because you have skin the game.
Like you, I also ended up paying for my own tuition. I had a co-op program offered in my field of study…this meant that I graduated in 5 years instead of 4 (like other programs), but it was SO worth it. I also agree with you on the picking a degree that has a good ROI. I’d rather my kid go to community college or just work their way up the ladder at mcDonalds thanpick a shitty degree. It’s just a waste of time and money. In fact, I fulfilled my childhood dream of becoming an author and I sure as hell didn’t need to throw money away on an English degree. You don’t need a degree to follow your passion. Get a degree to support yourself, work on your passion on the side. Otherwise it’s going to be a HELL of a difficult and heart-breaking journey.
Love this post!
So true FIRECracker! Many of us start our careers in a given field, but we end-up doing something else entirely after a few decades.
If that’s the case for most people, then why pay for a low ROI degree?
I actually have a friend who graduated with a degree in English. Her dream was to become an author. Fast forward a few decades later and she’s actually published a couple books, which is fantastic! But the vast majority of her earnings actually came from working in other fields.
That’s life I guess.
I have been funding my kids 529. He has $15k at the age of 2. I figure if we hit $100k by the time he is 10 then we have nothing to worry about. It can keep growing and he can use it for college and if he decides, a professional degree after that. If he does not use it then I guess we will take the penalty for withdrawal, but it is worth the gamble. I am hoping he goes to a good Cali state school also. Nothing wrong with state run colleges. They served me well to get to this point
Yep, nothing wrong with state colleges!
Love to see this post, Mr. Tako! I think about the schooling for my daughter after FI a lot. Similar to you, I left college owing a lot of money, but it taught me a lot along the way. I worked part-time through the first couple of years and was full-time by the end and it made me value money a lot more since it was out of my own pocket.
I agree whole-heartedly with the idea of “skin-in-the-game.” I have a 529 account for my daughter as well, but we don’t throw a ton of money into it. I don’t think we’ll have enough to pay for half of her education like you’re doing – that’s super generous of you!
As a side note, I think that’s funny how your parents are helping to pay for the grand kids education and didn’t hook you up… that rings a bell for me as well! 🙂
One question for you – do you think the cost will be lower as well because you’re FI and don’t show a lot of regular income on the books?
— Jim
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My understanding is that the tests for need-based scholarships are based upon income, not assets. These typically target low or middle income families. So yes, in those cases FIRE could be very helpful.
Then there’s another class of scholarship based upon academic, artistic or athletic merit. I believe those are independent of income levels.
Been away for a while. I’m within a couple months of paying off my house in full and trying to decide where to put my money I had been putting toward paying down the mortgage.
Two options I’m thinking of:
Maxing out Roth IRA, 401k, and then the extra in a taxable investment account.
Max out 401k matching, Roth IRA, and then throw some in 529 plans for the kids college. My kids are 7 and 4 and right now we have ZERO saved.
This is freaking me out a bit as I want to be able to help the kids with college but my understanding of the 529 plans is you get hit with a huge penalty when you take the money out unless you put it toward education for someone in your family.
Would it be better to put the money into a regular investment account so I can use it to pay for anything, or some into the 529?
I’m not wanting to force the kids to go to college – one is very creative and the other is talking about wanting to start her own business already.
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The thing is, you have no idea if your kids are actually going to go to college or not. Investing in the 529 makes the assumption that they will.
You don’t want that cash sitting around for all those remaining years either. I think the key idea here is to just get it invested.
If you aren’t certain your kids are going to college, one good idea might be to start a investment account for your kids that you jointly control. Stipulate how those funds will be used and when. Call it a “career launch” fund, and use those dollars to help get those careers started!
Nice plan!
Luckily we don’t live in the US.
Our plan for our kid’s college / university is basically not to save any for it. One of the pleasures of living in a country with free education up to Master’s degrees in the top universities (Finland). The university students actually get money from the government during their education.
I started at community college and it made a huge difference. Looking back, I wasn’t ready for the 4 year university experience at 17.
Also, I am human or cephalopod and have checked the appropriate box.
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That data is old. I’ll see your USA Today link and raise you a WSJ link:
https://t.co/QoeHSNRuQN
I like the no free lunch college plan. We’re saving for college, but he’ll have to work for it too. I doubt we’ll have enough to pay for 4 full years by then. I’m not too worried about going out of state. We could move to whatever state he goes to and gain residency there. That’s the flexibility of early retirement. Unfortunately, I think there are only a few good public colleges in Oregon.
Europe might be good for a few years too. Free tuition in many universities and we could travel more.
Oh, Europe, that’s a fun idea. Don’t you have to be a citizen to gain that free tuition? That’s probably easier said than done! 🙂
I have no problem paying for all college expenses, under the right circumstances, and assuming my personal finances are solid. I’ll do my best to educate and guide my kids when it comes to colleges, it’s role, costs, potential majors and career options. If they show an interest and aptitude in a field that has solid career prospects, I’ll gladly support them financially in their efforts to get ahead in life and make something of themselves. To me it seems silly to put so much effort in raising them and providing resources for them to lead a successful life and be a good person, only to cut them off at college, a moment in their lives that can have significant impact in their long term success. I disagree with the perspective that some parents have of teaching their kids a life lesson by having them pay for school and go into debt, especially if the parents can afford it. For me, their skin in the game is studying hard and trying to better themselves (internships, summer jobs, etc.), I’ll have no qualms of pulling funding if they loaf around and waste time and money.
Thank you for the caveat about 5 years for poor grades. Belatedly my dad said he was on board if I’d found a masters in 5 option. His chant was ‘out in 4!’, so I didn’t know. Senior electives become MS/MA classes, and is often good ROI at 23 to start with an MS. That is something I’d do differently if I had it to do over again.
My parents paid 100% for me and my sister at a “big name” private college. In retrospect, it was probably harder for them than I realized at the time. They never once made me feel guilty or indebted about it – just encouraged me to follow my passions and pursue excellence. Despite their scrupulous *never* mentioning money, I ended up feeling a deep drive to succeed. I (and my sister) have since both accumulated quite large amounts of money – mostly by driving the earning component. Not sure what the takeaway is here… perhaps that while early financial struggles are one way to forge a work ethic, they are not the only one. In my family – it was just an understanding that “you have been given gifts, both innate and material, there is no excuse, you will excel” (whether excelling was financial, artistic, athletic, intellectual, or otherwise). For my part, I plan to pay 100% of my kids’ college expenses wherever they go – I would feel wrong not “paying it forward.”
Great post! I, too, had to pay for my entire education, which set me back around $76k(this was for two degrees though). My wife also had a bit of student loan debt when we met, and last year we finished paying off what was about $105k in total. Being as I had to foot my own bill, I took school pretty seriously, and was determined to make the best out of it.
I fully agree with you about making your kids have some skin in the game. I think this applies to most things in life. If you have your own money tied up in something you now have something to lose, which only makes you work hard as to not lose your investment.
My plan also is to pay for at least half of my son’s college one day. We currently have a 529 for him that we contribute to regularly. And, then if he is doing well, and I have the funds I may consider contributing more.
Very interesting post as my wife and I have been having this discussion together and with friends who also have young children. My wife and I met in college, but had very different experiences. My wife’s parents paid for all of her college, while I paid my own way working a job many of my co-workers used to support their families. My father was a truck driver and really didn’t understand the value of an education, only hard work. I graduated debt free, but college was much less expensive when I went (1988-1992). Since I needed to eat and pay the bills, work was a higher priority for me and college was secondary. As a result, my performance suffered, which certainly limited my options when it came to law school. Given how much college has increased in cost, my son would have to borrow a substantial sum even if he worked as hard as me in school. I’m not sure that’s worth it if it limits his options after college, in the sense of the quality of graduate programs available to him.
Given our respective experiences, my wife and I have decided to pay for college with a few caveats. First, we’ll pay the full cost of a UC (we live in California) and if a private school offers enough in scholarships to pay the difference our son can choose to attend that private school. However, I will not allow him to make up the difference in the cost of a private school with loans since I believe graduating debt free is essential. I do not trust a 17 year old to recognize this as he picks a college. Second, we will monitor his grades and progress in school so he stays on track to do well and finish in four years. If he wants privacy and an extended stay in college (which I had and it took me a quarter over 4 years to graduate), then he will need to pay for college himself like I did.
I guess I believe this is where he’ll have skin in the game. If he doesn’t do well, we may force him to go the city college route, pay for college himself, or simply get a job and support himself. I want to give my son opportunities I didn’t have, but I will require him to take advantage of those opportunities and not squander them on beer and pizza. Fortunately, paying for his college is not a significant financial issue for us, at a UC at least, so our son will benefit from that.
If money was more of a concern, then I would definitely advise taking the city college route to save money and avoid debt as much as possible. From experience, it is certainly possible to work and do well enough in college, but I do not think it is optimal for doing your best. While doing better than kids that partied and drank excessively was easy, the ambitious kids who didn’t work and focused on their studies had an undeniable advantage.
I will say one thing about working in college though. In law school you’re not allowed to work your first year. I felt like I had so much free time, even studying a lot, that I was stunned at how relatively easy it was. Maybe that was the primary benefit of working so much as an undergraduate.
Great post.