The disproportionate rise in the cost of college relative to the cost of everything else is not news, but a new survey shows that college students are dumping their top choices for education based on price. Have we finally reached the tipping point?
Well, I’m a planner—not a prognosticator—so I’ll defer judgment to those with functioning crystal balls, but let’s address the college cost crisis and a way to avoid becoming the next student or parent squashed by education overpayment.
Is there really a crisis?
Yes, I believe there is. The cost of education has risen at approximately 2½ times the rate of inflation since 1985. From 1985 through 2011, the consumer price index went up 115% while the cost of college increased nearly 500%. Although the gap has closed slightly the past two years, the cost of education is still outpacing inflation.
Some claim that college costs are over-exaggerated because “the list price of college—especially the list price of elite private colleges—receives far more attention than the actual price.” To which I respond, are elite private institutions now reading from the same playbook as jewelry stores at the mall, where everything is half-price—all the time?
Aren’t people who don’t qualify for aid or scholarships still paying $59,950 for tuition, room, board and fees at Harvard?
But a degree from a prestigious university doesn’t actually have to be expensive. If you commute from home to a community college for two years and then complete your degree at any number of outstanding state universities, you can purchase an entire degree for the price of one semester on campus at an Ivy League school.
Amazingly, it may still be worth every penny to go to Harvard or Yale or any number of elite private schools, like Johns Hopkins or Lehigh, if you’re pursuing a specialty for which they are held in the highest esteem. Beware, however, because there is a growing parity among undergraduate degrees across the board—it may be grad school now where a big investment really pays off.
Developing an education savings plan
How, then, can parents and students develop a plan to maximize the college experience but minimize the price tag?
First, be honest with yourself (and your kids). If you’re a student, don’t fool yourself into thinking that any investment made in education is worth it. Don’t take total loans for greater than your first year’s (reasonably) expected salary after graduation.
If you’re a parent, humble yourself enough to acknowledge if you simply can’t afford to help your kids. They may curse you now, but they’ll be thankful later when they don’t have to pay your medical bills at the assisted living facility.
Second, decide if and how much you’re willing to pay for college. The realms of government, education and finance have colluded to give college the appearance of a birthright of every American, a burden resting on the shoulders of every parent.
No, it’s still a privilege, and you, as a parent, still have the prerogative to limit or yank funding based on your values and goals. I had a client who made more than a million bucks a year who decided he was only going to cover two years of college for each of his kids—the second two years—because he wanted to ensure they’d be vested in their education. (And no, my wife won’t let me get away with this.)
Third, develop a family education policy. This is the answer to the question, “How much are you guys going to pay for?” The worst answer is, “Whatever it costs for wherever you can get in, sweetheart.” Whatever you do, don’t write a blank check for education, or you’re all but guaranteed to pay top dollar.
Fourth and finally, fund your education policy. Ideally, the above conversations have taken place between mom and dad even before Junior is born, because that’s the best time to start saving.
If your family education policy is that “We will cover the cost for an in-state university as long as you graduate high school with a 3.0 GPA or above and maintain a 3.0 or better throughout college,” you’ll likely need to save approximately $350 per month from the day Junior comes home through his high school graduation.
If you’ll gladly pay for the kids to go to your alma mater—out of state—then you should be saving $700 per month, and if you only bleed crimson, increase your savings to $1,200 per month, per child for 18 years.
What is the optimal savings vehicle?
The optimal savings vehicle is actually a combination of vehicles. It is a good idea to use a college investment savings 529 plan, which basically works like a robust Roth IRA for education purposes. You contribute to the plan after tax, and all principal and growth in the plan is distributed tax free, if distributed for qualifying education expenses.
Morningstar does an excellent job comparing plans throughout the country each year. I recommend against any plan that requires you to pay a commission, limiting your investment, since the best plans are commission-free. Savingforcollege.com is a good resource as well, but in my opinion, their guidance is tainted by its willingness to accept payments from commission-based salespeople in its “Find a Professional” feature. Blech.
Since you use market-driven investments with inherent volatility in investment savings 529 plans, however, you may consider using a prepaid 529 plan if your time horizon is shorter. These plans vary by state, but most allow you to lock in today’s tuition prices for tomorrow. Be careful, however, because the financial instability of several states has put their prepaid plans at risk.
Regardless, I recommend saving only 50% of your anticipated savings needs in 529 plans because of their inherent limitations (imperfect investment options and, in some cases, investments reduced by commissions). You also don’t know exactly what will happen with Junior in the future. If he decides to join the Hells Angels instead of the glee club, you may pay penalties to get your money back.
Save the other 50% in the account most oft forgotten—the liquid investment savings account where you fund all the maybes in life. (Maybe we’ll buy a second home. Maybe we’ll add an addition for your mom to live with us. Maybe we’ll need more money for college funding.)
It is absolutely true that college can be ridiculously expensive, but only if you let it. Either way, state your expectations and plan accordingly to avoid joining the scholastic chorus of boos coming from those who paid a premium for a discounted education.
Tim Maurer, CFP® is Director of Personal Finance at the BAM ALLIANCE and an adjunct faculty member at Towson University.