It’s become almost passé to bemoan the exorbitant cost of a college education and the collective debt burden, now over $1.6 trillion, resting on the shoulders of U.S. students and parents. While it’s true that college tuition has risen at twice the rate of inflation, many academic consumers refuse to recognize their complicity in skyrocketing costs. Indeed, educational institutions charge what they do because we’re willing to pay for it.
Yet a perplexing antinomy exists—a college education can be excessively expensive, holding students and their benefactors financially hostage for decades, or it can be surprisingly inexpensive. Case in point:
Harvard Vs. Harford
Without accounting for any financial aid or scholarships, a student could trade one semester of Ivy League education for a four-year undergraduate degree from any number of excellent state universities. Specifically, if a student, living in Harford County, Maryland, were to commute from home to Harford Community College for two years and then commute to Towson University for the second two years, the total cost of tuition and fees—for an entire undergraduate degree—would be approximately $27,826 by my calculations, based on 2020 published estimates. That would buy you just a hair under 10% of four years of tuition, room, board and fees at Harvard–it wouldn’t even cover a single semester.
This is quite obviously a gross oversimplification, only factoring one of many important dimensions of the full college experience, and not accounting for the fact that few students at any college pay full price, but the illustration forces us to recognize that there are other educational options available aside from paying a fortune.
It also begs the question: In a day and age when the undergraduate degree has been largely commoditized and viewed as a prerequisite for virtually every white collar job available, do the intangible benefits to be derived from any collegiate scenario costing more than the $27,826 represent a good value proposition? Is the nearly $200,000 premium (in today’s dollars) you pay for the elite private or Ivy League undergraduate experience worth it? Is the $100,000 premium you pay to live on campus at an out-of-state, state university worth it? Is the $50,000 premium you pay to live and eat on campus at your state university worth it?
The answer for any of the above may very well be an emphatic and justifiable YES! but the value proposition for each student/school/benefactor combination will be different and worthy of exploration. Here’s a four step process that will help you make that determination and properly fund the resulting decisions.
Step 1: Can you?
This instruction is directed largely to parents, but the logic is identical and the process just as important for those flying solo in their educational endeavors. In developing your Family Education Policy, you must first ask the question “Can I?” What is a reasonable expense for your children’s education that your household could bear without unduly hampering your own financial plan, present and future?
It’s actually a selfish act to prioritize your children’s education over your retirement savings, because it will be much less costly for your children to pay off finite student loans than to bail out parents in the midst of a financial and health crisis in their old age. If you can’t, don’t; then set your pride aside and discuss this reality with your budding scholars.
If you’re having trouble answering the question Can I? without more of a frame of reference, let me give you a rough idea of how much you’d have to save monthly, from the day your child is born, for 18 years, assuming the cost of education rises at 5% and you’re able to earn 7% on your savings:
- Community college / In-state State U commuter: $ 155/ mo
- In-state State U resident: $ 542/ mo
- Out-of-state State U resident: $ 857/ mo
- Premier private / Ivy League resident: $1,618/ mo
Does that offer some perspective?
Step 2: Will you?
After determining whether you can, you should follow that with “Will I?” The financial entities who sell and administer education savings plans have seemingly colluded with academia to create an unspoken moral imperative for parents to fund their children’s college education. And while I have no desire to strip you of a healthy desire to pay for your child’s post-secondary schooling, I want to give you the freedom to recognize that it is your choice to make. This is an opportunity to parent, and to make a mark on your children based on your articulated personal principles and goals—the first step of every good financial plan. I urge you to capitalize on that opportunity.
Step 3: Develop a Family Education Policy
At this point, you can, with the aid of your co-parent, clearly set forth a Family Education Policy. This is your answer to the question your kids will eventually ask: “Hey, Katie’s parents told her they would pay [whatever] for college—what are you doing for me?” My hope is that you won’t even wait for that query to arrive, proactively communicating this message even before curiosity forces the issue. Maybe you’ll offer to pay up-to the four-year cost of an in-state state university education; or possibly up-to four years at your alma mater (although I’d warn you that this common directive seems less about them and more about you); maybe you’ll offer to pay the first two years of school, or a fascinating idea one client proposed—the second two years (to ensure her children were serious about the endeavor).
If you have the wherewithal and desire to offer your children the educational blank check—you can go wherever your heart desires that will accept you—by all means, do so. But if all you have is the desire and not the wherewithal, you’re doing no one a favor.
Step 4: Develop an Education Savings Plan
The number 529 has become nearly synonymous with education savings, and in part for good reason. 529 plans offer education savers options for hedging the future costs of education and/or tax privilege. Prepaid tuition plans give us the opportunity to pay for tomorrow’s tuition at today’s prices. The plans are state administered and typically only cover the cost of tuition in your state (although you may be able to use the equivalent of the tuition cost of your state’s universities in another state). If the cost of education continues to rise at its current pace, this would appear to be a good hedge, but the solidity of your prepaid plan of choice must also be considered. Since many states are enduring financial difficulties of their own, the solvency of some plans has been reasonably questioned.
A 529 investment savings plan is very different conceptually. It is an investment bucket of mutual funds you own that receives tax privilege similar to that of a Roth IRA. You contribute after-tax dollars to the plan, and the principal and growth can be distributed tax-free if used for a wide range of qualified education expenses. You may also receive a state tax deduction for a portion of your contribution. The contribution limits are quite liberal, allowing $15,000 per parent (or even grandparent), per child in 2020, also with an allowance to prefund up to five years. But since the funds invested in these accounts are subject to market volatility, a bigger concern over the past decade has been whether or not you are actually making money at all—much less over the college inflation factor.
If your children are very young and you can stomach the volatility, a college investment savings plan is an excellent tool, but I highly recommend using a no-load version of one of these 529 plans so you don’t start your investment in the hole via a brokerage commission. If your children are older and you live in a state with a strong prepaid tuition plan, that may be a good option to consider. But in either of these cases, I recommend you apply the 50% Rule. Save 50% of your expected education needs in education-specific 529 plans, but store the other 50% in conservatively invested taxable accounts (or even savings accounts and CDs) since there are so many other variables at work.
Does education have a price? Learning has inherent value which is incalculable. Education is one of the primary ways we learn. I taught at the college level for seven years and believe that it is one of my most important contributions; but while the educational process may be priceless, we must not ignore the associated price tag.
This article, updated in 2020, was originally published in my blog on Forbes.com.