Ignore The Sensational Articles;
You Can Afford to Send Your Child to College
My wife and I had our son in December of 2016, but our planning for sending him to college began a year earlier. Our goal: to provide enough money to pay for 4 years at a UC school without subjecting him to student loans.
The prospect of paying for four years at a UC is a staggering cost. But by starting to ‘pay’ for college in 2017, we can get the cost down to a monthly car payment.
Making College Affordable
The trick to affording college is in advanced planning. Setting money aside early to pay for a child’s college can turn a near impossible expense into a very manageable cost.
Imagine if soon after your child was born, you opened up an account to save for their college education. You would have 18 years of compounding growth to work toward your advantage. If you use a 529 plan, a Coverdell account, or an IRA to invest, you’d have tax deductions working in your favor as well.
Turning College Costs Into a Car Payment
With 18 years to work with, an aggressive investment strategy can be appropriate. By investing just $275 a month, the cost of an inexpensive car payment, you would have $150,000 available when your child enters college. (Assumes a heavily small-cap-weighted portfolio with a 9% average return)
The Key is Starting Early
By starting early, building a sizable college fund for a child is extremely doable, but if you wait the cost becomes far more difficult. Even a few years will turn college savings from a car payment back into a daunting task.
If you wait until the child is 8 years old to start investing, the numbers become significantly more difficult, but not impossible. With only a 10-year time horizon, you will likely need to use a much more moderate investment strategy. Assuming a 7% average return over 10 years, you would need to invest $866 per month to hit $150,000 by the time your child enters college.
The Rising Cost of College
Of course, you may worry $150,000 wouldn’t be enough to cover the cost of college for a student. Many articles cite the cost of college at a staggering thirty thousand dollars a year. The College Board, one of the most often cited sources, places the average tuition and fees at a four-year private university at $32,410 in 2015. Additionally, college costs have also been increasing much faster than inflation, averaging around 5%.
Our UC Goal
Take my wife and my goal of sending paying for four years at a UC. A UC school currently costs around $27,000 per year for tuition, fees, books, housing, food, and other college costs. If college costs continue to increase at 5% per year, it could cost us $260,000 to put our son through college starting in 2034. Fortunately, the true cost of college can easily be managed for the average family.
The True Cost of College
Although the above numbers are accurate, they are misleading when it comes to the cost the average family will actually pay. The College Board does list the average tuition and fees for a private four-year college at a whopping $32,410; but the average in-state tuition and fees at a public university is only $9,410.
That is a significant difference in costs. And since 73% of students attend public universities according to the U.S. Department of Education, chances are pretty good a $150,000 education fund will cover most if not all of your child's education expenses. A professional financial adviser can help verify if you're saving enough.
Understand the Net Price
Fortunately, there is more good news for families hoping to send a child to college. The cost of college is further reduced when the net price of college is calculated. The net price for a college is the true cost a family will pay when grants, scholarships, and education tax benefits are factored in. The net cost for the average family at a public in-state school is actually only $3,980.
For those planning to send their child to a private university, the net price offers similarly good news. For a private school, free financial aid money reduces the costs to the average family from $32,410 per year to just $14,890.
Most colleges offer net price calculators on their website to help you understand the free financial aid your family could qualify for. You can also use The College Board’s Calculator to research a large number of participating colleges at once.
And remember, the net cost only incorporates financial aid you don’t have to pay back, meaning free money to you and your child.
The Slowing Rise of College Costs
For those saving now for the future, there is more good news. There are some experts who believe tuition increases at colleges will also slow in the future, and may actually reverse. The rapid inflation associated with college education has become a common topic amongst educators, activists, politicians, and the media. As a result, significant pressure is being placed on colleges and governments to slow the rise. Further reductions in costs could be realized as new technologies are adopted by colleges.
Already, price increases are slowing at many schools nationwide. The College Board’s report “Trends in College Prices” showed an increase of just 2.9% from 2013/14 to 2014/15 for public four-year colleges. Although 2.9% is still above overall inflation, it is significantly better than the 5% increases we’ve seen over the past 20 years.
You shouldn’t, however, count on prices to stabilize at colleges. Instead, plan for the 5% increases to continue. If price increases do slow, you’ll have more money available to your child for graduate school or possibly a fifth or sixth year. Alternatively, if tuition continues to rise, you’ll be glad you saved extra money.
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Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career provides him with a unique insight on personal financial, having been a VP at a financial institution leading up to 2008, and involved with technology and internet stock research leading up to 2000. He can be reached for comment at info@purposefulfinance.org