Sunday, October 29, 2006

College Planning with my Investment Advisor - part 1

$45,000.
That's what a top tier college costs today.
Not only that, but a very large percentage of students take more than four years to finish school - usually five!
Five years at $45,000 a year. That's $225,000.
Can you believe that? I went to the Harvard and Standard web sitees and check the tuition rates myself - it's true - $45k.

Here are some questions I ask myself:

1. Will my children get into top tier private schools?
2. Will they go to less expensive state schools?
3. If they can get into a top tier private school, will I pay for it?
4. Should my children pay or take on debt for any of it?
5. If they can't finish in four years, should they be responsible for subsequent years?
6. Will the added financial responsibility motivate them or imperil and distract them?
7. Is it reasonable to expect a college student to be able to either:
a. earn $45k in one year to cover expenses
b. take on $45k (or more) in debt, knowing that it might be the equivalent to a well paying staring salary

What tough questions.

If I want to cover $225,000 of today's dollars, I'll need to invest between $12,000 - $13,000 per year per child in today's dollars (increase that amount about 7% per year due to academic inflation (I'm not sure if the calculation incorporates current savings) - that will be in a future update.

Somehow, I had used an on-line calculator - perhaps one that had been associated with Quicken - though I don't recall. It had predicted college expenses of $30,000 per year (much less than $45,000).

We're pretty good savers, but this means I'd need to save twice what I was planning for each of my three children (from $18,000 a year to $36,000 a year). I'm really not sure if:

1. I'll be able to do that consistently
2. I don't think I'd like that much of my non-retirement assets locked into a 529 plan - what happens if my children earn academic scholarships, get into West Point, etc....

It's very disappointing when you think you're on the right track and your balloon pops!

If I increase savings to $36,000, I'll effectively cut our current monthly out of retirement savings in half. The again, my new job will allow us to save more - I'm just not sure how much more -especially after my wife takes a new job.

What would you do?

Regards,
makingourway

7 comments:

Anonymous said...

Generally, I panic. LOL

We have 5 kids. The oldest is in a "private" college right now. She is a junior this year. The price tag here is $36k a year.

We have our 2nd leaving next fall. Although, I believe she has chosen a closer, state school, this will most likely cost us under $20k. At least the first year.

The next 2 years will each bring us 1 more kid into school. Ouch! Our junior in college is working for a medical degree, so this will mean more years in college. Again Ouch.

In my view, it is impossible to fund college for our children. You can loan college dollars, retirement is not that easy.

They are aware of the costs and obligations for obtaining a degree and we have taught them to evaluate the value of that cost. College is a must, debt should be evaluated.

Our youngest 3, mine, all have money for college. My husbands, not so. I have always lived with little and have taught my kids to plan for the future since birth. This is a way of life, not an option. College is mandatory and I will help all I can, but they are the responsible party for their debt and decision.

Unknown said...

My daughter is very young, so we have more time. Also, we're fortunate enough to have the money already to pay for her education (and that of any future siblings). So my comments will be less about "how to get there", and more about "what's the philosophically correct approach?" Here are some thoughts in no particular order.

1. The value of the graduate degree is > the value of the undergraduate degree. Thus, if the educational budget is fixed, you should have a preference for spending it on graduate (professional) programs rather than undergrad programs.

2. That said, both my wife and I attended private undergrad universities, and I can appreciate how difficult it might seem to an 18 year old to turn down an admission to his or her "dream" school and instead attend State U. Also, particularly for schools like Harvard, Princeton, Stanford, etc. there is some continuing value to that sheepskin post-college.

3. The flip side to my last sentence is that some private colleges are simply not worth their cost. Whether you measure value by educational opportunity, or by "pedigree" (something I dont like doing, but that I acknowledge as a fact of life), I just dont think a degree from Vassar or Claremont McKenna or whatever mediocre private university you'd care to name, is "worth it." There are plenty of public schools that will provide a superior education opportunity at 1/3 the cost.

4. Most of my willingness to pay for private college depends on how mature I judge my child to be. The more confident I am that he or she will use the educational opportunity given, the more likely I will be to pay their way. Unfortunately, many 18 year olds (myself included at the time), view college as an extended adolescence rather than a first step into "real life". Im not happy about the fact that I basically screwed around in college, took easy classes, got bad grades, majored in a worthless liberal arts course of study, and pissed away my dad's money. So call me a hypocrite, but I now feel that college shouldn't be a time to "figure out" what you want to do, but rather a time to get the education (and grades) you need to get a good job afterwards (i.e., one that allows you to be financially independent). This is not a popular notion in our post-60s "do what feels good" culture that is modern America. My main point is, if you're going to pay for private college, I think it makes a difference if you think your child will be focussed and self-motivated, or whether your child is still relatively immature. For the former, I'd be more inclined to pay the ticket for private education; for the latter, I think State U is a better return.

5. My parents paid my way for undergrad, but I picked up half the tab for law school. That made all the difference. Whereas my undergrad was squandered, my law school education was maximized--I graduated with top honors, made law review, got a bazillion job offers, etc. So while I think the idea of loading your child down with crushing student debt is unwise, so too is allowing your child to completely avoid shouldering some of the cost of education. I believe in the ownership society, and part of that philosophy involves owning the costs of education.

6. Finally, loving your children is not about taking care of them by doing everything for them. I love my daughter, but my objective in raising her is to raise a happy, well-adjusted person who eventually is independent of me and my wife. This means that, as she passes into adulthood (18-22 y/o), I expect her to have the skills, knowledge, judgment, earning power, etc. to get through life without my help. Part of this, I believe, involves giving her everything that she needs, but not eveything that she wants. Life requires compromise. It's a painful lesson, but one that everybody needs to learn sometime.

Unknown said...

My daughter is very young, so we have more time. Also, we're fortunate enough to have the money already to pay for her education (and that of any future siblings). So my comments will be less about "how to get there", and more about "what's the philosophically correct approach?" Here are some thoughts in no particular order.

1. The value of the graduate degree is > the value of the undergraduate degree. Thus, if the educational budget is fixed, you should have a preference for spending it on graduate (professional) programs rather than undergrad programs.

2. That said, both my wife and I attended private undergrad universities, and I can appreciate how difficult it might seem to an 18 year old to turn down an admission to his or her "dream" school and instead attend State U. Also, particularly for schools like Harvard, Princeton, Stanford, etc. there is some continuing value to that sheepskin post-college.

3. The flip side to my last sentence is that some private colleges are simply not worth their cost. Whether you measure value by educational opportunity, or by "pedigree" (something I dont like doing, but that I acknowledge as a fact of life), I just dont think a degree from Vassar or Claremont McKenna or whatever mediocre private university you'd care to name, is "worth it." There are plenty of public schools that will provide a superior education opportunity at 1/3 the cost.

4. Most of my willingness to pay for private college depends on how mature I judge my child to be. The more confident I am that he or she will use the educational opportunity given, the more likely I will be to pay their way. Unfortunately, many 18 year olds (myself included at the time), view college as an extended adolescence rather than a first step into "real life". Im not happy about the fact that I basically screwed around in college, took easy classes, got bad grades, majored in a worthless liberal arts course of study, and pissed away my dad's money. So call me a hypocrite, but I now feel that college shouldn't be a time to "figure out" what you want to do, but rather a time to get the education (and grades) you need to get a good job afterwards (i.e., one that allows you to be financially independent). This is not a popular notion in our post-60s "do what feels good" culture that is modern America. My main point is, if you're going to pay for private college, I think it makes a difference if you think your child will be focussed and self-motivated, or whether your child is still relatively immature. For the former, I'd be more inclined to pay the ticket for private education; for the latter, I think State U is a better return.

5. My parents paid my way for undergrad, but I picked up half the tab for law school. That made all the difference. Whereas my undergrad was squandered, my law school education was maximized--I graduated with top honors, made law review, got a bazillion job offers, etc. So while I think the idea of loading your child down with crushing student debt is unwise, so too is allowing your child to completely avoid shouldering some of the cost of education. I believe in the ownership society, and part of that philosophy involves owning the costs of education.

6. Finally, loving your children is not about taking care of them by doing everything for them. I love my daughter, but my objective in raising her is to raise a happy, well-adjusted person who eventually is independent of me and my wife. This means that, as she passes into adulthood (18-22 y/o), I expect her to have the skills, knowledge, judgment, earning power, etc. to get through life without my help. Part of this, I believe, involves giving her everything that she needs, but not eveything that she wants. Life requires compromise. It's a painful lesson, but one that everybody needs to learn sometime.

Anonymous said...

$45000 must include room and board and stuff. Tuition at the very most expensive colleges is around $35k and $31k is nearer the number at most top private colleges. On average students at these schools are getting about a 1/3 of the cost or so in scholarships. If you are in a state with good state universities then that can cut the cost a lot (but less scholarships at those schools). My opinion on this has changed over time. Seems to me now that if you are going to go to grad school then the name of the grad school matters and a if you work hard at a good state U you can get into a good private grad school. Of course Berkeley, UCLA and a few other state schools are on a par with the top private schools. At the non-professional grad level students should only go to schools that give scholarships. The school that will pay is probably the best fit to the student. I think we can extend this to the undergrad level to some extent. Look for the school that will give the best deal.

Personally I and my parents paid zero tuition. I did my undergrad in Israel funded by the Israeli government as an immigrant. I got a grant from the British government to do a masters at London School of Economics and then my first private university was Boston U. where I got my PhD funded on a mixture of B.U.s and a foundation's money.

YeOleImposter said...

I am just looking in to how to put the money away for 4 of my kids. I don't have enough time or money to fund their entire tuition at anything other than a community college - but we will try to make a dent.

I am currently looking at putting the money into a 529 plan - there are a couple that are handled by Vanguard and look to have low expenses.

GaryP
Money & Investing Dogberry Patch

makingourway said...

Friends,
Thank you for sharing the wonderful thoughts.
We'll increase our savings rate a bit, but not enough to fund 100%.
We'll probably dip into other non-cash savings to fund most of the rest. I like the idea of our children paying for some of their education, I need to figure out the best approach such that they put effort to fund the education, but are not distracted from studies - some form of optimized compromise.
Moom, indeed $45k includes room, board, health fees and tuition.
We'll almost certainly go a combination of 529 and outside investments. I can sacrifice some of the tax benefit of the 529 for financial flexibility.
Regards,
makingourway

Jim said...

I agree with what "Miserly Bastard" wrote about the value of a graduate degree. I attended a good (not elite or anything) undergrad because money was tight at the time and I was going to have to borrow almost all of the money for tuition. Luckily, I found a good school that gave me a full scholarship.

I attended one of the top private law schools and graduated with about 6 figures in debt. The law school tuition was absolutely worth it and has opened many doors. But I think that the additional value of attending an elite undergard would not have been worth it to someone in my situation.

FYI, my opinion would probably be different if I wanted to go into investment banking right after law school because the elite undergrad degree would have almost been a prerequisite.