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College Planning is Impossible (But Do It Anyway!)

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I'm often writing about frugality. Today, I'm writing about futility.

Over the last week, I've focused a lot of my attention on estimating college expenses. We have two young boys, ages 2 and 4 years old. Planning for college is an exercise that can't be ignored.

The spark for this article was inspired by Justin from Root of Good's article, How to Pay for College while Early Retired. (I highly recommend his website, it's one of the best resources on financial independence and retiring early.)

The article answers a question I had myself. It's one thing to retire at age 33 with a huge nest egg of savings, but affording college for 3 kids is a whole other thing. Before reading his article, I did some rough math in my head: $50K/yr for 12 years (3 kids at 4 years) and came out to a whopping $600,000 bill.

As you read the article, it becomes clear that Justin has a good plan to limit the expenses of college. The in-state, public university brings the number per year down to $24,000, more than cutting the $600,000 in half. That $24,000 is split into $10,000 tuition and $14,000 in room & board and expenses. He's already paying that $14,000 to some degree in his own budget. That $14,000 isn't $14,000. It's an average of what people spend. Justin and his family aren't average in their spending habits.

There's much more to the analysis, but he makes good points that "nobody pays sticker price for college." There are grants and scholarships. People can take Advanced Placement classes or even community college classes in high school to earn credits. (I took a computer science in high school at a local university and started with a few credits.) He also brings up the very important point that his children may foot some of the bill. I'm a big believer in this as I think it helps them have some skin in the game.

By all practical measures I can think of, Justin has figured out college planning.

But I claimed that college planning is impossible. I put that in the title!

College Planning is a Pile of Uncertainties

It feels to me that Justin has eliminated many of the uncertainties by focusing on one particular college option. He recognizes that they may go to another university, even a public one, but falls back on his in-state, public school. Without this decision, the discussion gets extremely difficult. This one decision guides all the math that leads to an article with 100 comments. It's clearly very helpful to so many people including me.

I'm not ready to declare where my toddlers are going to college. I've run some numbers for 2030 to create an average between public and private universities. The average public college cost should be around $42,500 assuming a 3% inflation rate. The average private college should cost around $57,500 assuming a 3% inflation rate. Thus I'm estimating that college will cost an average of $50,000 in 2030 dollars per year.

Did you spot all the assumptions there?

When I boil it down to $50,000 a year it sounds like $200,000 is a good estimate. However, choosing a public school would lead to a $170,000 avearge. Choosing a private school would be $230,000. That a $60,000 difference isn't trivial.

However, the averages I used for public and private are just that... averages. Some schools will be more expensive and some will be less. A particular public school may come in at $150,000, while a private one could be $250,000. That's a huge difference.

The other assumption here is the 3% inflation rate. While that rate may be accurate over the long-term, a small change in this number can have a dramatic effect when compounded over 15 years.

Should I try to save $150K, $200K, or $250K? What about scholarships and grants? How much should we assume we get from them? Whatever assumption we make is yet another unknown variable.

How is College Planning Different from other Types of Financial Planning?

At first glance this appears to be similar to planning retirement, but it is very different. If you save too much in retirement, there isn't a tax penalty. However, if you save too much for college, it can be difficult to get the money out without paying a penalty.

On the other hand, it is dangerous to save too little for retirement. There's little danger if you don't save enough for college. After all, the kids can usually get loans.

The difference-maker is that in retirement, you can control some costs without guilt. Skipping a vacation may not be preferred, but it's easier to justify giving up a luxury to pay bills necessary to live. How do you balance the difference between paying more for Harvard vs. a state school? Isn't harder to say that you should skimp and give up decades of potentially extremely-high earnings power?

What about Financial Aid?

When I started to research how much college would cost, I sunk my teeth into financial aid. I expected to find more ambiguity, but I was surprised to find some concrete formulas such as the FAFSA.

I felt like I finally found something that I could work with... until I did a little more reserach. I'll be writing why more in the next few days.

What if Saving for College Becomes Unnecessary?

That question is not nearly as silly as it seems. There's significant talk from politicians surrounding the potential free college. What will that talk look like in 15 years?

That says nothing about the potential of online learning. Fifteen years ago, feel people had heard of a company named Google. Facebook and YouTube didn't exist. Today there are abundant resources for learning almost anything online.

Let's take that 15 years and fast-forward from today. I believe that online learning will be off-the-charts awesome. That's not to say that all learning should be done through a computer screen. I simply think that such time will be extremely efficient in teaching people.

Final Thoughts

In the next few days, I'll cover a few areas that I purposely glossed over here. I don't want to leave people thinking that they shouldn't save for college. This is one area where we shouldn't be "Lazy." As my wife says, "We don't want to be caught with our pants down" when it comes time to pay for college. (Her way with words is reason #1372 why I love her.)

Instead, I'd like to spark a conversation on this complex topic. Obviously our crystal balls are going to be a little cloudy, but that doesn't mean we can't make wise decisions.

Posted on September 28, 2016.

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11 Responses to “College Planning is Impossible (But Do It Anyway!)”

  1. Geoff says:

    Hey LM,

    I just recently graduated college and can give you a break down of my experience and cost. First off, I attended college in California which is going to be different from many other states. I also went to college for 8 years instead of 4, and did things a bit differently, so I am probably an outlier.

    I started off with many years at community college, and was able to save a boat load on the GE requirements. In fact, because I was considered independent and in the poverty line, I was able to get a bunch of money from FAFSA which covered the tuition and books. I then transferred to a state school where I was able to repeat this process and get money from the FAFSA for both tuition and books, and even had a little extra for gas money.

    I was able to get through college at the pace that was appropriate for me, and I was essentially paid to get my BA. There are many ways to go to college, and this seemed to be the best for a frugal person. Utilizing community college and an instate school is by far the best strategy and my college degree is as useful as any other undergraduate degree.

    • Lazy Man says:

      Thank you for the comment Geoff.

      Readers, Geoff has commented before. This is outstanding perspective/information from one of the most intelligent people I’ve ever (virtually) met.

  2. stannius says:

    I have been trying to answer this question for months now. (Or I should say, I tried to get people to help me answer this question a few months ago). I had limited success and got a few insults to boot.

    As you indicate, there are just so many assumptions, which can wildly affect the results.

    Perhaps the best strategy was proposed by JoeTaxpayer: hedge your bets by putting some into a 529 and some into taxable brokerage accounts. Then you have the money for college if you need it, and if you don’t you can withdraw (at last some of) it without penalty.

    • Lazy Man says:

      Joe Taxpayer is one of those people who is the smartest person in the room… it doesn’t matter the room. I talk with him personally at every FinCon conference and it is typically the most enlightening time I spend in a year.

      (Can I possible praise him more? I don’t think so.)

      I think hedging your bets with 529s and other taxable accounts is smart. However, I like to optimize my long-term planning which is why I’m not particularly happy with the current situation.

  3. Justin says:

    Glad I could provide some food for thought with my article. :)

    I feel like I’m 80% of the way there in terms of having it covered. The other 20%? Who cares! We’ll wing it when we get there. I had to pick some assumptions to start with (namely, public in state university) because otherwise the decision tree has a thousand branches and it would be impossible to narrow it down to a reasonable analysis.

    Maybe they go in state, maybe they go somewhere else. The cost probably won’t be a lot higher if they go somewhere else because we’ll be picking colleges at least in part based on cost.

    • Lazy Man says:

      One of my main points is that the decision tree is crazy. That’s a much better way to put it. Your children are older than mine, which narrows the decision tree by a few hundred branches.

      We plan to pick colleges based on cost/value as well. At the same time, there’s a dream that they might go to Stanford or MIT. I view it like thinking about where you want to take your wife to dinner on your ten-year anniversary. You aren’t going to take her for $6 foot-longs from Subway explaining that it is a good cost/health decision. At the same time, you don’t want to pay $25 at a steakhouse for a Caesar salad, right?

  4. robyn weinbaum says:

    planning college for 3 kids? have i missed something?

    i went to college on full scholarships [high grades, high SATs, state school]. all i paid was a registration fee and books. my kids had state scholarships and went to dual enrollment, AP classes, community college and then finished at another state funded university. there are ways to do this without breaking the bank.
    we also had florida prepaid, but they didn’t need it.

  5. Big-D says:

    My son is 22 and a senior in college. I have personal feelings on this, however by the tenor of your article you have different feelings toward a parents responsibility to a child’s education payments. I agree you want to take some of the burden off of a child, and pay for a majority of it, but you also want to let them know that if they do well, and get scholarships, grants, etc. that they might get to keep some of the money. Please keep in mind my advice is dated as when I started saving for my sons school – they did not have 529 accounts.

    I created an UGMA/UTMA account for my son. I placed 3 years of bonus in there when he was 5, 6, and 7 totaling about $20k. I invested it in an EFT like mutual fund and when he was ready to go to school he had $60k. My son knew that was all I was giving him for school, and that his mother wasn’t going to give him a dime for school. Anything else was on him to earn or take the financial load on. This means if he did well in school and got scholarships/grants, he didn’t have to spend as much money on his school. He just started his senior year and still has $50k in the account thanks to fortuitous rulemaking of FAFSA. I think he will have that $50k when he graduates in May as well, and being his account, that is a great start into the real world, with a BA as well.

    My thoughts while reading this article:
    • Where are the child’s responsibilities in this whole thing? My son is responsible for his title, insurance, books, food, entertainment, etc. His account should be used for 2 payments: Tuition, Room & Board. Otherwise he sees scorn from his father. Any scholarships/grants, etc. are his to apply for. We had the discussion in 8th grade about his high school grades counting and now his college grades counting for/against him in terms of grants/scholarships.
    • Ignore the uncertainties, shoot for the state school and go from there. If they want to go to a private institution, make them do the leg work to figure out how to pay for it. Work over the summers (or in high school) as it will build character, and the money they spend will be theirs, which they earned, showing pride and it won’t likely be pissed away.
    • You are overthinking the costs. Take a typical but nice in state school, take those costs and shoot for those.
    • College is the new High School diploma. You will not be able to get any sort of a good paying job without some post-secondary degree. College will not be unnecessary; just you have to pick the correct degree. An art degree will only be good if you are an artist, not if you want to work at a fortune 500 company. That discussion has to be had when they are about to enter high school.
    • What about Community College? Community college is great to start out with, generally cheaper, and typically you can transfer credits to the state schools. I don’t know about MA but here in IN, you can go to a CC for 3-4 semesters (live at home and commute), then transfer to the state school with full credits. My son paid $3400 a semester for tuition at a CC and pays $4500 at the state school plus $4500 in room/board. Significant savings are to be had, and when he graduates, his diploma will still say the same thing, the State School.
    • What about Trade Schools? Some people are not meant for higher education. I am not saying your kids are not, but I know several people who send their kids off to college and they could not hack it. Trade schools are great for that, as they learn a trade, and can also do that skill for the rest of their lives. Some will be happy doing that skill. If you save for a state school, you should have enough for this as well.
    • What about FAFSA? While you might now have a hard time getting anything from FAFSA, I would not rely on it. I didn’t but we got lucky on the ruling on my son, so he gets a log of money from them each semester. Ignore it. Don’t rely on it. Just let it be a safety net or unexpected surprise when your kids go. Just think of it though, if you are FIRE by the time they go to school, your income should be pretty low, so you might get more than you think. Again, just count this as couch cushion money :)
    Yes your kids are young, and you want to put some money aside, which you are thinking too hard about this. Put the money aside, add to it yearly, and when they are 15 or 16, you can start to stress the details. Who knows, Hillary might win and you will get free tuition for your kids.

    • Lazy Man says:

      You bring up a great point about the children’s responsibilities. We want them to have some “skin in the game”, which I agree with. I haven’t thought about how much is appropriate for that. It is probably an article itself to try to figure that out.

      I was planning to write an article about FAFSA today… I’m hoping to get it done and published, but it may be Monday instead. The short of it is that our choice to own real estate properties will likely give us too many assets to qualify for much. I like the idea of ignoring it, but I also liked it as one of the few things that I feel is relatively capable of planning for.

      We don’t want to shoot for state school. I jokingly refer to Stanford as “a decent safety school.” I stress “jokingly” obviously. However, getting them into the very best schools is important to us (goals obviously can and probably will change over time). And it might not be important to our children, but it doesn’t hurt to be prepared.

      Let’s circle back to the earning it and working for it themselves, something we also believe in (as I mentioned above). My wife and I both worked some significant hours in high school and it is great for building character. I think there might be a careful balance as “pizza chef” may not standout to Stanford. It’s a balance of what’s going to get them in the top schools, which is another uncertainty.

      Community college is something we are thinking about exploring to supplement their high school courses ;-).

      In reality, we’ll likely have my wife’s GI bill when she retires in a few years which will cover half of their college education (at a state school, with a limit towards private school). That could reasonably be our contribution with other money coming from scholarships, grants, etc. and their own contribution. We are saving money in 529 plans as well.

      What’s really underlying much of this what I think will be a lack of other meaningful places to spend money at that age. We should have our house and real estate properties paid off and we live very frugally. I think if you asked people what they’d do with extra money, it might be invest in themselves or invest in their children.

  6. […] recently wrote that college planning is impossible (but that you should do it anyway). The impossibility comes from having a 2 and a (newly) 4 year […]

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