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.
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.