This blog post idea is brought to you by T. Rowe Price, but it is not sponsored. At the annual financial blogger this past week, they gave away little plastic eggs with blog post ideas.
Imagine the poor T. Rowe employee folding hundreds of pieces of paper and stuffing them in hundreds and hundreds of egg. It reminds me of a cartoon character scrubbing a tremendous mountain of potatoes. I would wager that over 97% of them got thrown out without a second glance. I hope that employee sees this and thinks, “It was all worth it!”
Enough introduction. Let’s dig in. The full blog post idea was, “Think down payment: Why College is Like Buying a House.” I’d like to write an article about why that is so ridiculous, but the more I think about it, the more like it. College and homes may be the two biggest expenses you’ll ever have. (Perhaps transportation, food, health care, and even general “retirement” round out other big ones?) College education and houses typically financed over the long term. Both of them tend to fall in the category of good debt.
That are differences though. I’m not an expert at financing college, but I think you can do it with minimal down payment. It may not be easy and there might be some fairly tough loans if you do it that way, but it can be done. Getting a mortgage without a down payment, well, I wish you luck on that. If you are able to pull it off, you have found the black swan of lenders.
Other than the down payment minimums, there is a difference in the timing. Within a small margin of error, I can plan for my sons going to college in 16 and 17 years respectively. Well, let’s hope I can. If I don’t have the money to buy a home today, there is always three months down the road.
Finally, there’s the difference that one is “more optional” than the other. Shelter is a basic need. education is higher up Maslow’s hierarchy. That said, you don’t need to buy a house to satisfy the shelter requirement.
Going back to the original premise, I really like the idea of saving a “down payment” for college. It feels a lot less overwhelming than trying to save $150,000 or so, plus whatever that inflates to over the next nearly two decades. If you want something even scarier take the number and multiple by the number of children you have and whoa! (assuming you have more than 1) that’s a ton of money.
Perhaps if it isn’t so overwhelming people will be more apt to do it? Is that too much like behavioral finance?
I would say that college saving is more like saving for retirement than buying a house.
* You have a defined timeframe (18 or 19 years depending on childs birth month) from birth to when they need it.
* They have a 4 year “retirement” to use it all.
* You hope to have enough.
* It is a high return on investment (in most cases, depending on degree, university, etc.)
* The costs are unknown, but likely to increase a lot (like retirement and healthcare).
I can think of others but my main point is that your the house thing works for some levels, but the actual act of saving for college for kids is more like a retirement plan. If you view it like that, you might get better results.
Jeffrey Schultz says
I started putting money into my son’s 529 plan right after he was born. We were using BlackRock at the time. After about a year I finally decided to look at one of the statements. On the back was a table really hit me in the gut. The table provided as estimate of what college would cost when my son was ready for college. And remember he was only one. And while I thought I was get a jump start I evidently was not. So the chart then compared what I was putting away to what college will cost. It then gave me three options of how to get on track. Option one was $660 per month. Option 2 was a catch up of 10K or so then $400 per month. Finally, the third option was a one time payment of $73,000. Yep 73K. The point of the story is that I know brown bag my lunch.
Lazy Man says
Yeah, the projected increases in college are almost up there with the compounding of interest… if what they are saying is accurate.
One thing to remember, is that there are college loans, grants, scholarships, etc. available. I think at some point colleges are going to realize that they’ve priced out students if they keep going up. There’s already a lot of talk now about whether college is worth the huge amount of student debt. If they get reigned into something more in-line with inflation’s 3%, then your investment dollars may catch up.