tuition Archives - Lazy Man and Money

How Much Do I Need to Save for College?

February 6, 2019 by Lazy Man 15 Comments

A little over 6 years ago, I became a dad. Less than a month later, I wrote an article about saving for college.

Yes, I’m weird.

I thought I’d do something I call “Then and Now.” The idea is to look at an old blog post, review it, and update it for now. I feel that the value of a blog is the journey. Otherwise, you might as well just create a website. Here we’ll see how things have changed in the first trimester of our college financial planning. I think we’ll find that not only has our family has changed, the world has changed, and my knowledge of the saving for college has changed.

Life would be boring if nothing changed over six years, right?

Let’s get started with my 2012 view. Then we’ll get to my 2019 view.

Then: How Much Do I Need to Save For College (2012)

That’s a question that my friend Kevin asked me probably around 3 years ago. It was a simple question. He had recently had a son and he wanted to put aside money to cover his education. Kudos to him for starting early. The question lead me to write this article: Saving for College – An Exercise in Depression. In hindsight, it was a total cop-out as I never did answer his question.

Today, I think I’m going to do better… hopefully a lot better.

I have a vested interest this time around. My own son is four weeks old today and I’m in Kevin’s shoes (not entirely, but I’ll get to that the end). I got in reminder about all this from CollegeAdvantage, the place I determined had the best 529 plan for my niece and nephew. Specifically their newsletter had this image on the right (click for a larger view). The part that caught my attention is the bottom that assumed annual deposits of $2,400. For all practical purposes (minus some interest compounding) that’s $200 a month.

This didn’t answer Kevin’s question, but goes down the right track, giving me a good estimate of how much I’d have if I saved roughly $200 a month. However, it didn’t tell me how much college was going to be when Little Man is 18. Without this information I really can’t know how much to save.

When in doubt, I fire up Excel and get nerdy with some math. Here’s what my Excel spreadsheet looks like (click for larger) and I’ll explain what I did here:

On the right you’ll see three headings with numbers below them, “Monthly, Interest, and College Increase.” These are the main variables that I’m playing with here. If I save $674 a month (more on that seemingly random number later) and earn 6% interest I’ll have the amount at the bottom of the “Interest” column under the Savings heading. The Interest column represents how much money I’d have at the end of year assuming deposits and interest. I could have titled this column better, but that’s the beauty of Excel, I’m getting to the numbers quickly. For fun I’ve totaled up the amount of actually cash I’d be putting aside by saving $674 a month. So putting $145,584 over time yields me $350,957 when Little Man is 21. I didn’t factor in taking the deductions out of this to actually pay for college, so there’s room for improvement here. It is important to remember that this is an estimate and there’s no guarantee of earning 6%.

Now let’s turn our attention to the right column of College Costs. Using the “College Increase” value, I can estimate how much college might cost Little Man at age 18. The 4% is just a best guess. Ideally, I would know how much college costs are expected to go up over the next years. Perhaps some research group has a good answer there. I settled on 4% because quite honestly, if you put a 8% number in there the last year of private college is $212,000. I don’t see that happening. Even at 4% the last year being $96,000 looks pretty daunting. However, in 18 years it might not be. I’ve totaled up the last four years of the college costs and you can see that public college is likely to cost around $184,500 with private school costing $363,000. Now it becomes a little clear where that $674 a month came from… that amount gives me the $350,000 range that covers 4 years of private college.

The last piece to the puzzle is where did I get the information for the public and private school costs to start with right now? The answer is Collegeboard’s annual estimates. They did all the heavy lifting give me a number for how much an average public or private college would cost with most of the typical fees rolled in.

So now that I’ve gone through all this math, let me make things easy for you. Saving for College has a College Cost and Savings Calculator, which is dead simple. You just put in a child’s age and it tells you a number that you need to save. I put in $0 just now and it came up with a $602 number that I have to save each month. From there, you can adjust the scenarios just like I could with my Excel spreadsheet. If I had seen this calculator first, I would have skipped the spreadsheet, but the spreadsheet does give me helpful checkpoints. When I did it a couple of weeks ago, I believe that number was $674. When I plugged that $674 number into my Excel spreadsheet things started to fall into place.

The calculator from Savings for College also has a lot of other valuable information. For example, it assumes a 6% cost of college increase using historical information. The 4% assumption in my spreadsheet looks to have been an underestimation. If that stands true, the last year of private school for Little Man is going to cost $143,543. Zoinks!

There are still a few different factors at play here. Going back to the CollegeAdvantage chart, there are taxes to consider, but 529 plans can help with that. If you are saving in a regular brokerage account, who knows what long-term capital gains are going to be at that time? Again, you just take your best guess and adjust as you get closer.

Now for the fun part… I get to throw most of this research in the trash. It turns out that Little Man appears to be eligible to get free public education thanks to my wife’s GI Bill with the military. I knew that it was a tremendous benefit, but this exercise has put it in a whole new light.

Now: How Much Do I Need to Save For College? (2019)

Kevin’s simple question about 9 years ago as his son was born is still an important one: How Much Do I Need to Save For College? Did he need to put aside $50, $100, $200, or even $500 a month to cover his new son’s college expenses. At the time I got depressed doing math of saving for college, as college costs were going up as fast as the average stock investment was projected to. The end result: Expecting compound interest to help your college investment seemed doomed to failure.

It’s important to note that he viewed paying for his son’s college as a strong financial goal. Living in Silicon Valley at the time, I believe he had the income flexibility to put significant money towards that goal.

Then (2010 and 2012), I took the question on face value. It’s an interesting mathematical question. My thought was, “Let’s do some objective number crunching! Yum!”

Now (2019), I feel it is more necessary to talk our feelings about college costs. For this article, I’m going to put aside the question of whether you should or shouldn’t pay for your kids’ college. Kevin felt strongly about paying 100% of the costs. I feel strongly about helping, but also that the kids have to have some skin in the game. Other people may not be in a position to help at all. We all come from different backgrounds and have different philosophies on this topic.

Instead, I’m going to do my best to work with the objective math of paying for 100% for college costs. You can always adjust it to suit your parenting style/philosophy.

Then (2012), we had my wife’s GI Bill that would cover Little Man’s public college schooling for 4 years. It even covers some living expenses. Now (2019), we have two kids. We have to split the benefit between them. That means there’s a gap that we have to save for. The original question was for one kid… and that easy answer was the GI bill. Now things are different.

In 2015, when the boys were age 2 and 3, I put together a spreadsheet to estimate their education costs in high school and college. We send them to a private prep school due to a large discount we are eligible for. We plan to continue to do that through the 8th grade. At that point, we’ll have to navigate the high school waters. Many of children in the class will go to some of the best private high schools in the country which cost as much as some of the best colleges. I decided to include that into the numbers, but I don’t think that’s feasible without some kind of scholarship. For the purposes of this article, you can pretend the high school component doesn’t exist. (Again, it’s best to customize to your specific situation and goals.)

Here’s what the numbers look like for kid 1 (the oldest):

Remember these numbers were from 2015. I used the average cost of public and private college that year and assumed a 3% increase each year. Years ago, I thought it would increase at 7%, but those numbers just got really, really crazy.

Here’s kid 2. Since they are almost the same age the numbers are pretty close:

Here’s the summary that’s going to be the glue that makes the first two tables make some sense:

I’m going to start with the summary first and work backwards. The summary adds up the high school costs (the four years in bold in the high school column) and the college costs (the four years in bold in the average college column). Because I don’t know if if the kids will go to public or private school, I averaged the costs of the two. The college cost is divided in half which is an estimate of using my wife’s GI Bill. I then added up those numbers coming to around $300,000 for each kid (one a little more and one a little less).

Once I knew that my goal was to save $300,000 each, I could play with the monthly savings number and projected investment gains (estimated at 7%). It turns out that I needed to put $625 for kid 1 and $600 for kid 2 to come up with those kind of numbers. That’s a lot of money, but remember that the high school would be the expensive part, and I don’t see it happening (my wife doesn’t necessarily agree with me on this).

If we were only concerned with college, we’d have a much more manageable amount of around $220 for each kid to cover the estimated gap not covered by the GI Bill.

Of course 2015 numbers aren’t relevant. I’ve updated the same three charts above for 2019.

Kid 1:

Kid 2:

Education Summary

One thing that stood out to me is that the costs of college didn’t go up 3% every year as I expected. Overall, they went up 7% in the three years total. I had expected it to go up more than 9%.

This math assumes that one were to start saving from scratch now.

How Much Do You Need to Save for College?

This is a lot of math that is very specific to our family and our financial situation. I don’t expect the numbers to mean much to you.

What I’d like for you to take away from this is the process. It isn’t perfect. It makes a lot of assumptions that will eventually be shown to be wrong. However, there’s value in doing this exercise at least every few years. I learn something new every time I do it. Finally, I continue to get more data and that helps my planning over time.

Have you planned how much you need to save for college? Has the plan changed over time? Let me know in the comments.

Why is College in America So Expensive?

September 25, 2018 by Lazy Man 2 Comments

I’m going to be at FinCon this week. For those who don’t know, FinCon is when many of the personal finance bloggers get together to network, learn, and just be around their own people.

It’s always the busiest time of the year for me. This year, I’m juggling bringing the family as well. On the day we get back, my wife may turn around and fly 90% of the way back to do a 2-week Hurricane Florence deployment. It’s a good thing it’s not my 6 year old’s birthday, their dentist appointments, or school picture day on that first week. Oh wait, it just happens to be all those not-so-oddly-specific things.

Aside from that, I’m super-excited for the closest I’ll ever have to a happy version of “Bring Your Children to Work” Day. I’m sure it will be much better than the alternative, “Turning Over a Tenant” version of the day.

P.S. If you are a blogger at FinCon and want to make some friends, just say almost anything related to Pokemon with my kids around.

I still got a lot of loose ends to tie up before I go, so today, I’d like to tackle something short and easy:

Why is College in America So Expensive?

Hmmm, that certainly doesn’t seem short or easy. In fact, it’s neither. The Atlantic recently wrote around 3000 words on that topic.

It’s a very good read. If you have the time, I suggest you just dig in.

It took me a few days to read over a number of sittings. (I generally work with very small blocks of time.) Here’s briefly what I learned. I’ll put it in a book report summary form to match with the topic of education.

The high cost of college in the United States is unique. It’s nearly twice per student of the average developed nation ($30,000). Two thirds of developed nations keep their college costs at $2400 a year or less, with many free.

There are few reasons why colleges are so expensive. I covered a couple of them 3 years ago. One of the reasons colleges got expenses is because they’ve spent a lot of money in luxury amenities such as lazy rivers, steakhouses, and ski resorts to lure students. However, the bigger reason is that student debt is the problem.

At the time, my thinking was:

“Access to money has gotten too easy for colleges. It seems to be a never-ending cycle. Raise tuition to build awesome stuff to recruit students. Students get bigger loans to cover tuition. Student debt grows and grows. It seems like the housing bubble to me.”

As one would expect, The Atlantic goes quite a bit deeper in their reporting.

For example, we learn that students in America spend around $3300 on things like housing, meals, health care, etc. In many other countries, students go to school closer to home and need fewer dorms and on-campus meals. The health care is covered differently. You could view some of this stuff as just showing up in a different line-item because there’s an inherent cost to feeding and housing students whether it is at home or at college.

In other words, it isn’t necessarily those lazy rivers that I suspected. I’m sure it doesn’t help, but we have to do dig deeper.

The Atlantic proposes one answer: It’s the cost of paying people’s salaries itself.

The argument (from a couple of cited researchers) is “… college is a service delivered mostly by workers with college degrees — whose salaries have risen more dramatically than those of low-skilled service workers over the past several decades.” The researchers argue that it isn’t much different than “doctors, dentists, and lawyers” who have risen at the same rate since 1950s.

The Atlantic agrees that this may be part of it. However, it makes a note that other countries have similar economic trends, so it doesn’t explain why American colleges are still twice as much.

Next, The Atlantic looks at the public university system where a large majority of students get their education. Funding for these schools have dropped off a cliff (my words) leaving them to try to recruit wealthier students with “nonteaching staff”:

“Some of these people are librarians or career or mental-health counselors who directly benefit students, but many others do tangential jobs that may have more to do with attracting students than with learning. Many U.S. colleges employ armies of fund-raisers, athletic staff, lawyers, admissions and financial-aid officers, diversity-and-inclusion managers, building-operations and maintenance staff, security personnel, transportation workers, and food-service workers.”

The Atlantic also points a finger at the college rankings. Published research ranks highly in the rankings and published professors are expensive. That doesn’t necessarily help the students. Student-to-teacher ratio in the US is slightly smaller. This may seem like it would the students, but there’s conflicting reports on that.

There is also a case to be made that the “net” cost of college, after grants, isn’t that far off from other countries. Costs may start out of higher, but come down quite a bit when you look at the final price.

This leads to a predictable problem that I’ve been struggling with (fortunately, I have a decade to figure it out). The “the price varies wildly depending on the place and the person.” It’s one of the reasons why college planning is impossible. While you might be able to figure out the cheapest (or the most expensive) college, it’s really hard to know what is going to be the best value so far in advance.

The Atlantic analysis takes a turn and compares college expenses to health care. In each case, America is terribly inefficient by paying twice as much for less than stellar results:

“Hospitals and colleges charge different prices to different people, rendering both systems bewilderingly complex, Staiger notes. It is very hard for regular people to make informed decisions about either, and yet few decisions could be more important.”

Finally, the Atlantic seems to get to the reason why I thought colleges were expensive all along:

“Ultimately, college is expensive in the U.S. for the same reason MRIs are expensive: There is no central mechanism to control price increases… In places like the United Kingdom, the government limits how much universities can extract by capping tuition. The same is true when it comes to health care in most developed countries, where a centralized government authority contains the prices. The U.S. federal government has historically been unwilling to perform this role. So Americans pay more for pharmaceuticals—and for college classes.”

The article then asks the question if Americans are getting more value from their colleges. That would obviously help justify the cost. Unfortunately, it seems like the end result of the education is not anything special in standardized testing. Graduates are getting more value in terms of earning more money:

“It’s a diabolical cycle: Colleges are very expensive to run, partly because of the high salaries earned by their skilled workers. But those higher salaries make college degrees extremely valuable, which means Americans will pay a lot to get them. And so colleges can charge more.”

The final conclusion uses a few words to sum up just how difficult college pricing is:

“This convoluted, complicated, inconsistent system continues to exist, and continues to be so expensive because college in America is still worth the price. At certain colleges, for certain people. Especially if they finish. But it doesn’t have to be this way, and almost everywhere else, it isn’t.”

Sometimes it feels like it is enough to make my head explode. I want my children to have every opportunity to succeed, which seems like it’s necessary to engage in this game of Plinko. I just wish it made a little more sense.

Saving for College – An Exercise in Depression

January 22, 2010 by Lazy Man 15 Comments

My friend from Rich Credit Debt Loan asked me a simple, but thought-provoking question last week. I’m probably going to tease you with the actual question for a little while. We decided the best answer for the question was to create a calculator and I haven’t had the time to do such a thing. However, the question centered around his plan to save enough money to put his children through college.

In order to answer any question like that, you have to start by gathering information. “How much would tuition be now?” was a key question we had to answer. Often, you can’t know where things are going if you don’t know where they start. Then we looked to how long he had to save for his children. Then we tried to model how his investments would perform over that span. Lastly we searched the web to see how much college costs are likely to go up while his kids grew. The sobering fact hit us over the head… hard. We found a few sites that estimated costs to go up between 6 and 9%… which was exactly what we estimated as the growth on his investments. In other words, compound interest isn’t likely to help him save for college.

There’s some debate about whether putting a child through college a parent’s responsibility. No matter which side you are on with that debate, I found it refreshing to see someone plan their finances far in advance. It makes me wonder what those who aren’t thinking 10 to 15 years ahead are going to do when college comes around. I know there are always loans and scholarships, but wouldn’t it be nice to not have to think about that?

I wish Rich Credit Debt Loan some luck on whatever path he chooses. It looks like he’s going to need it.