Article in Summary:
- The average cost of state university tuition, room and board is $20,000.
- The average undergraduate student loan debt upon graduation: $20,000.
- The rapidly increasing costs of college combined with a depressed economy have made some families second guess if it is worth it to save for and pay for college.
Those of us socking away money for our kid’s education these past two years are beginning to feel like Sisyphus eternally pushing that rock back up the hill. Our 529 accounts appear stuck in neutral while college tuition continues to skyrocket. Studies appear weekly showing the dismal “return” from private university degrees. What’s a parent to do?
To answer that question, ask yourself this question first_ Do I want my kids to be responsible for this endeavor in any way or is this my gift to them? Too many parents skip this philosophical first step to education planning. And many parents disagree with their spouse on this very topic. Some believe that having the child pay something towards their education gives him some skin in the game and he is less likely to screw it up. Others may have been saddled with student loan debt for years after college and don’t want to replicate that situation for their own kids.
My friend Jane viewed the first two years of her private university education as one long frat party. Needless to say her parents pulled the plug after sophomore year. Jane then spent the next year working full-time and trying to save enough to finish her college degree. When she finally made it back to school, she went on to graduate with honors and a student loan payback schedule. When I asked her what she was doing to save for her own daughter’s college, she told me she’s opting for a mixed approach – some savings and some financial aid. And the state university system. We’ll see how that works out in a few years.
Whatever you decide philosophically, the way I look at it we really only have two choices: Accumulate Assets OR Take on Debt to pay for Junior’s education.
Since I prefer earning interest rather than paying interest, I’ll start with the argument for continuing to save for college even when it feels hopeless. You may disagree and can skip to the “Taking on Humongous Debt” section below.
Saving When It Feels Hopeless
The average cost of state university tuition, room and board is $20,000. If you have a five-year old, they will be making their first tuition payment around August 2023. According to my handy college calculator, if you put away $700 per month between now and then in an age-appropriate asset mix of stocks and bonds earning an average 7% per year, you should have enough to pay for four years of college.
But what if you can’t put away $700 per month? What if you don’t earn 7%? And what about saving for retirement at the same time? The old adage “There are lots of ways to pay for college, but only one way to pay for retirement – what YOU save between now and then” still rings true. Make sure you are saving adequately for your golden years first. What’s left over can go to the college savings plan. And if it’s going to a tax-protected 529 plan, at least you won’t be taxed on the earnings whatever the return may be. Bottom line: Even if you can’t pay the whole enchilada, the more you save, the less debt you or your child will need to take on down the road.
Taking on Humongous Debt
Now some would argue taking on debt at record-low interest rates allows you to accumulate assets (that earn a higher return) for some other goal (ahem_ like retirement). But is that really happening?
As of yesterday, the market was up 4% year-to-date. For the last twelve months, the return is closer to 13%. Some people are refinancing their mortgages with rates around 3.5%. That would seem to validate the idea of borrowing against the equity in your home to make college tuition payments. You could put all your extra cash into the market and come out ahead.
But a lot more people are still paying 5-6% for mortgage loans and accumulating any extra cash in a savings account paying .01%. Increasing your debt load now and making 5% interest payments doesn’t make a lot of sense when your other money isn’t earning more. Planning on borrowing in the future? Chances are interest rates will be higher than where they are today, making this scenario even less appealing.
A related question I often get is, “But if I save for college, won’t it reduce my chances at qualifying for financial aid?” There are a few answers to this question, including a couple I can’t print here. (I have never understood why it’s better to rely on someone else’s money to pay for your kid’s college than your own.) The reality is 70% of college costs are paid (according to the College Board) with loans not grants. So, even if you are completely relying on getting financial aid, chances are you are still going to come up short.
And those student loans? Here’s the average undergraduate student loan debt upon graduation: $20,000. Average starting salary for those undergrads lucky enough to find a job: $40,000. Here’s how long it’s taking kids to pay off their student loans_ 10 years.
Accumulate assets or take on debt – you decide.
How do you plan to manage the rapid rise in college costs?