College is crazy expensive. We all know that. Again, $100k+ for a 4-year degree at an in-state public university and over $300k for an elite private.
With 3 kids, you could be looking at $1 million in college costs.
And that’s just for undergrad.
If your kid wants to be a doctor, or lawyer, or dentist, or vet, or nearly any other “white collar” professional, they will have to go beyond undergrad and that will be even more (for back-of-the-napkin budgeting, figure $200k-$300k more).
But, sadly, the costs of college are actually much worse.
The true costs often end up being much more than what you pay because of how you pay.
Let me explain.
The Hard Math
Let’s take a typical family. We’ll call them the “Avorudge” family.
They’re in their 40s, have 2 kids, and a combined household income of $200k.
They want to pay for their kids’ college, but they also have retirement goals. They’ve worked hard in stressful jobs, and can’t wait to fire their bosses and pursue their “empty nest” dreams.
(Mr. A wants to get his Captain’s license, buy a boat, and do dolphin tours. Mrs. A wants to start a non-profit charity teaching men how to put away their dirty dishes and socks.)
Their oldest daughter is a Senior in high school and the time has come for college.
After working with a Financial Planner who specializes in college, they establish a budget of $100k.
They have $30k saved in a 529 plan, and they can cash flow $1k/month for all 4 years.
They also want their daughter to have “skin in the game” (so she’ll study hard and not party so much), so she’ll take out the max $27k in Federal Direct Student Loans.
SIDE NOTE: This can be a smart strategy because she’s planning to be a school counselor, so she can go on an income-driven repayment plan like SAVE and then have her loan balance forgiven via the PSLF program.
Combined, this gives them roughly $100k to spend on college.
Their daughter has narrowed down her choices to two schools.
College A (Toy. U.), is $25k/yr.
College B (Lex. U.), her “dream” school, is $50k/yr.
If she chooses College A, they can pay for college with no parent debt.
If she chooses College B, they’ll have to take out $100k in loans.
Hmmm…what to do.
At current interest rates, the loan payments for College B will be around $1250/month for 10 years (standard repayment plan).
They don’t want to crush her dreams, so they reason, “We can afford that payment. Heck, we’re already paying $1k/month toward. Let’s do it. She’ll be so happy!”
But here’s the problem with that reasoning, as well-intentioned as it is coming from a place of love.
They’re not considering how the debt is (1) increasing the overall cost of college, and (2) decreasing what they can save and invest for retirement.
Using rounded numbers, they’ll end up paying roughly $50k in interest on that loan. So, the $100k loan becomes $150k, and the cost of College B balloons to $250k.
But those loan payments are made with after-tax dollars. At their income level, they’re in the 24% tax bracket and so they have to earn roughly $325k to pay $250k.
So, because they’ve financed college and made loan payments for 10 years using after-tax dollars, their gross cost is around $325k.
That is, indeed, very gross.
But wait, there’s more – and this part is really bad.
They will suffer huge opportunity cost losses that could badly impact their retirement (*NOTE: parents rarely figure this in, which is why having a fiduciary Financial Planner is so helpful – we nerds think about this stuff all the time).
If their daughter had gone to College A, they would have avoided loan debt and so could have invested that same amount ($1250/mo for 10 years) and let it grow for retirement in tax-advantaged ways.
With optimized financial planning (investing properly, tax optimization, etc.), at age 70, that amount could easily grow to over $1 million.
So the true cost of college for them will end up being over $1 million.
That’s what we call, The Million Dollar College Mistake.
“Opportunity Cost” Is Really Important in Money – and Life
One of the most important concepts in finance, and in life, is: opportunity cost.
What’s that?
An “opportunity cost” is simply this: when you spend a dollar (or a minute of time) on X, it’s no longer available to be spent on Y.
Every dollar you earn in life will go to one of two places: it will be spent how you want it to be spent, or it will be given/taken away in ways that you don’t want it to be.
This is a Spiritual Law, because it has such a huge impact on your happiness.
If your resources are largely going toward what you love, you’ll be happy.
If your resources are largely going toward what you don’t love, you’ll be unhappy.
Is Paying for the Expensive “Dream” School a Mistake?
Would it be a mistake if the Avorudge family took out loans for their daughter’s “dream” college, and it ended up costing them over $1 million dollars?
I don’t know. It’s not my life.
It depends on the rest of their financial situation (Can they absorb that kind of loss and still meet their other goals like an on-time retirement?), and the values and goals they hold in the deepest parts of their hearts (Is it more important for them to give their daughter a dream school or retire on time?).
This is where psychology (and spirituality) meets money, and this is why “financial planning” is actually “life planning.”
There are limited dollars and minutes available. How do you want to spend them?
If you can get clarity on that, hard decisions become much easier.
The True Costs of College
Regardless, hopefully you see the connection with college planning.
Times have changed. We used to be able to pay for college without it deeply impacting our entire financial lives.
But now, because it’s so expensive, there are complicated tradeoffs and difficult decisions have to be made – with long-term consequences that can be hard to see.
This fact has some people asking, “Is college even worth it anymore?”
And I’m sorry if what I’ve said above contributed to that concern for you.
Because here’s my answer to that question: HELL YES.
College is still 100% worth it. Here’s why.
There are both financial and experiential reasons why college is still worth it.
On average, someone with a college degree makes MUCH more in earnings in a lifetime than someone without a college degree. It’s even more pronounced for those with graduate and professional degrees — well over $1 million dollars.
So not going to college is a different kind of opportunity cost, and a different kind of Million Dollar Mistake (NOTE: We see many “million dollar mistakes” that people make, like overpaying in taxes).
Second, the experience of college is priceless. The growth, the maturity, the friendships, the memories (even the hazy ones), are deeply meaningful. For many, the college years are some of the happiest of their lives.
BUT, overpaying for college and taking out loans to cover it at the expense of everything else might not be. This is especially true if you’re not on track for the kind of retirement you want.
The saddest conversation a Financial Planner has to have is telling a 60 year old, “I’m sorry but you don’t have enough saved. You can’t retire until 70, unless you want to eat beans and rice and live in a van down by the river.”
And, of course, you don’t want to go into retirement underfunded and then run out of money and become a burden to your grown children.
My point is that you need to approach college planning with Eyes Wide Open (please don’t watch that movie, it was truly awful).
You need to run all of the numbers and look at all of the costs, both short-term and long-term, and then have deeply honest conversations with yourself and your family.
The good news is that there are ways to make it all work. In most cases, you can hit the “sweet spot” of paying for college and still retiring on time if you know how the system works, where to look, what to do, and what to avoid.
So, if you have kids you’re sending to college, get clarity on how you truly want to balance your resources, and then run the numbers to find the right plan for you.
Your future self, and your grown kids 20 years from now, will thank you.
*The content contained herein is intended as education and entertainment, and does not constitute investment, tax, or legal advice. Please consult the relevant advisor before making any decisions. Additionally, any opinions expressed here are solely those of the author, and do not represent the opinion of Leetown Advisors or its affiliates.
