College costs what?

The cost of a college education is at an all time high.  What is a family to do to prepare for and then pay for all the tuition, fees, room and board? 

A bachelors degree from a reputable college is becoming the new high school degree.  I shared education attainment trends in This ain’t your parents retirement.  As of 2017 over 34% of people had earned a bachelors degree.

But at what cost?  I did some digging on tuition inflation and found a new government agency – the NCES – National Center for Education Statistics.  This Center is part of the Department of Education.  If you want an eyestrain, here is their simple organizational chart.

NCES Org Chart

One of the first things I looked at was a big database full of data going back to 1963 on the cost of a college education.  I took the raw data and placed it into a chart that shows every five year increments in the data.

This first chart is the trends of costs of a public college.  This is adjusted for inflation.  Using 2015-16 dollars, the cost of public college was $7,174 in 1963-64 and had risen to $19,189 in 2015-16.

In 1963-64 the tuition/fees (blue bar) was only 26% of the total cost but by 2015-16 that percentage rose to 46% of the total cost.

Public College Cost

If you think public college is a lot of money just wait.  This second chart is the trends of costs of a private college.  Using 2015-16 dollars, the cost of private college was $13,981 in 1963-64 and had risen to $39,529 in 2015-16.  This roughly works out to two times the cost of a public college.

In 1963-64 the tuition/fees (blue bar) was 56% of the total cost but by 2015-16 that percentage rose to 71% of the total cost.

Private College Cost

Then I started wondering about the inflation rate on college tuition compared to overall inflation.  What I found is that the college tuition inflation rate is on average two times higher, sometimes three or four times, than overall inflation (see Rate Ratio column).

                                                   http://www.finaid.org/savings/tuition-inflation.phtml

Then I wondered what tuition might look like in ten years. Now both our boys are in college already (one a senior, one a freshman and both on a planned five year degree plan) so ten years out will not impact me but I was curious for younger readers.  Taking the public college cost of $19,189 and applying a 6% annual inflation, the cost would go to $34,364! 

With this very large cost looming for people with kids, I wanted to share what we did to prepare and what I have seen others do to prepare.

Times have changed so adapt

Back when Mrs. r2e and I attended college costs were a lot lower than today.  Mrs. r2e paid 100% of her college costs by working in high school and then in a work study program while in college.  On the other hand, I had a generous Aunt with no children of her own that left money when she passed away.  That covered about 50% of costs and I worked to pay the other 50%.

About when our oldest was five we saw predictions that the price of higher education was going to be way higher by the time they attended.  We see the value in working hard to pay your own way but we knew that was a high mountain to climb.

When our two boys started getting serious about college we knew times had changed.  The cost of college was so high that we determined that even if they got a full time job it would not cover the cost.  They did get part time jobs and we did stipulate any income the boys earned would go into savings accounts and they could spend only a small portion for things they wanted now and save the rest.

We also told our two boys we had four years of college costs covered.  Wait Mr. r2e you said your boys are in five year programs.  Yes, that is correct.  The boys know they have several options – work, scholarships or student loans for their fifth year.

Start saving early and routinely

We did not start saving for education immediately.  However, when we did start saving, we turned it into an automatic transfer and considered it untouchable. 

Prior to 2005, we made inconsistent transfers into some mutual funds set up in the boy’s names.  We were also fortunate that both sets of grandparents sent money annually that we put right into these accounts.

Then in 2005 something woke us up.  I do not recall the specific reasons why but in looking at our financial records (25+ years of Quicken), I saw we closed all the individual mutual funds and then opened up 529 Plan accounts for both boys (BTW 529 plans started in 1996).  That same year, we ramped up our monthly commitment on automatic transfers into the 529s.

Here is what happened though.  Our two boys are three years apart in age.  When I ran scenarios on the timing of college and costs, we ended up having to put more money in monthly into our older son’s account to make up for lost time.  Purely the time value of money thing.

Prior to 2005 we had college funds scattered around.  In 2005 we consolidated into two 529 plans.  At that time we had saved or been gifted $32,000 for both boys.  When we set up the 529 plans we also set up automatic deposits into the accounts.  For our oldest, we put in $340 a month and for our youngest $275 a month.  We did this monthly until each boy’s senior year in high school.

In looking back at our records, it is interesting that I did not adjust these monthly automatic transfers as my salary went up.  I think maybe I just wanted to get those amounts into our routine budget and then as my salary increased, those extra dollars would be focused on retirement.

Between our own money, gifts from others and gains on investments both boys ended up with decent 529 balances.  Right before they started college, our oldest had $81,000 and our youngest $89,000 (shh…don’t tell my oldest).  This should all work out because with our youngest securing a small academic scholarship, we can take some money in his 529 and transfer it to our oldest if needed.

So how do you apply this?  Let’s say you starting saving money right after your kid is born.  With 18 years, a rate of return of 4%, to achieve a goal of $100,000 you need to set aside about $325 a month.  If you wait and only have 10 years to save, you need to set aside about $700 a month.  Your choice.

Saving for College or Fidelity or Vanguard have some great calculators to help you with your individual scenarios.

Gift money diversion

Some may look at this as being mean, but seriously, how much birthday and Christmas money does a kid really need?  Early on when we were closer to family (physically), there were lots of toys, etc.  Later on, this turned into gift cards or checks.  What better gift to give a kid than a savings account?

Throughout their lives, we took a portion of any gifts and put it into their savings accounts.  No, we did not deprive our kids from enjoying their childhood.  We did help teach them a lesson in saving for the future. 

And what happened to that money we stuck away?  It is in a simple savings account that is in their name that they can access.  Technically not used for education costs but we have told them now that they are living outside the house, non-routine expenses are their responsibility.

We also had generous parents that would provide a once a year gift ($500 or $1,000) intended for education.  We always deposited that into the boy’s 529 plans.

Have a serious conversation

Every kid is unique.  Just because your neighbor’s kid is going off to college does not mean your kid needs to go off to college too.  Early on in the high school years (this is when we did it) we started having conversations about the ‘after high school years.’  Both our boys indicated that they wanted to go to college. 

However, both our boys are totally different so we approached this individually.  Our oldest has a knack for pulling out A’s with little effort.  Our youngest thought he was like his brother but learned the hard way that he is not.  So we had very individualized conversations with both that took these factors into account.

Now we have close friends and neighbors that have sent all their kids to college.  In some cases it has turned out that college is just not right for some.  And that is fine.  Hard lesson to learn after paying for one or two semesters but the lesson was learned.  In fact, in all the cases we saw, the kids went a technical route and are now working in the trades making a pretty dang good salary.

The other part of the conversation may be that you have your kid go to a local community college or junior college.  This route allows your kid to test the waters at a lower cost (tuition is lower and usually they might still live at home).  If you do decide to go this route, make sure you talk with the university they might transfer to eventually to see if credits will transfer over.

Look for scholarships

OK, so you have saved some money.  Maybe your kids have also worked and saved money.  And maybe you have some generous parents.  But you still do not have enough money saved up.  Time to look or scholarships.

With our income and savings our boys did not qualify for needs based scholarships.  They could qualify for academic scholarships though.  We had them apply for multiple scholarships.  We did not have them apply to many scholarships though.  Quite honestly, we knew we had the money saved up and we knew many others had greater needs.

So, buddy up with your kid’s high school advisor/guidance counselor to find out about scholarships.  Google “ college scholarships” and you should find a lot.  There are tons of scholarships out there, many times it is seeing if you are qualified in the first place.

At the end of the day, our youngest ended up with a small academic scholarship at the university he is attending.  We know that this was offered to attract him there as they were competing with other major universities he was accepted into.

How are you approaching the high cost of higher education?

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