You already know that college is expensive, but how expensive is it? Let’s find out!
I recently had a discussion with some clients we’ll call John and Joanna, who have 2 teenage boys (I do free consulting). Anyway, one of their boy’s graduates from high school in 2018, and the other, two years behind him. Both boys wanted to attend college, but neither knew what they wanted to study. Neither son had a solid plan for paying for their schooling, nor grades to justify a scholarship. They assumed that because their education was important to Mom and Dad, their parents would simply write out a check.
Being able to provide higher education for their children was of paramount importance to Justin and Joanna, but they were understandably concerned. They brought their boys to talk to me, hoping I could help them understand the impact the costs of college would have on their parents’ and their own futures.
The Opportunity Costs Of A College Education
Opportunity costs of a college education can be rather sobering, which is exactly what I was hoping it would be to the teenagers. (Which is an almost an impossible task. If you are parents you totally know where I am coming from!) As we started I was hoping this approach would help them understand the need to be more serious about their plans.
The oldest boy, Justin, wanted to attend Arizona State. The average cost for a year at Arizona State last year was $25,000, so the bill for a four-year degree is estimated to be $127,082.
But costs are increasing at an average of 7% per year, and the average student takes over 5.5 years to graduate. Considering those factors, the final bill would be $204,787!
The younger brother, Joshua, had his sights set on Purdue University. The cost there is currently $30,000 per year, making the TOTAL BILL $174,598 by the time he graduates.
Did you notice that I referred to the amount by saying “the total bill…?” I intentionally used that word because those numbers are not really the costs of an education. Those numbers are simply the amount for which someone will write the check.
The total bill for both of the boys is $301,678, which is a significant amount indeed, but to understand the full cost, we have to consider opportunity costs as well.
Let’s assume for a moment that Joshua is going to get a student loan that doesn’t require payments until 6 months after he graduates. The starting salary in the field he is considering is roughly $40,000 a year. With an interest rate of 4% for 20 years, his monthly payment on a loan of $174,598, would be $1,054.51.
If you’re making $40,000 and were to get paid monthly, the gross amount of that check would be $3,333.33. He’s likely to pay roughly 25% in taxes, which would leave him $2,500 a month to live on. That student loan payment would be more than 42% of his take-home pay. And, the total amount he will pay back on that loan of $174,598, is $253,082.40 ($1,054.51 x 240 months).
But $253,000 still isn’t the total cost of Joshua’s college degree, because it doesn’t take into account opportunity costs.
What if Joshua didn’t have to take a loan and could save that $1,054.51/month in an account that was earning 4% instead? He’d wind up with $388,057! 😮 Not going to lie I would take that!!!
If the parents pay for both their sons’ college education, the numbers are no less sobering.
The Story For The Parents
John and Joanne would need to have already saved $250,909 and have it grow at 4%, to be able to write checks totaling $301,678.
Or, starting right now, they would have to save $35,834 every year, for the next 8 years, to fund their sons’ education.
If they do indeed write those checks for $301,678, using money from their typical retirement assets, John and Joanne also lose the growth that money would have earned.
They are currently 48 years old; that $301,678 earning 4% annually, would grow to $508,295 by the time they’re 65. Without that to add to their retirement account, they will have to go without $26,719 every year in retirement from age 65 until age 95. If we multiply that yearly figure by 31 (the years of their retirement), we arrive at a figure closer to the real cost of the parents financing their boys’ education: $828,289. (The more I talk I feel like I should start a college.)
Let that number sink in for a moment.
Now don’t get me wrong – I’m not trying to discourage anyone from getting a college education. But if that’s in your, or your children’s plans, you should know there are smarter ways to finance college for your children. There are ways to do it where you don’t miss out on opportunity costs. Let me teach you how. (Join me for my FREE webinar!)