Sometimes the advice given in Money magazine disappoints me. An article in this month’s issue was one such time. The article has a reader asking how much money they would need to save up for college. The financial planner who answered the question starts by saying that it was “unrealistic” for most families save up enough to pay for all of college nowadays. Instead, most parents should aim to save “at least a third” of the costs.
Really? A third? Just give up now? Abandon all hope ye who enter here? Can’t we do better?
This seems to go along with the standard advice given by broke people that you’ll always have a car payment, always have a house payment, and that you should be thankful for the meager returns you get from Social Security because it is “so safe and dependable”. (I guess they don’t take much stock in the reports from those overseeing Social Security that the program is running out of money and we will need to see cuts in benefits or pay in even more than 13% of our paychecks to maintain the current, poverty level of benefits in a decade or less.)
Is saving up and paying for college really so out-of-reach that most people can’t do it? How is it that a product is too expensive for most of their customers to afford? That would just not be sustainable, and probably the current system is not. And yet, it doesn’t seem like most people are really trying.
One assumption in the article is that those born today will pay three times as much for college as they do today. This is based on looking at the costs of college over the last few decades and simply extrapolating the curve. Any engineer will tell you that interpolation – finding values within your data – is fairly safe, but extrapolating – projecting values outside of your data – is very risky. I think extrapolating in the case of college costs is bad for two reasons: 1) If you keep raising the price of something, eventually demand will drop and you’ll need to stop raising prices since people won’t be able to borrow more and because the product won’t be worth the price and 2) Public colleges have seen a huge increase in tuition because states have been footing a smaller portion of the bill. Now that students are paying a greater percentage, the huge rate of increase we have seen over the last few decades should slow.
I would also expect to see a cut in all of the frills we have been seeing that have been driving costs, like lavish recreation centers and work-out centers, unlimited high-speed internet, and expensive new stadiums as colleges run out of the ability to raise tuition and need to cut back to the necessities. The easy availability of student loans has allowed colleges to raise costs with impunity, and they have found that they needed to provide expensive perks to attract students. After the student loan bubble bursts (and it will) and loans become much more difficult to get, we should see some of the latte bars close and a return to the basics.
But still, even if costs do continue to rise somewhat, is there no way to save and pay? Let’s see;
From the article, the average cost of a public school education is about $60,000 today. (The article says to decide on public or private, based on your “personal preference,” but I say of you don’t have the cash, you don’t need to be going to a private school on student loans or the public dole.) Let’s say that the costs double before your child, born today, goes to school. So by the time little Johnny goes to school in 2034, college costs $120,000.
Let’s now say that you forego new cars, instead buying used cars that are 4 years old for cash and driving them for 8 years before getting a newer model. Since a car loses half of its value about every 4 years, a car that cost $30,000 new would cost $15,000 when you bought it four years old and be worth about $4000 when you sold it. Your costs would therefore be about $1250 per year, versus $5,000 per year if you bought a new car very four years on payments. Savings over 18 years = $67,500. So we’re halfway there with the minor sacrifice of driving one somewhat older car. Note if we do this with two cars, we’d be there already.
What else can we do? What about that cell phone. Instead of getting the latest smart phone and paying $120 per month, we get a flip phone and pay $15 per month. We also get a tablet and use WiFi connections when we need to browse the internet or read The Small Investor on-the-go. We now save $105 per moth. Over 18 years, that’s $23,000.
What about meals out? If we do one less family dinner out per week, we’d save about $50 per week. Over a period of 18 years, that’s $46,800.
So, with simply 1) buying used cars instead of new, 2) using a flip phone instead of a smart phone with data plan, and 3) eat just one extra meal in per week, we have saved up more than enough to send a child to college. Note that I’ve assumed no investment return – you should be able to double the money at least once during that 18 year period, meaning you could pay for two kids. I’ve also assumed no scholarships, or saving money by doing things like using community college during the first couple of years.
I realize there are many families earning $40,000 per year who are doing most of these things already just to keep their heads above water. They don’t have the income to save for college even with these sacrifices. But how many people with $80,000 incomes drive new cars, have phones with all of the bells and whistles, and eat out most meals and then say they can’t afford to pay for college. Before throwing in the towel, perhaps many families should first look at how they’re using their income. Maybe we just need to shift priorities.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.