There’s been a lot of talk in the media about whether college is actually worth it. Some think the price of a degree has eclipsed the value you get from it. Previous generations didn’t have to wonder. It cost an average of $542 per year to attend a public college in 1975. Adjusted for inflation, that would be $3,100 today.
If you could spend $12,000 to make $900,000, you’d likely consider that to be an incredible investment — after all, that equals a 7,400% return on that investment! According to the Social Security Administration, men with bachelor’s degrees earn $900,000 in additional income over their lives versus men who only have high school diplomas. Clearly, in 1975, the financial case for college was relatively solid.
Fast forward to 2023, and the average cost of college has risen to $26,027 per year while the majority of college students take more than four years to graduate. If a student earns their bachelor’s in five years today, it will cost an average of $130,135. That’s nearly a 4,200% increase since 1975!
All this is to say, college can still be a good value proposition, but the return on investment has dropped from 7,400% to 592%. That’s absolutely worth it: I feel so strongly about the ability of education to help people provide for their families that I proudly support Helping Hands for Single Moms, which helps low-income single mothers earn college degrees. But, if you end up paying interest on student loans for decades, the ROI drops even more. This means careful shepherding of your education-related finances is prudent.
Make Prudent Choices
One thing those ROI statistics gloss over is that returns differ depending on your course of study. In general, the ROI for a theater major will be lower than that of an engineering or finance major. That doesn’t mean you shouldn’t pursue a career in theater; if that’s your passion, go for it. But the expected ROI should make you think twice about going deeply into debt in order to turn that passion into reality. That money will be due whether you become a star or not, and bearing the financial burden can be difficult if your income is low.
It’s no longer widely possible for college students to pay for college by themselves without either receiving significant financial aid or taking out a considerable amount of student loans. That means it’s a good idea to start planning for how to fund your child’s college education many years before it happens — some parents begin saving as soon as their child is born, and that’s a good idea!
Assess Your Financial Position
The first step toward making sure your child will be able to attend college is to determine where you are, and are likely to be, on the financial ladder. This will influence the way you plan. If you are very wealthy and know you are likely to still be very wealthy when your child is in college, you’ll be able to pay cash for any expenses not covered by scholarships and other aid. For this reason, I generally tell my wealthy clients not to set up a 529 plan because those plans count against your student’s FAFSA eligibility.
The same goes for low-income students; that 529 plan could deny a student access to assistance they absolutely need in order to afford school. However, if you’re solidly middle-class, not having college savings is a big gamble. It’s possible for parents to make enough to render their students ineligible for financial aid, but not enough to actually afford college. In such situations, if the student has no savings to tap into, they may have to take out student loans and therefore burden themselves with potentially decades of debt.
A common savings vehicle that doesn’t count toward your FAFSA eligibility is whole life insurance. Frequently, parents of aspiring college students will be advised to purchase a whole life policy with the idea of using the cash value component to fund their child’s education. My concern is that this works now, but will it still work when your child is ready to go to college?
Consider what happened with whole life plans and Medicaid. At one point, it was possible to save money in a cash value component while receiving Medicaid. This allowed people to leave an inheritance to their children despite Medicaid spend-down rules that require low assets in order to qualify. That was stopped once Medicaid recognized what was happening. I worry the same type of rule change could impact families’ ability to use whole life policies to save for college.
Currently, that cash value component is a way to have assets that aren’t “visible” to FAFSA. A simple rules change is all it would take to render that component visible, and have it count against you. Attentive readers are at this point no doubt asking, “If saving for college kills my eligibility for financial aid, how can I save for college!?”
The answer is to start early: Don’t gamble on qualifying for need-based aid if you have the ability to save money. However, starting those savings too late may not be enough. Much like saving for retirement, the earlier you begin saving, the less you have to save. Compounding interest works for college savings just as it does for retirement savings. If you need a given amount of money when your child is 18 years old and ready for higher education, you can generate some, and sometimes much, of that money through interest if you start saving early enough.
If you start young, you can take an aggressive approach: Analyze how a given asset class is likely to perform over time. Because your time horizon is so far out, temporary fluctuations are of less concern. As your time horizon dwindles, it’s time to start dialing back. Ask yourself, if the college fund’s investments lose 50% of their value, will college become unattainable? If the answer is “yes,” reduce the risk!
The bottom line is that college has become an expense for which you must begin planning earlier than ever in order to avoid going into debt for many years to fund a degree. By starting as early as possible, you can increase your chances of being able to pay for school, at least in part, upfront. At Asset Preservation Wealth & Tax, we regularly counsel clients on ways to help their children afford higher education. Our clients know that every dollar that isn’t financed via student loans is a dollar that adds to, rather than detracts from, the ROI of getting a college degree.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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