College Planning: Taking a Big Step Back

Personal Finance
college planning

Since 1978, the cost of college tuition has risen roughly 1,200% according to the Bureau of Labor Statistics. To give you some perspective, the cost of medical care—which is often looked at by retirees as a cost that continues to dramatically increase—went up over that same time period by a measly 634%. Other items like food and shelter only rose 370% and 257% respectively, while the Consumer Price Index—a broad inflation measure on goods and services—rose only 279%.

So, with college costs continuing to increase at such a dramatic rate, what are young professionals and young families supposed to do if they have aspirations of helping support their kids through college? In short, save early and save often. But, before you do, take a big step back.

Adding a Step to the College Savings Process: A Step Back

When it comes to saving for a child’s college education, the costs can be daunting when we look at what college costs are today and what they might be in the future. Take for example a young family with a new-born child.  The cost of a private school education by the time he or she turns 18 will be approximately $148,000 (assuming today’s cost inflate at 5%), with the cost of a public school degree ranging from $66,000 to $80,000 depending on whether the student will attend an in-state or out-of-state university.

So often we see young families that want to jump right into the discussion around how to save for college and what it might cost in the future (see above, it’s not pretty), before ever stopping to take a step back to determine if college makes sense in the first place, and more importantly at what cost. In today’s rapidly increasing college tuition landscape, it’s more important than ever to ask some critical questions before even beginning to save for college. Over the next few paragraphs, we’ll discuss the important questions that must be considered before taking that big step to saving for college.

Does College Make Sense for My Child?

The first critical answer to determine when taking a step back during the college planning process is whether or not a college degree truly makes sense for your child. This is admittedly difficult to answer when kids are young, but as they grow it can oftentimes be easier to get a sense for their academic interests, passions, and aptitude. In a world where college can cost upwards of $150,000 per year (estimated future cost for a new-born) just going to college to go to college is no longer a sufficient answer.

On top of answering the does college make sense question it helps to answer one additional one. In what fashion does college make sense for my son or daughter? For those students with passions that may not require a four-year degree, trade schools and other vocational schools are increasingly becoming a great option that come with a lower price tag. On top of that, students are increasingly looking to tackle their general requirements at community and junior colleges before transferring to a state university for the classes that are more in-line with their major. As clarity grows around whether or not it makes sense for your child to attend school, you’ll be able to get more focused on the mechanics of how you’ll save and what path they might use to pursue their degree.

Should I Save for My Child’s Education?

For many young professionals with kids, there are often aspirations of wanting to help support a child’s education by footing some or all of the bill. However, it is important to keep in mind that many of life’s other financial priorities cannot be funded by federal loans, which makes it important to first have your own financial house in order before ever beginning to save for college. Here are a few things to check off the list before saving for college:

  1. have a liquid emergency account equivalent to approximately three to six months expenses available in the event of a job loss or unexpected major expense;
  2. have adequate life and disability insurance to help protect loved ones in the event of an unexpected tragedy;
  3. pay off high interest debt as there is no sense continuing to let credit card bills spiral out of control just to save money for college;
  4. and, lastly make sure you are on track for your own retirement first, as you can’t fund retirement with government supported loans like you can for college.

What’s the Return-On-Investment (ROI) For My Child’s Degree?

Lastly, it’s critical that parents and students begin to assess the return on investment (ROI) of a degree. It’s not necessary to determine a hard number or to try and calculate an actual ROI, but rather to honestly assess what a student hopes to do after college. Just because a student has great grades, an awesome ACT score and a passion for studying doesn’t mean they should attend the $60,000/year private university. That choice should be centered more around the career path a student aspires to. For example, if a child wants to be a teacher or a firefighter someday, great! Both are incredibly honorable professions. However, neither necessarily require a degree that comes with a steep price tag and a lifetime of student loan payments.

Yes, in a world of unlimited resources the student should go to the best school, with the best teachers, and best resources, but we unfortunately don’t live in that world. Which is why families need to be able to have honest conversations around whether or not the degree is worth the outlay or if a lower priced school might make sense financially for the career that a student hopes to pursue.

In the coming weeks and months we’ll be tackling more college planning and student loan topics that focus more on how much to save, what college savings vehicles to utilize, and more on student loans and the various repayment plan options. Stay tuned for more info and feel free to schedule a free call to discuss any questions you might have.

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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