For many families choosing a college is a decision that has consequences beyond just the task of figuring out how to pay for it.
Many families have multiple financial obligations (e.g. retirement, private school, health insurance, etc.) of which paying for college is just one that can sneak up on you if they are not prepared.
For some parents, paying for a school that cost $50-$75k a year could mean delaying retirement savings for four or more years. Never do this!
Choosing a college is a personal decision, but our advice is that each family should go into the college selection process with their eyes wide open and understand that college, like every other investment you make, is a huge financial decision that requires long-term planning for your child’s future as well as your own.
Starting a monthly contribution to a 529 plan early is a great way to pay for college. But with the current rate of inflation, it would take saving over 2k a month for a baby born today to pay for the full “retail” price of some schools like Harvard or Yale. That is a daunting number for most families.
One way to help make this decision is to “begin with the end in mind.” (Thanks Stephen Covey!). In other words, start with knowing when and how much you will need to retire first and then determine what you can afford to pay for college.
Unlike a student with options to pay for college, when you reach retirement age, no one is going to lend you money to retire, so make sure you have saved enough in a diversified portfolio of mutual funds to pay for it.
For many people, especially those who have started late, this can be a difficult task, but making monthly retirement savings a “fixed cost” (i.e. the income is automatically diverted from your paycheck to your retirement accounts and you spend whatever is left) should be among your highest financial priorities.
Once you know what you have left you can make more informed choices about how much you can afford to put into a 529 or “pay as you go” for college.
The next step is to realize that college is still a “buyer’s market” if you open your search to include more than just local schools or schools with prestigious names. Many admissions officers do not meet their enrollment goals each year meaning they are searching for students. Many of these same schools offer “merit-based aid” (as opposed to financial needs aid) that greatly reduce the “retail price” of the college. Obviously, this varies across different schools, but our advice is to be open to other schools.
Say School A is a brand name school that everyone knows and respects. Your child is accepted but School A offers little or no financial aid. School A is 60k a year which comes directly out of your 200k household income.
School B is a lesser known but equal quality institution. School B is 60k a year as well but offers 30k in financial aid. That is a difference of $120,000 or more over 4 years. $120k that could be going into your retirement accounts and growing to 400k or 600k in 10 years.
Obviously, your child needs to be a good fit for the chosen school, but parents should know that if they pay for School A and retire 5 years later or on 15% less income, they are trading their retirement for their child’s preferences.
Finding a more affordable option takes time, but in the end if you can find a school that your child loves but doesn’t get you off track for retirement, it can be a huge return on investment.
So to summarize:
- Prioritize retirement savings!
- Open a 529 as soon as possible and put a fixed monthly amount into it.
- Expand your options and be open to lesser known, but credible schools.