Getting Smart About College Costs

February 29, 2012

Just about every parent thinks about the day when his or her child leaves home with a blend of pride and sadness.  Today’s parents with college-bound children probably add a measure of financial anxiety into the emotional mix.   Not only are these kids emptying all their stuff from the upstairs bedroom, they may also be emptying their parent’s bank accounts and hopes for a secure retirement.

Such are the stratospheric costs of a college education, a phenomenon that President Obama considered serious enough to address in his recent State of the Union speech.  In fact, the increase in college costs over the last twenty years make the real estate bubble look like mere soapsuds.  In 2006, when real estate prices were over 4 times higher than they were in 1978, college costs were up more than twice that amount since their ’78 value. Unfortunately, however, while the real estate bubble has burst, the inflation of college costs keeps right on rising at an average of 6 percent annually.

The markup in college costs, when compared to a flat and even declining trend in personal income for most Americans, has many experts questioning whether a college education is still worth the money.  Bill Gross, head of one of the world’s largest investment companies  which manages billions for university endowments and pensions, nevertheless is sharply critical of the failure of our higher education institutions to help our children prosper in a global labor market.

Not only are American students not getting the math and technical skills they need to compete in an increasingly global labor market, but they are starting their adult lives saddled with education and credit card debt that will threaten their financial security for years to come.  Getting the right job is not just a matter of being smart enough and properly trained; today it’s a question of what your credit worthiness and ability to manage your finances.   An employer looks at two Harvard grads, one with a 750 FICO score and another with a 650 and just guess who will get hired?

As a CFP® professional, I’ve done the numbers for clients and as long as all the assumptions are correct – such as a 40-year uninterrupted career in a stable or growing industry – with no time-outs for such things as babies or a mid-life crisis cruise around the world — college still looks like a decent investment, paying as much as $500,000 more to a college grad over a lifetime than a high school student.  Nevertheless, the dropout success stories of Bill Gates, Steve Jobs and most rock stars are likely what your reluctant seventeen-year-old is apt to bring up when it comes time to discuss the reasons for going to college.

As a college and twice-over grad school grad and parent to a daughter with multiple degrees, I confess I am biased toward the importance of higher education.  Neither of us Blayneys was at all strategic or practical about our educations. I was an English major who did not choose law school as the way to make myself employable while my daughter went to a liberal arts college which defined the term “liberal” very liberally indeed. We are now each gainfully employed in fairly technical fields – financial planning and speech pathology – and I would like to attribute our success primarily to our four years of learning how to write, think and talk.

But I will also admit that the world has changed significantly even since my daughter’s college years and the spread between the costs of and the return to higher education has narrowed to the point where, for most American high school kids, going to college is no longer a “no-brainer.”  (That, at least, is a good thing!)  It now takes a lot more work to make college a cost-effective investment, starting with the appropriate vehicles and strategies for saving for education, to the options for college funding (loans, grants, work– study), to the smart use of tax deductions and credits allocated between parents and their students.

This blog post is therefore intended to set the stage for a subsequent three-part series to dig much deeper into these smart college saving and funding techniques.  I’ve started here with the assumption that yes, college is still worth it, and my job going forward will be to show today’s parents and students how to make a college degree even more worth it.  As we are finding with a host of financial issues these days, it’s primarily a matter of focusing on the expense management side, as opposed to purely on returns.

The fact is that most American parents still dream of a college degree for their children, even when according to a 2011 Pew Research study, the majority of Americans now question the value of college.  So the question before us is how can American families make the dream affordable and rewarding?