Calculating College Costs

In sitting down to write this blog, my setting certainly impacted the topic.  I’m sitting on the campus of the College of Wooster in northern Ohio.  I’m chaperoning my daughter who is here to compete in the finals of a state writing competition.  My reward is working outside on what can only be described as a picture-perfect day.

73 degrees and sunny skies aside, there’s something about a college campus, especially this time of year.  Most students have returned home by now, but faint remnants of graduation weekend, students winding down athletic and other commitments linger.  There are competing feelings of finality and rebirth as one school year closes with a new one just a few months away.

Taking inspiration from my surroundings, my thoughts turned to the current state of the cost of higher education and what it takes to save for such a thing these days.  Not to pick on what appears to be a wonderful institution, but for tuition, fees, room & board, the College of Wooster will charge $64,520 for the 2019-2020 school year.  Even with potential financial aid, scholarships, and other awards, for most, saving that kind of money is a daunting task to say the least.

News of late has focused on the amounts of debt students take on during this time in their life.  Politicians have started making student loan forgiveness and college costs a pillar of the upcoming election cycle.  Billionaire Robert F. Smith, this year’s commencement speaker at Morehouse College, made headlines when he announced mid-address that his family was going to put together a grant or foundation to adopt the class of 2019 and payoff the student loan debt of every member of the class.

Outside of waiting out Congress or benefitting from the whims of the extraordinarily wealthy, there are other signs that the tides might be turning on rising college costs.  This recent posting by the Federal Reserve Board of Kansas City indicates that, while the cost of college has been rising at something like 7% for the past decade or more, recent years have seen that rise cool to around 2%.  A similar, more detailed report from the College Board suggests much of the same.

While some of the news is positive, when planning to save for college it is still wise to assume that costs will continue to rise at rates faster than normal inflation.  Also, because of the relatively limited timeline to save for a young child, return expectations should be more limited than what you might expect over longer term savings, like retirement.

We’re often asked how much someone “should” save for college.  This is a very loaded question.  Parents and even grandparents can differ on exactly what they want to provide for a child.  Full tuition, room & board at any school of their choosing?  Public in-state institutions only?  Half of the costs?  Two years of community college followed by two years at a local university?  The options vary as widely as the opinions of the “right” way to proceed.

We could apply any number of assumed inflation and investment return rates to carry out this analysis.  Looking somewhere in the middle, if we assume 6% inflation and 5.65% per year investment return, the following table illustrates the amount someone would need to save each month if they start at birth, age 5 or age 10, respectively, to cover tuition, room & board at various types schools based on national averages.  The indication of “First Year” vs. “Last Year” means that the saver would either have everything needed starting the first day of school or would continue saving throughout the four years of college.

There are many factors to consider when looking at data like this.  Cash flow is a big one.  Is there additional room for savings after current needs and retirement savings (you can borrow for college, not for retirement as many a financial planner will tell you) are covered?  Are there other family members (grandparents, aunts, uncles, etc.) setting something aside for which you should account?

Then, there’s how best to save.  Typically, the answer is a 529 college savings plan, like the College Advantage program offered in the state of Ohio, but results can vary based on individual needs and goals.

Having a plan in place can take a lot of the stress off these decisions and reduce the mental fear & fog that exist when we leave these things fester in the back of our minds.  We’re here to help.  Whether just looking very generally, or on a school by school level, we can customize a plan based on your goals and values around college savings as part of your overall financial plan.  If you, or anyone you know, is struggling with how to approach college savings, let us know.