College long term costs

Paying for College
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<p>I am a first time poster. I am here mainly because I am interested in the college admission process. The topic I am posting about is something I have been writing and debating about on financial independence early retirement forums. But I figure I post here to get perspective from people dealing with college costs today. </p>

<p>I am 41 and we plan to to semi-retirement around 45 and full retirement at 48. It will not matter that much but one variable is the cost of college for our 2 year old child which I am concerned about.</p>

<p>It is something I been trying to research and estimate this recently. After looking over the data recently I feel that it might not be as bad I thought it was. Of course it depends on what bad means. I thought it was going to be bad reading all these scary articles in the media about how in the last decade college costs has been going up 8% every year and will continue to do so. </p>

<p>I looked into it and found that the large increases has really been for public universities which are at lower cost than private universities and the rate of increase for private universities has not been as high. In other words, colleges which are expensive have not increased as a much as the less expensive ones. So your worst case scenario for a expensive private university is not as bad as what the price tag today plus 8% nominal price increase every year.</p>

<p>I do all my planning for retirement in 2013 dollars and I wanted to model how much will it cost to put my child through and expensive private university in 2013 dollars 15-16 years from now. I used one expensive private university, one Yale U, as a target for my estimates as it would represent the worst case scenario in terms cost. I picked it because that is where I went and a lot of my relatives went as well and if my DS could get in I would like him to continue the family tradition. Him going would be "worst" case in terms of financial impact but would be "best" case in other metrics.</p>

<p>The data points I used are Yale college tuition+room+board in 1976, then in 1990 (year I started to attend there) and then 2012 (last know data.) So I can then try to figure out what costs my DS will encounter in 2029 when he will start to attend. </p>

<p>I found 1976 cost was $6425, 1990 cost was $20820, and 2012 cost is $55300. There will be personal expenses but I will assume my DS will work on campus to pay for it himself. </p>

<p>What we find is Yale costs went up by an average of 8.8% in 1976-1990 and up an average of 4.5% in 1990-2012. So the rate in increase is actually decreasing. Of course we have to calibrate against inflation as some of this increase are just reflecting overall inflation in the economy. I found that inflation rose by an average of 5.5% in 1976-1990 and inflation went up by an average of 2.1% in 1990-2012. So doing the math shows Yale costs went up an average 3.3% above inflation during the 1976-1990 period. Also Yale costs went up by an average of 2.4% above inflation during 1990-2012. So if anything the "surge" in college costs is worst during the pre-1990 period than the last couple of decades when there was a supposed unprecedented increase in college costs. I used PCE (US Personal Consumption Expenditures Chain Type Price Index) as my inflation index mainly because I feel (and it seems so does the Fed) that it better reflects inflation at the household level than CPI.</p>

<p>I think it has more to do with lower cost private and public universities moving their prices in line with places like Yale mostly to capture all those student loans and government subsidies over the last couple of decades so it does seem to be a massive jump in prices for those places. But for the highest cost places which is the worst case scenario the situation does not look that bad. I can live with 1.8% higher than inflation. So it is not bad depending on what bad means.</p>

<p>What does this mean for me. Well, if Yale cost $55300 in 2012 and if I assume (a big if) my DS attends Yale in 2029-2033, and if I assume the same 2.4% increase per year on top of inflation (I am pretty sure it would be lower, something like 2.0% as I think this student loan bubble will burst soon) I am left with a cost of $88K per year in 2013 dollars. So that I what I model for as a worst case scenario. All other scenarios will cost less then that. I should be able to adjust our earnings and investments a few years before our DS attends college to extract some financial aid (like I had my parents do a couple of years before I attended college to achieve the same goal which worked) but I will not count on it. It was clear a couple of years before I attended college back in the late 1980s that I would most likely get into an elite but expensive university. While my parents income was not high they had high assets. I had learned back then that this would hurt us getting need based financial aid. I got my parents to shift around investments to help us get said aid. It worked. I plan to do then same when it gets close 12-13 years from now when our DS might be getting close to college. It will just be an added bonus.</p>

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<p>You are making a choice to retire very early. Your retirement income will be used to calculate need based aid for your child (although judging from your post, it appears that you don’t intend to apply for this but rather will find this education yourself).</p>

<p>A number of thoughts…you are talking as though acceptance to Yale is a foregone conclusion. I’m not sure how you would be able to project that 16 years or so into the future. The school currently accepts well less than 10% of applicants. It is very hard to know what the landscape will be 16 years from now.</p>

<p>If you are choose to retire this early, I imagine you have already amassed enough assets to help you live in your retirement years. Any income you decide to take out of IRA or TSA accounts prior to age 59 1/2 will have both tax (unless this is all Roth money) as well as account penalties for early withdrawal.</p>

<p>Just be sure your assets are going to last for the likely 40 years or so that you will be a retiree…roughly double the number of years it looks like you were employed.</p>

<p>In addition to protecting your own financial interests, I hope you are also looking out for your spouse.</p>

<p>And I hope you have sufficient money in some kind of college savings for this two year old…before you retire.</p>

<p>Just my humble opinion.</p>

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<p>Just throwing some initial thoughts out there:</p>

<p>if you want to retire in a couple of years, presumably you’ll have substantial assets in order to support yourself and your family in retirement before you can begin to receive Social Security. Just to pick a number, say you have $5 million. Those assets, using the current FAFSA formula, would translate to an EFC of around $280,000, ignoring the asset protection allowance and also ignoring any income you might have as a result of these assets. This is higher than your worst case $88K tuition, so there’s no way you’d be eligible for need-based aid. </p>

<p>For families with college students today, one of the few ways to shift assets so that they’re not included in financial aid calculations is to purchase an annuity. You might already be considering this is your planning. Even so, any assets outside of your annuity will be assessed at the rate of 5.6%. Assets of $1.5million would give you an EFC of $84K. The income from your annuity might push you outside the range of need-based aid.</p>

<p>What happens if the annuity loophole is closed? Would you have enough saved so that an $88K/year withdrawal of principal is doable?</p>

<p>Your calculations of real increases in college costs are interesting but rely on only one data point. You might do similar calculations for lower-tier private colleges. For example, my son’s college increased tuition 5% every year for the past 4 years, or a little over 4% after inflation, nearly doubling your 2.4% calculated value for Yale. As far as public university price increases, I think we’re coming to an era where states are cutting back the amount of budget they’re willing or able to allocate to higher education, and tuition increases of 9-10% in real terms might become the new normal.</p>

<p>Bottom line for me would be to forget about receiving need-based aid and instead focus of tax-advantaged ways to support yourself in retirement and save for college.</p>

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<p>Thanks a bunch for the feedback. </p>

<p>1) I want to be clear about something. I am not expecting or will be putting pressure on my DS to get into Yale or anything like that. I noticed that most parents that do this to their children mostly did not go to Ivies and are trying to live through their children. I used Yale merely as a worst case scenario analysis.<br>
2) Our plan, using conservative assumptions, is to have about $6.5 million (in 2013 $ terms) in assets outside our house by the time we retire about 7 years from now. Due to the nature of my work, when that day comes most of it will be in IRAs. [for transparency, my name is not Mitt Romney :)] We plan to use up most our assets outside IRAs from when I am 48 to 60 and then the IRAs will kick in. Because we had our DR late in our life, when our DR applies to college we are just at the point where we have used up most of our assets outside our IRA but the IRA has not kicked in yet. So on paper our assets and income look low and we can rake in the financial aid. I am not counting on it as these rules and policies might change over time.
3) I remember doing a lot of research into this as a high school student back in the 1980s to optimize the financial impact of me going to an expensive college and I recall the that IRA/401K are not considered as part of assets in need based financial aid analysis. I was so into this stuff that I was able to predict pretty accurately the aid package I would get from Yale (and Princeton as well as MIT as I got into both of them as well.) They were pretty much the same number as back in the 1980s they all used the same formula to compute aid. I have no idea if these assumption are true today since I really did not care about this since college.
4) My view on future college cost I guess is rather optimistic. I think the current surge in college costs has more to due to the college loan bubble where people are told they have to go to college to be successful which is not 100% true. Then they take out these large loans thanks to government subsidies. We are at the point now there the ROI of college I think outweighs the cost once we factor in the student loans which could not be removed even in bankruptcy. I am pretty sure in the next 15 years there will be a reversal of these trends. I do agree that public universities cost will continue to go since states are cutting back. It might get to a point where I might as well have my DS go to Yale, if he can get in, since the cost of state university is the same cost anyway. But for planning purposes I plan for “worst case” which is Ivies. I figure other private universities will be slightly below Ivies and public will be much higher than today but still below the privates.</p>

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<p>Who is “they”? Dependent students can only take out < $30k in loans and the average student takes out less than that.</p>

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<p>“they” are the students. My take on the college tuition situation is college will charge X + present value of subsidized student loan since X is what the student and/or family is willing to pay. So any increase in the subsidized student loan will merely show up in increased college costs leaving the student to pay X.</p>

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<p>Your income from the IRA will be unearned income. It WILL count in the financial aid formula when you start to draw on that. </p>

<p>Prior to that, any asset in income will also be assessed.</p>

<p>I think you won’t get the need based financial aid you THINK you will get. </p>

<p>Schools like Yale look much deeper into finances than the FAFSA. The liquid assets you plan to use would need to be substantial. After that, the income from your IRAs will also likely be substantial…unless you plan to change your living style quite a bit.</p>

<p>Sorry, but from what I’m reading here, you plan to be a wealthy retiree who hopes,to game the system so that your now two year old can get need based aid. </p>

<p>Colleges have seen it all. Schools that are most generous will scrutinize your finances more deeply than you seem to think.</p>

<p>Good luck. Come back in 16 years and let us know how it all pans out.</p>

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<p>Have you considered just working a few extra years and putting that money aside for your child? In all likelihood, he/she won’t get in one of the few schools that meet full need and you will be face with the dilemma of how to pay for school. (You do understand that the overwhelming majority of colleges don’t meet full need, right?)</p>

<p>Even dirt poor folks don’t get enough aid at most colleges. </p>

<p>Are you comfortable with cost being the determinant factor in your child’s options?</p>

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<p>Just so you’re clear, a freshman can take out $5500 in loans (up to 3500 of which may be subsidized). That is not even a drop in the bucket at top price schools. Less than 10% of the cost at several. </p>

<p>As an aside, another “just so you’re clear” you have MILLIONS in an account, you’re retiring decades before most, and you’re trying to game the system so that people with parents who LEGITIMATELY can’t afford to pay will have even less resources to pull from when they get in to a top school. Good example for your D.</p>

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<p>UGH! As someone who actually comes from a poor family, people like you bother me to no end. </p>

<p>You are in an incredibly fortunate situation. Can’t you appreciate that instead of looking for loopholes?</p>

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<p>I hope you aren’t serious. If you are, you have some nerve.</p>

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<p>There is quite a bit of scholarly research on the reasons for college cost increases, and there is not a lot of support for the loans as causation. It seems more that the loans are brought on by high cost, rather than the reverse. The biggest driver by far for increased college costs has been shown to be reduction of public subsidies for public colleges, and corresponding increases in tuition to make up the difference, including very large increases in OOS tuition. The spending per student in real dollars at public colleges has been pretty flat, so this directly conflicts with the notion that there is a “bubble” of college costs driven by loans. Over the same era, the public support for colleges has been reduced repeatedly. There are a few states where public support for colleges has remained strong, and in these states tuition is still quite reasonable, again in conflict with the hypothesis that college prices are driven by a loan “bubble”.</p>

<p>So why do the private school prices also go up? Well, looking at it from the private school’s POV, they view their product as better than the public school, so they price it higher. For example, Cal costs $56K per year OOS, so of course Stanford is going to set their sticker price higher than that.</p>

<p>IMHO, if you want to predict future tuition increases, it would be better to try to gauge future public subsidy spending policies as the big driver rather than federal loans, which are a drop in the bucket compared to private school tuition.</p>

<p>See data here:</p>

<p><a href=“http://www.sheeo.org/sites/default/files/project-files/All%20States%20Wavechart%202011.pdf[/url]”>http://www.sheeo.org/sites/default/files/project-files/All%20States%20Wavechart%202011.pdf&lt;/a&gt;&lt;/p&gt;

<p>Look at a state like Georgia, for instance, where the public subsidy remained strong from 1986-2009, and the real dollar tuition cost actually went down slightly over that period. The other end of the scale are states like Mass, where real dollar spending per student in 1986 and 2011 were identical but the burden of cost was shifted from ~75% borne by public subsidies in 1986 to only ~50% in 2011.</p>

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<p>BobWallace, we’ve addressed this notion in several threads. Considering all colleges have consistently gotten more public money every year and are well above 2007 levels now (all time highs), that arguement literally holds no merit.</p>

<p>Simple observation- 2008, 2009 public schools saw reductions in public funding. Why would tuition continually increase the last 5 years when they started receiving their ‘missing’ funding again? The answer is that its completely unrelated.</p>

<p>I can go back and do the numbers again but for every state flagship I’ve looked at so far, its complete hokum.</p>

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<p>Sigh. I was really hoping to get feedback on my long term college cost assumptions. Instead it became a discussion on my method of financing. While that was not the point, let me give full transparency, I am very serious about gaming the system. I been pretty much doing that my entire life including coming up with how to and executing how to save my parents money in terms of college costs and game the FA system. I was much more into it then they were but I am sure they enjoyed the savings. </p>

<p>Looking at all net price calculators seems to indicate that IRAs are excluded from any FA calculations. </p>

<p>[A</a> common myth about college financial aid - CBS News](<a href=“http://www.cbsnews.com/8301-505145_162-57562859/a-common-myth-about-college-financial-aid/]A”>http://www.cbsnews.com/8301-505145_162-57562859/a-common-myth-about-college-financial-aid/)</p>

<p>seems to indicate this as well.</p>

<p>This makes sense since the laws around IRA/401Ks are such that you cannot touch the money until you are 59.5. So even if I wanted to use our IRA money when I am 57 for our DS (that is Dear Son which is the SOP on various early retirement boards) education I could not without paying a penalty. Like I said, I will not price in this loophole for my retirement planning when it comes to college cost but for sure I have no qualms about taking advantage of it if the numbers add up. Also the rules on this could change in the future so I still plan to price in paying about $88K in 2013 dollars a year for an elite education 15 years from now. For sure financing would not be the main factor for helping my DS pick a college in the future. I want him to go to Yale not because it is an Ivy but because I went there. I would want him to go to my alma mater even if I went to less famous university. But it is reasonable to plan for the worst case scenario. All my retirement planning are based on reasonable worst case scenario analysis. </p>

<p>As for me working a few extra year to help pay for my DS college. The fact is even if I have to pay $100K 2013 dollars a year for my DS for college 15-19 years from now it should not impact my retirement plans as is. But my point is, if the rules indicate that I can extract $ savings based on my financial numbers and I got to my numbers based on legal actions I fail to see why I should not take what is given to me. I have every intention of doing so if the opportunities presents itself.</p>

<p>That said, I love to hear any and all feedback, especially feedback on my 2.4% post inflation rise per year for elite private universities assumption.</p>

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<p>And Georgia is your example? Google the “Education” lottery and the Hope scholarship.</p>

<p>Sorry, but this just isn’t true. Credit expansion is the problem, not funding. Money is fungible and universities are spending more of it than ever before.</p>

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<p>kmt1972</p>

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<p>Save as much as you feel is appropriate but trying to accurately predict the cost of a luxury good in 15 years in todays dollars is futile. As every prospectus says on the planet, “Past performance is no guarantee of future results” so using these rough historical averages provides no predictive capability and I think that is what is failing to generate interest.</p>

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<p>If you will take the trouble to review the data provided, you will see that public subsidies have not increased in real dollars, and in fact have decreased on average. Can you cite a source for your claim that they have increased? I have kindly provided mine.</p>

<p>Georgia is an example, not the only example, but of course those who have taken the trouble to examine the data already know that.</p>

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<p>BobWallace, thanks a lot for you feedback. I agree for public universities the state level cuts last few years are the most likely culprit for college cost increases. </p>

<p>Another argument would be “Baumol’s disease” which the article below talks about which again has nothing to do with the student loan bubble theory which I espouse. </p>

<p>[The</a> Tuition is Too Damn High, Part V ? Is the economy forcing colleges to spend more?](<a href=“http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/30/the-tuition-is-too-damn-high-part-v-is-the-economy-forcing-colleges-to-spend-more/?tid=pm_business_pop]The”>http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/30/the-tuition-is-too-damn-high-part-v-is-the-economy-forcing-colleges-to-spend-more/?tid=pm_business_pop)</p>

<p>The same guy then also wrote</p>

<p>[The</a> Tuition is Too Damn High, Part VI ? Why there?s no reason for big universities to rein in spending](<a href=“http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/02/the-tuition-is-too-damn-high-part-vi-why-theres-no-reason-for-big-universities-to-rein-in-spending/]The”>http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/02/the-tuition-is-too-damn-high-part-vi-why-theres-no-reason-for-big-universities-to-rein-in-spending/)</p>

<p>Which talks about the market asymmetry where people are not clear about the benefits of a university degree to the point where I feel we are at the point where ROI is actually negative for some majors. I feel the student loan bubble is part of the same phenomenon. I just happen to feel that sometime in the next 15 years people will see through this and relative demand for college will decline where prices increases of 3% above inflation will not take place. This is just a guess.</p>

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<p>I looked at your data, just like the last one you spent its heavy on charts and light on facts. The “2011” dollars they claim don’t use the inflation rate but some sort of bizarre discount rate that they don’t delineate. SHEEO Higher Education Cost Adjustment to be precise making this data useless. Why they wouldnt use inflation curves is beyond me.</p>

<p>The fact of the matter is university budgets and enrollment have gone up. Theres no explanation other than credit availability.</p>

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<p>Your IRA balance IS excluded from the calculations…although a number of Profile schools DO ask for that number.</p>

<p>However, any money you actually receive from these accounts is NOT excluded. So if you take a draw from your IRA, plan to reflect that on your financial aid forms. You will receive a 1098 statement for these withdrawals when you take them.</p>

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<p>The discount rate used is one intended to be relevant for college spending rather than household spending.</p>