Author Topic: How much are college costs going to rise?  (Read 4393 times)

chucklesmcgee

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How much are college costs going to rise?
« on: November 21, 2012, 11:04:34 AM »
Everyone knows that college tuition is rising well above the rate of inflation. But how much are costs going to continue rising over the long term? Say, 25+ years?

I'm wondering because I'm doing quite well as a 25 year old and am looking to take advantage of some tax-advantage college savings plans, probably a 529, which could help me pay for my unconceived child(ren)'s tuition or perhaps a spouse's graduate school tuition, or any other future descendants costs. The tax exempt earnings are pretty key because this money is also going to be growing for quite a while before being distributed and I feel tax rates are going nowhere but up in the future. It's more of a thought experiment than anything, let's not get hung up on my excessively forward looking plans here or my specific situation.

Anyways, college tuition's been increasing by about 8% annually, or about 1.7-1.8 times regular inflation. http://www.finaid.org/savings/tuition-inflation.phtml. Private college costs per year are right at the average US household income- and wages haven't risen anywhere close to the rate of tuition inflation. At the current rate, a private college undergraduate degree will have a sticker price of $1.7 million in around 25 years. How long can this pattern continue?

There are a ridiculous number of factors to consider. College endowments are also rising, and lots of top schools are raising the minimum income needed to even be expected to actually pay/take out loans for, so hardly anyone pays the sticker price. Also you have this massive student loan debt that's already crippling a generation who can't get jobs and lots of people are defaulting on them (though can't discharge for the most part). The government could change student loan policies which make student's think twice before borrowing, which could reduce demand and encourage colleges to lower tuition or hold off on increases. So many college graduates being produced has diluted the value of an undergraduate degree and that's creeping into graduate degrees as well- a BA is the new HS diploma, a PhD is the new master's, PhD's typically need to be "post-docs" in many fields for another 3-4 years before being considered for a faculty position. At the current rate of tuition increase and the stagnant job market, the benefits of a college degree will be outweighed by the cost. Inexpensive online universities are coming into the picture. That could increase the number of graduates and further dilute the market, discourage people from paying for an expensive education, or have no effect at all as employers won't take them seriously.

So I'm really not sure what to plan for. If costs increase at 8% a year, there's really no way to expect to generate enough interest from an index fund to provide for college costs in 25 years short of investing a principal that's already the size of current college costs, since the stock market averages 8% a year, more or less.

I'll probably just put in the maximum I can deduct from my state's taxes this year, $4000. What are other people estimating as their child(ren)'s future college costs compared to the present rate?

YoungAndWise

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Re: How much are college costs going to rise?
« Reply #1 on: November 21, 2012, 11:41:28 AM »
Although I am eighteen myself and not expecting to have children in the near future, I have an opinion on the tuition rising.
At a certain point and time, universities are going to have to stop raising their tuition prices, the reasoning why is people are starting to go against the "go to college, be successful in life" mantra that has been said for a long time.

Here is why:

1)The realization that cost of college is not going to automatically insure in the long run a high standard of living when compared to technical schools/apprenticeships.

2)Students are getting fed up with the rising cost and when the students get fed up they rebel. This hasn't hit Texas as hard as other states, however a couple California universities are prime examples of this.

3)The challenging of the old principles of success which is "do good in high school, go to a good college, do good there..." so on and so forth. Many of my teachers are advocating technical colleges and even saying just have a plan after high school so that is another reason.

However I think this will mostly affect private universities the most since public colleges/ universities are subsidized by the government I think. That being said I could be wrong.

Kriegsspiel

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Re: How much are college costs going to rise?
« Reply #2 on: November 21, 2012, 02:57:08 PM »
Young and Wise pretty much hit everything I was going to say.  The Echo Boom Bomb Blog has a few good posts about college in general.

secondcor521

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Re: How much are college costs going to rise?
« Reply #3 on: November 21, 2012, 07:04:23 PM »
In my planning I use a 6% rate of inflation, which I obtained from one of the College Board's "Trends in College Pricing".  They seem objective to me.

As far as how much to save, I set a target for how much I decided I would contribute to my kids' educations, increase it by the above percentage per year so I get the future costs, then I take their balances and project forward at what I project my investment rate of return to be.  If it looks like I have too little, I add some.  If it looks like I have too much, I don't worry about it that year.

I try to remember that it won't all work out according to exact averages and so forth.  My eldest sister went to five years at two state colleges.  My other sister went to a top notch $$$$ university and med school.  I went to an expensive Ivy league school my first 2.5 years, but my first year was practically free due to ROTC scholarships.  My last two years were at another private school, but since I was married, I got extra aid my senior year.  Overall, I'm guessing that between the three of us it turned out to be about average on average.

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meadow lark

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Re: How much are college costs going to rise?
« Reply #4 on: November 22, 2012, 07:36:38 AM »
I think so much of this is a choice.  I got my BA at a private, expensive school that was paid for by my mother's employer.  I think she paid an extra $2500 a year (plus $350 a month for me to buy books & live on.)  Obviously I worked also.  After I graduated I went back to school for an AA in nursing at a community college - $11 a credit - I paid $660 plus about $2000 for 2 yrs of books, lab fees, uniforms, etc.  My family in Louisiana are all getting their BS's paid for by the state - b/c they got decent grades in high school, my neice in NM is getting her BA paid for by the lottery scholarship. These are not hard, exclusive programs to get into.  I think you have to pay for the first semester and that's it.  I could choose an employer (2 blocks from my current employer) to give me free tuition for grad school or free tuition for my kid.  There are a lot of ways to get cheap/free education.  None of them may work for you in particular, but there are a lot of Americans who have no business getting student loans.  And I see no reason to save my money for college for my kid.  (Doesn't mean I won't pay something when the time comes.)
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Nords

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Re: How much are college costs going to rise?
« Reply #5 on: November 22, 2012, 10:22:38 AM »
I'm wondering because I'm doing quite well as a 25 year old and am looking to take advantage of some tax-advantage college savings plans, probably a 529, which could help me pay for my unconceived child(ren)'s tuition or perhaps a spouse's graduate school tuition, or any other future descendants costs.
I've never had to face this question myself-- who would be the beneficiary of your 529?

But maybe I'm asking the wrong question.  Maybe a better question would be whether you should maximize your own retirement savings first (401(k), IRA, and taxable accounts).  18 years is plenty of time to build up a college stash, especially with financial aid and work-study programs. 

If you're already financially independent, then saving for college would be an interesting analytical exercise.  But regardless of how well you're doing "now", I'd still take care of yourself first.

I'll probably just put in the maximum I can deduct from my state's taxes this year, $4000. What are other people estimating as their child(ren)'s future college costs compared to the present rate?
I'm not going to join the "What we did for college" recitation, but I'll suggest that if I was starting today then I'd save for a couple years at the local community college followed by a couple years at State U.  I'd use the College Board data to come up with a spreadsheet using inflation of 3-4%.  As you and others have pointed out, 6-8% is no more sustainable as college tuition than it is as a safe withdrawal rate.

secondcor521

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Re: How much are college costs going to rise?
« Reply #6 on: November 22, 2012, 02:39:06 PM »
I'm wondering because I'm doing quite well as a 25 year old and am looking to take advantage of some tax-advantage college savings plans, probably a 529, which could help me pay for my unconceived child(ren)'s tuition or perhaps a spouse's graduate school tuition, or any other future descendants costs.
I've never had to face this question myself-- who would be the beneficiary of your 529?

He can set up a 529 and be both owner and beneficiary for now.  He can then later change the beneficiary to his kids if/when the arrive on scene.  If he ends up not having kids, he can use it himself (perhaps for his own grad school), or transfer it to his nieces, nephews, or siblings.

I did something similar when I went to grad school (although I already had kids at the time).  I set up a 529 for myself, contributed enough to get the state tax break each year ($4k in the case of my state), immediately turned around and withdrew from it to pay for tuition and fees.  After I graduated, there was some money left over, so I changed the beneficiary to one of my kids and have continued to add to it for his education.

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chucklesmcgee

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Re: How much are college costs going to rise?
« Reply #7 on: November 22, 2012, 02:58:06 PM »
After I graduated, there was some money left over, so I changed the beneficiary to one of my kids and have continued to add to it for his education.

That's what I'm imagining. You can actually change the beneficiary to any descendant, so in theory it can be passed down to your grandkids, great grandkids, etc. How cool would it be to sack enough money in there to provide a what effectively amounts to a permanent tax-exempt educational trust?

Nords

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Re: How much are college costs going to rise?
« Reply #8 on: November 23, 2012, 08:06:26 AM »
He can set up a 529 and be both owner and beneficiary for now. 
Thanks, good to know.

MooreBonds

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Re: How much are college costs going to rise?
« Reply #9 on: November 23, 2012, 10:22:54 AM »
I'm wondering because I'm doing quite well as a 25 year old and am looking to take advantage of some tax-advantage college savings plans, probably a 529, which could help me pay for my unconceived child(ren)'s tuition or perhaps a spouse's graduate school tuition, or any other future descendants costs.

Funny you mention that....I opened up a similar account about 8 years ago for the same reason. :)  ( I ended up cashing it out in 2009 to partially pay for an engagement ring for an engagement that didn't end up working out. Long story on that).

However, although I am still single yet plan on eventually getting married and having kids, I would probably not repeat the 529 thing at this point in time for a variety of reasons.

What if they get scholarships? What if they are sensible and are willing to do basic courses at a community college for a year, before transferring to a more expensive school, and don't need as many years of the higher priced education? Or, better yet, what if I or my wife works for a university to utilize their reduced tuition benefit?

Any non-educational withdrawals have a 10% penalty. Given that there is a chance the money may not be needed, I'd just as soon max out my 401k/IRA/HSA account, and then simply add more to taxable savings, since I will need the taxable accounts to fund a (hopeful) ER someday. Plus, in the meantime, I get full control over what the funds are invested in, and not limited to the somewhat reduced offerings (and more importantly, HIGHER expense ratios)  in many 529 plans out there.

If it's looking like a child won't have access to any of the aforementioned items that would greatly reduce tuition, I could always start maxing out each year when they're 15, and start socking away to get at least my state's income tax deduction (on the first $8,000 in 529 contributions each year) for at least some 'guaranteed' savings.

secondcor521

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Re: How much are college costs going to rise?
« Reply #10 on: November 23, 2012, 02:37:17 PM »
@MooreBonds,

Sorry about the engagement that didn't work out.

Oversaving into college funds is a risk.  I addressed it in my case in a couple of different ways.  I plan to roll down unused funds from kid to kid to kid.  If I still have money left over at that point, I can trade it to even younger nieces and nephews for a quid pro quo cash gift (perhaps at a slight discount) from my siblings.  I can go take classes myself - I'll probably be retired then.  I can start on my grandkids' college accounts.

Also, I don't recall if it's 529s or ESAs, but one of those two types has the feature that you can withdraw excess funds without penalty to the extent that the child gets scholarships.

As far as the 10% penalty goes, in the meantime the money has grown tax deferred, that is only applied to the earnings on the amount withdrawn, not on the entire amount withdrawn.  Also, in my state I get an up-front tax deduction for the first $4k per year.

You are right about the limited choice and potentially higher ER.  In my case I'm using target-date funds that have worked well, but the ER is 0.75%, which is higher than I remember it being back when I started the account.  Thanks for the comment that made me go look; I'll probably invest a little differently going forward now that I see that the ER is higher than it was initially.

(I also max my 401k and IRAs, but not HSAs -- I'll have to look at the HSA a little more.)

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chucklesmcgee

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Re: How much are college costs going to rise?
« Reply #11 on: November 23, 2012, 04:35:28 PM »
What if they get scholarships? What if they are sensible and are willing to do basic courses at a community college for a year, before transferring to a more expensive school, and don't need as many years of the higher priced education? Or, better yet, what if I or my wife works for a university to utilize their reduced tuition benefit?

Any non-educational withdrawals have a 10% penalty. Given that there is a chance the money may not be needed, I'd just as soon max out my 401k/IRA/HSA account, and then simply add more to taxable savings, since I will need the taxable accounts to fund a (hopeful) ER someday. Plus, in the meantime, I get full control over what the funds are invested in, and not limited to the somewhat reduced offerings (and more importantly, HIGHER expense ratios)  in many 529 plans out there.

If it's looking like a child won't have access to any of the aforementioned items that would greatly reduce tuition, I could always start maxing out each year when they're 15, and start socking away to get at least my state's income tax deduction (on the first $8,000 in 529 contributions each year) for at least some 'guaranteed' savings.

You're right that there's a possibility education expenses could be less. Maybe. If I see my kids going to a professional school, say med school, where financial aid besides loans and scholarships are about nil and costs are about the same public or private, I'd have a hard time imagining that costing much less than it does now.

It's definitely not a very high priority for me vs. the Roth401k/RothIRA/HSA. But tax-exempt earnings are pretty powerful, especially over time, even if expense ratios are a bit higher than I like (VA does have a Vanguard index fund at 0.26%). VA maxes out at $4,000 for state deductions on contributions. I think I'll do that for now. Can't see myself saving too much at that rate.