(4 minutes to read)
College costs are high and are continuing to increase faster than inflation. While high-paying jobs might await graduates in science, technology, engineering, and math (STEM) fields, other majors don’t always offer the same return. This raises tough questions: Is a college education still worth it, and how much should parents spend on it?
First, let’s set a few parameters. This article is about choices and high-level strategy around saving for college. If you’re looking for nuts-and-bolts information about saving for college, tax deductions, and 529 college savings plans, savingforcollege.com is a great resource. For our purposes, let’s just take as a given that college savings accounts, also known as 529 college savings accounts (named after a code section in U.S. tax law: 26 U.S. Code § 529—qualified tuition programs), are the best savings vehicle to focus on in most cases, as they are a tax-free way to save. Also, let’s assume you won’t qualify for financial aid and are going to fund college education from your savings or pay out of pocket when your child or children start school. We’re not going to cover financial aid, including which accounts or what income counts toward parent financial contribution, or how to fill out the federal student aid FAFSA form. Those details are important, but here, we’re looking at the bigger picture.
Within that bigger picture, there is a cluster of issues to sort through.
Skyrocketing cost
For the last two decades, college costs have been rising faster than the general inflation rate. In the financial plans we prepare for clients, we typically program general inflation at 3% per year and the rise in college costs at 5% per year. If anything, we’ve been on the low side with this estimate. It’s hard to understand how the cost of college can keep going up like this. At some point, a college education may be neither affordable nor a good investment.
Costs can vary widely by institution, with top private schools costing about $90,000 per year for the 2023–2024 academic year. With costs like this, we may want to ask, is $360,000 really worth it for a college education? Public schools can be more affordable, particularly for in-state residents. The range is wide here, but $30,000 to $60,000 per year covers a broad swath of US colleges and universities.
The ratio of cost to value depends on the cost of the degree and the salaries or fulfillment waiting on the other side of them. This ratio may be more out of whack in particular majors. STEM fields continue to offer a good financial return on investment, with high-paying jobs and multiple opportunities awaiting engineers, computer scientists, biologists, and more. However, that’s less true for fields within the humanities. And that may be fine—being classically educated may have lifelong value in other ways. College doesn’t have to simply be a vocational training program. However, the cost of humanities, social sciences, or other non-STEM education may be becoming too steep for parents who are just trying to get their kids launched into financially self-sufficient adulthood without breaking the bank.
With these considerations in mind, is a residential college model still the best way to educate young people and prepare them for adulthood? I don’t know, but it’s a question worth thinking about.
ALLOCATING LIMITED RESOURCES
Families make a wide range of choices about how much to invest in college for their children. Some families take the view that they’ll do as much as possible to help their kids get a head start in life. The pressure on kids to excel in high school and middle school to get into the best possible college is intense. And paying for an expensive residential university education is part of the deal.
Other parents want to be sure they have set aside enough for themselves so they won’t be a burden to their children later. Some families believe the kids should have a personal stake in the outcome and cover some of the cost of their education themselves.
These are important parenting decisions. Each family will have its own viewpoint and financial circumstances to provide context to their decision.
These are also important financial decisions. Most families have limited financial resources and must choose between financial goals. With college savings, there’s a trade-off between retirement saving and college saving—between parents’ retirement security and the amount they spend on one or more college educations to launch their kids. Any money you save and later spend on college education for your children is money that you won’t be saving for your retirement.
It’s good to be clear on what your policy will be in allocating your limited resources.
mechanics of savings
There are also tricky issues around the mechanics of saving for college.
For example, how much should you save in a 529 college savings plan versus a regular taxable brokerage account? It depends in part on how much you need to save and how much time you have left. The longer you have, the more valuable the tax-free growth on your money in the 529 plan becomes.
It can be challenging to figure out how much to save. The costs are high and rising, investment returns are uncertain, and you won’t know what the final cost will be until a few months before you need the money, when your child knows which school she or he will be attending.
If you overshoot savings, and overfund your 529 plan, there is a 10% penalty on money you take out that isn’t used for college. You also have to pay income tax on the investment gain on any money you withdraw and don’t use for college.
If you have other assets to cover any college costs not funded by 529 accounts, you may lean toward slightly underfunding your 529 accounts to make sure you don’t save too much and wind up with the 10% penalty and tax on withdrawals not used for college. (You can also transfer the funds to other family members if you’ve saved too much, but that may not have been your intent initially.)
These considerations invite the question: Is an expensive college education worth it? You’ll have to decide that for yourself and your own children. But if you’re going to stretch yourself financially to buy it, make sure you get a return on your money.
Decide what’s most important to you in allocating your limited financial resources. And look for good value in education; it can be easy to overestimate the value of getting into an elite institution. There are nearly 4,000 colleges and universities in the US, and there will be many schools that are a great fit for your kids and offer a quality education at a reasonable price.
Parkworth Wealth Management provides holistic wealth management services including financial planning, RSU and stock option planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you would like help planning for your kids’ college education, schedule a complimentary consultation.
