About this time each year thousands of high school students all over America receive acceptance letters from the colleges and universities of their choice. My daughter was one such recipient and has already completed her first year at a distinguished university in the Midwest.
Early in her second year, we received a letter from her school outlining the reasons for a significant tuition increase. Such increases are common these days. Going back as far as 1970 many universities have seen an average increase in tuition costs of approximately 7.5%. (The average inflation rate during the same period of time was approximately 4.5%.). Easy credit options for students have allowed universities to assess higher and higher tuition pushing college costs upward at well beyond the inflation rate. Between 2004 and 2012 debt for undergraduates climbed nearly 40%. Today six-figure and multiple six-figure college education costs are common.
As a financial planner, I help families grapple with these high costs. What I know, and what I see clearly every day, is a situation where middle class parents are mortgaging their own future – their retirement – to provide for their children’s college education. While it’s nice to say that parents should save for college it is not always possible. Many parents now have no choice but to allow their children to accumulate crippling student debt. Today about 70% of students graduate with a significant debt burden – usually about $30,000 -- and limited employment options to pay it down.
Given this increasingly heavy burden for so many Americans I wondered if the escalating fees at my daughter’s and other universities would stand up to routine fair-value-for-investment analysis. For that purpose I compared a college education’s investment value, as measured by annual mid-career incomes, for graduates of both public and private colleges.
The result is eye-opening. Across the board, private or public -- prestigious or plain vanilla – mid-career return on investment ranges between 5% and 7%. So my admittedly cursory analysis indicates that for the vast majority of students, a high-cost education is not justified by its investment return.
My advice to college education “investors”? Look at college as an investment choice rather than a trophy reward. Obviously there are many other factors involved in choosing a college, but unless your child is a star performer capable of attending and succeeding at the top of her class at a top- tier school, then an in-state public school education might be a wise financial decision. The cost savings are considerable and the end results surprisingly similar to more expensive school choices in terms of long-term financial stability, quality of life as an adult and knowledge gained.
Clearly college choice now ranks high among a parent’s long-term financial decisions. Today far too many middle-class parents are underprepared for retirement and their children are in no position to help them due to the enormous student debt they have accumulated. Sensible and unemotional college choices might help to avoid financial hardship both for hard pressed parents and their soon to be heavily indebted children.
For Frank Fantozzi’s full report contact: firstname.lastname@example.org (440-740-0130)
Frank Fantozzi is a Personal Financial Specialist, Registered Investment Advisor and Certified Public accountant based near Cleveland.
- Personal Finance - Career & Education
- Investing Education
- college education
Frank Fantozzi, 440-740-0130