This past weekend I spent half my time on an overnight visit to the college where my son is likely to attend starting next fall. So I didn't get to do my regular post about money and markets.
Recall in my prior post College Bound, I was shocked to find out that I could potentially have to shell out $200,000 over a 4-year period to send my first child to college.
Plus with the cost of college going up at about 8% per year, and since I have another child just entering High School, college could turn out to be a real deal-breaker financially. Well I am reaching the end of my journey of discovery and getting ready to write my first check, so I figured I would share what I found out. Most of this applies only if you live in the United States, so if you live elsewhere, your experience may vary.
First thing is that there is a huge difference between the cost of public and private colleges. Most public schools in my state (New York) cost about $20,000 per year inclusive which includes tuition, food and lodging. Comparable private colleges in the region cost between $45,000 and $55,000 dollars per year!
Since I went to a private school myself I felt my child deserved the same advantages. And I also heard that private schools really don't cost all that and you get some type of discount, right? How much do private schools really cost? Here's what I can tell you:
1) Some kids get what the call the "full ride" which includes 4 years of college completely paid for including room and board. This is available to people who attend federally funded military academies such as the one located in West Point, NY (not far from where I live) and Annapolis Maryland. Well my kid has no interest in the military, and I don't blame him so that option is out.
2) Other kids get the "full ride" if they are extremely talented with a highly desirable skill. Musical or artistic talent don't seem to count as much as sports. If your child is talented enough to get a "full ride" based on their talents and abilities, congratulations! No such luck for me.
3) On the private school side, discounts seem to fall into one of 2 categories:
3a) This is students with with B+ to A- averages and 1000-1200 SAT scores and offers a "scholarship" of about 10K per year lowering the cost of private schools from 35K to 45K
3b) This category is for students with A to A+ averages and SAT scores from 1200 and upwards and offers a "scholarship" of about 20K per year lowering private school cost to about 25K to 35K.
My child fell into category 3a bringing the cost of our first-choice private school to about 42.5K per year.
4) Next up is "need based" Financial Aid. This is based on a formula developed by the US Government and takes into account your salary and all other financial assets including the cost of your home but not including for your retirement funds. Based on completing an on-line form at Fafsa.gov starting on January 1 of the year your child will first attend college, the form determines a single number called your "Expected Family Contribution". Colleges determined your "need based" aid based on this formula
Amount of need = Cost of Attendance - Expected-Family-Contribution
Well in my case, my Expected-Family-Contribution was 70K a year. This is more than the cost of attendance, even before the discount. So no need-based financial aid for me.
After that, all that's left is student loans. Media reports indicate that student loan debt is the new debt crisis and now exceeds credit card debt! And unlike most consumer debt, student loan debt cannot be discharged in bankruptcy. On that basis, student loan debt is now burdening an entire generation of spenders and savers who can not afford to buy houses and all the required stuff and can have adverse financial consequences across the lifetime of the student. In other words, the jobs available with that college degree don't justify the degree of indebtedness.
And the terms of student loans are not that favorable. Students who have demonstrated financial need based on the FAFSA formula get what they call "subsidized" loans. These loans defer interest calculations while the student is college. For the rest of us what's left are "unsubsidized" loans.
A quick check of the terms for these loans were horrendous. For example, they take 1% "service fee" off the top. So if you borrow $20,000, you own them $20,200 right off the top. After that, the rates are above 7.5% per year and start accumulating interest as soon as you start borrowing. My first instinct was - can I take other side of that trade? In other words - can I loan you the $20,000, take a $200 bonus and collect 7.5% per year?
Fortunately, my son was admitted to a SUNY - State University of New York - college and it will cost me about $20, 000 out of pocket for the first year. This may not be best in all cases for example if your child is highly talented and knows exactly what they want to study. In my case, my son is unsure what he wants to study. Many thanks to the great state of New York and to its motto "Excelsior" which means "ever upward" in Latin.
We are not ruling out a Master's Degree or other type of graduate school once he figures out what he wants to do. What I have found is that is not where you start out, but where you end up in life that counts.
That's all for now, have a great week.
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