Are student loans a bubble like real estate was?
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We all know education is important to the well-being of our prosperity, but does it have to come at such a price? In the future, will it even be possible to send our kids to college? Do we even know how much our children will have to pay in order to get a college degree?
There’s been a lot of buzz about the ever-rising cost of college in the United States. Some have suggested that these price increases are actually creating a debt bubble that’s ready to pop. The closure of Sweet Briar College and Tennessee Temple Universities this year have been harkened by some as the end of higher education as we know it. Mark Cuban said these college collapses are just the beginning. Cuban said the student loan bubble is bursting and these schools are just the first victims.
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Other parts of the higher ed system appear to be falling apart as well. Alia Wong of Atlantic Magazine recently wrote about the downfall of for-profit colleges. She informed us of the predatory way most online schools urge students to take out loans to cover their education, with particular emphasis on veteran’s loans. Few students know that some of these schools bring in over 90 percent of their income from student loans. Or, that most for-profit schools only graduate 22 percent of first and full-time students.
We know a college degree is still worthwhile, but most of us don’t know what college will cost in 5, 10, or 18 years.
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The sanctity of the college degree has only recently begun to be questioned. Millennials, the most educated generation in American history, are having a lot of trouble finding jobs after graduating college. NBC News says the fact that Millennials can’t find middle-class jobs even though they have college degrees is a symptom of a middle-class betrayal.
Nevertheless, a college degree is the most common vehicle for upward social and economic mobility. Workers with a college degree make a lot more money and are less likely to be unemployed. Degree-holders make, on average, $56,665 annually versus the $30,627 annual average income of high school graduates. The unemployment rate for workers with a high school diploma is about 9.1 percent, which compares with the 3.2 percent unemployment rate for folks with a 4-year degree. This is even true for Millennials. The unemployment rate for young adults (20 to 24-years-old) with only a high school diploma was 17.5 percent, whereas it was only 7 percent for young workers with a 4-year degree.
We know a college degree is still worthwhile, but most of us don’t know what college will cost in 5, 10, or 18 years. The internet is rife with data; but, do we really know how these numbers were collected? What will it cost for today’s parents to send their kids to college?
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I wanted to know, so I used information from the internet and a little Excel work to provide some estimates on how much college will cost for our children. You can see for yourself in the table below:
How did I figure this out?
Searching the internet, I discovered, for the 2014—2015 school year, the average in-state tuition and fees was $9,139, it was $22,958 for out-of-state students, and the average private school price was $31,231. I also learned that the average tuition increase for 2014—2015 was about 2.9 percent. This rate of increase is actually lower than the 10-year average, which is about 5 percent.
This was all the information I needed to do some calculations in Excel. Basically, I used averages of existing tuitions and the recent rate of increase to figure out approximately how much it will cost for my kids, who are only 2 and 4-years-old, to attend college at a range of different types of schools. (Email me and I’ll give you the excel formula so you can do the same estimates for your local college.)
What does this tell me?
These numbers are a best-case scenario since the actual tuition rate of increase is likely to be higher than my calculations. With state budget cuts for universities and inflation on the rise, we’re likely to see universities jack up their rates.
College will never be cheaper than today: A child entering college in the next couple years can expect to pay about $30 to $40k for their undergraduate degree. The same education will cost between $50 and $64k eighteen years from now. Using a combination of scholarships and personal (parental) funding, these costs can be greatly reduced, but they’ll still be more in the future.
It is still possible to work your way school at some universities: For example, Boise State University (my alma mater) a part-time worker making $10/hour ($10,400/year) could earn more than enough to cover the annual price of in-state tuition and fees of $6,640. This is easily attainable for a young person still living at home, going to school on a scholarship, making more than $10/hr., or getting some assistance from a college investment account.
In-state tuition is almost always cheaper: It seems paramount to get in-state tuition because you will save more than 50 percent over the course of your degree.
It is still possible for parents to pay for their children’s education: It seems daunting, but parents may still be able to cover the estimated $50 to 60k cost of a child’s tuition 18 years from now. Here’s one way. Imagine a family that contributed $100/month for 18 years to a low-fee index fund that yielded an average of 5.84% annual growth rate. That fund would end up with $60,000 after 18 years. Most college investment plans yield 7% and the Vanguard 500 Index Fund has yielded 7.55% over the last 10 years—including the recession, which is more than enough to cover the price tag for a college degree.
College will still be within reach for middle class Americans for the next few decades, especially for dual-income households.
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College costs are rising, but providing for your children’s education will still be possible for the foreseeable future.
I’m surprised an Ivy League education wouldn’t cost more in the future: For most Americans, a $200,000+ undergraduate degree is simply unattainable. But I was surprised that the cost of paying for an Ivy League education won’t be absolutely impossible in the future. Eighteen years from now, a 4-year Ivy League undergrad degree will only be about $370k. You may laugh at that price tag but I’ve heard podcasts from dozens of rags-to-riches entrepreneurs that make more than enough to provide this for their children. Pat Flynn of Smart Passive Income makes more in 6-months than it will cost for a 4-year Harvard education 18 years from now. If he invested a single month’s income for his children’s education, they could go to any Ivy League school they wanted. Not bad, Pat.
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College will still be within reach for middle class Americans for the next few decades, especially for dual-income households. But it is slipping out of reach for the working-class and poor people in our country. Education is one of the biggest deciding factors in lifetime earnings and career potential. As a nation, we are going to have to think about how we will still be able to keep a college education within reach for our young people because it is still one of the surest pathways to a moderate income.
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Photo: Flickr/ Kevin Dooley
Good question, John. What is going to happen? Will those Boomer jobs be filled with GenXers and Millennials? What happens when Boomers sell their businesses and move to Florida? Nobody really knows. I see three major trends with regard to college and the workplace that (I believe) will remake our economy and have huge impacts for retiring boomers: 1) College is still considered the sacred cow– THE ladder to a middle class lifestyle. The Millennials are the most educated generation in US history. This will remain true for the foreseeable future. GenXers and Millennials have taken out more debt in… Read more »
What happens to the job market when the baby boomers retire?