10
Education
Getting Schooled
WHY do I need to read this chapter?
Knowledge is vital. It’s the wellspring of so many of life’s blessings. Getting an education, however, is a value proposition. Lifelong learning may be priceless, but a college education is not. Indeed, it can come with a hefty price tag.
The proliferation of student loans, and the presupposition that they are “good debt” (chap. 7), has converged with the perception that obtaining a college degree is a mandatory milestone. The collision of these factors has created what some are describing as an education bubble.
But whether you are a parent supporting a student or a student yourself, please know that while education can indeed be very expensive, it is possible to get a rich educational experience that is surprisingly inexpensive. In this chapter, we’ll discuss how. We’ll also give educational benefactors—generally parents and grandparents—some guidance with the Non-Conformist’s Four-Step Education Savings Plan.
In May 2012, I had the distinct privilege of being interviewed by David Greene on NPR’s Morning Edition.1 We were discussing education and, in particular, its cost and the detrimental effects of burdensome student loans in a slow job market. I insisted that we must view education as a value proposition. We should consider what we’ll get out of our time at college before committing to the cost, and especially before undertaking any debt to pay for it.
“You need to gauge how much you’re willing to pay for your education based on how much money it’s going to help you make in the future,” I posited.
I then launched into a hypothetical example. “When I’m talking to a student who might be passionately interested in social work, I’m going to recommend that they not necessarily consider going to NYU and racking up a ton of bills that they will not be able to pay back.”
I have several good friends in the crucial field of social work, and I know they are sorely underpaid. And while I could have used any pricey, prestigious university in my example, for whatever reason, I pulled New York University out of thin air. At the time, I didn’t even know for sure if they had a school of social work. I’d soon find out.
I got a two-page letter coauthored by the dean of the NYU Silver School of Social Work and the president of the National Association of Social Workers, both of whom were also professors at NYU. First, they had misconstrued my mention of social work as a slight to the profession. Then, they endeavored to convince me of the value of NYU’s diploma in social work, as indicated by their high standings in the oft-cited U.S. News and World Report rankings.
In my response, I assured them that my mention of social work was no accident, and especially, no disparagement. Then I got to the value proposition. I’d researched their ranking of social work schools in U.S. News. Indeed, NYU landed at a respectable #16. But it was tied, and guess with what school? My home state’s (public) University of Maryland, Baltimore.
“How then, as a financial planner,” I queried, “could I rationally recommend that a prospective student pay double or triple the cost for a similarly ranked education, especially if they are using debt to pay for school?”
Needless to say, I didn’t get a reply.
A Look at the Numbers
While few would disagree with me that price should be a consideration when making educational decisions, it’s not reflected in our behavior. An undergraduate degree is now widely considered “the thirteenth grade,” a requisite step for anyone hoping to be successful in life. The cost of an education, therefore, reflects this increased demand.
“Since 1985, the overall consumer price index,” which is the primary measure of inflation, “has risen 115 percent while the college education inflation rate has risen nearly 500 percent,” said Steve Odland in a 2012 Forbes article.2
And while the past few years have seen the gap between overall inflation and the cost of college draw closer, education is still outpacing inflation, according to Bloomberg. “Including room and board, costs average $18,943 for in-state students at public schools and $32,762 for out-of state residents. At private schools, the bill is $42,419.”3 Per year.
Those numbers are averages, of course. If you bleed crimson, Harvard is going to set you back $58,607 for tuition, room, board, and fees in the 2014–2015 academic year.
How did this happen? And who am I to argue with the forces of supply and demand? Well, in this case, we’re not just talking about the supply of education. We’re also dealing with the supply of funding. Much in the same way the federal government’s belief that everyone should be a homeowner—and its policy reflecting this belief helped cause a housing bubble in the mid-2000s—its belief that everyone should have a college degree may have played a meaningful role in outsized education inflation.4
And how could it not? You don’t have to get past Econ 101 to recognize that if the government makes it easy to pay tuition hikes through grants and subsidized loan programs, parents and students who believe education is a primary indicator of success will be happy—in some cases even desperate—to pony up.
At this point, however, it matters less how college got to be so expensive and more how to get a quality education that represents a good value.
Harvard versus Harford
I struggled with applying myself—academically anyway—in my last couple years of high school. As a result, my college options were limited. Community college offered me an excellent opportunity to begin my higher education while honing my scholastic skills.
After a couple years at Harford Community College, I was able to transfer all my credits to any school in the University of Maryland system, including my now alma mater, Towson University. While this route may not have been my first choice at the time, in retrospect it was an excellent way to get a quality education for an especially reasonable price. And by especially reasonable, would you believe that you can get an entire four-year undergraduate degree for the price of thirteen weeks at Harvard?
Indeed, the cost of tuition and fees at Harford Community College for sixty credits—two years of school—would be $7,488 at 2014–2015 academic year prices.5 Assuming the student would complete his or her education at Towson University while living at home, the cost for two years of tuition and fees would be $17,180, again at 2014–2015 prices.6 That brings the total cost of an undergraduate degree to $24,668, which wouldn’t even cover the cost of a semester on campus at Harvard.
This begs the question: In a day and age when the undergraduate degree has been commoditized and become viewed as a prerequisite for every white collar job available, do the intangible benefits from any collegiate scenario costing more than, say, $24,668 represent a good value proposition? Is the $200,000 premium or more (in today’s dollars) that you pay for the elite private or Ivy League undergraduate experience worth it? Is the $100,000 premium you pay to live on campus at an out-of-state, public university worth it? Is the $50,000 premium you pay to live and eat on campus at your state university worth the cost?
The answer for any of the above may very well be an emphatic and justifiable yes. Please don’t get the wrong impression. I’m not trying to suggest that Harvard isn’t worth it, or that everyone should go the most economical route. Indeed, Harvard is entirely worth it for the student who will optimally benefit from the education itself, the life-shaping experience, the Ivy League credential, or perhaps the connections alone. Similarly, if you want to be a doctor specializing in internal medicine, it’s likely worth it to pay Johns Hopkins University the $74,444 it costs for just your first year of med school.7
The value proposition for each student/school/benefactor combination will be different and worthy of exploration. Here’s a four-step process that will help you make that determination and properly fund the resulting decisions.
The Nonconformist’s Four-Step Education Savings Plan
Step #1: Determine if you are financially able
Can you afford it? This instruction is directed largely to parents, but the logic is identical and the process just as important for the many students flying solo in their educational endeavors. You may simply not have the income to maintain your household and save or pay for college at the same time. That’s okay. You have more friends than you’d guess in the same boat.
If you’re having trouble answering the question, “Can I?” without a more complete frame of reference, let me give you a rough idea of how much you’d have to save monthly, from the day your child is born for a full 18 years to have 100 percent of your financial needs met. This assumes the cost of education rises at 5 percent per year and you’re able to earn 7 percent annually on your savings:
With that context, I must ask again: Can you afford it?
If you’re a parent (or grandparent) struggling under the weight of this decision, please consider the following: It’s actually irresponsible to prioritize your children’s education over your present-day solvency and your future retirement saving. It would be much easier for a child to repay a student loan than to bail out parents with health issues who didn’t save enough for retirement.
And how much school debt is too much? If you must incur debt to pay for school, try to keep the aggregate amount less than you can reasonably expect to earn in your first year’s salary. Otherwise, it will almost surely be a strain financially.
Step #2: Determine whether or not you will choose to pay
Educational and financial institutions who run college savings plans may prefer you to believe that it’s a cardinal sin to deny your children (or yourself) college funding, but that’s because they have a vested interest. Deciding to help your children with education costs is an admirable choice, but it’s still your choice. An unwillingness to offer your children a free ride doesn’t make you a bad person.
Step #3: Develop a Family Education Policy
A Family Education Policy is the clear articulation of the answer to a question most parents will hear from their children at some point: “So, how much will you pay for my college education?”
As with many important questions in parenting, I recommend that you initiate a preemptive strike here. Don’t wait until Johnny or Sally comes home to report what his or her friend’s parents are going to pay for. Be the first to discuss this with your child.
You might, for example, offer to pay 100 percent of an in-state public university’s costs if Junior keeps his grades up. But whatever you do, please don’t write a blank check with the naïve response, “I’ll pay for whatever school you can get into.” The law of adverse selection suggests you’ll end up paying top dollar for the warm-climate party school.
I recall one client, in particular, who had more than enough income to send each of his children to the school of their dreams. Instead, he used the context of college to send a parenting message. He and his wife offered to cover the financial costs of two years of education—the second two years. They wanted to ensure their kids were vested in their own educational decisions. They wanted to ensure their kids understood the value.
I’m not quite as tough. My wife and I have developed (and communicated) our own policy: we’ll cover up to the cost of four years of in-state tuition at one of our excellent state universities. This doesn’t mean we won’t support our two boys financially if they choose to attend a private school or an out-of-state university. But we’ll pay only for up to the price of an in-state state school. They will bear any excess costs, and I’ll encourage them to do so if they believe it will be in their long-term benefit.
And yes, if they’re able to fall under Mom and Dad’s financial aid cap, we will gladly donate the balance to the worthy cause of their choice, including a down payment on a home, a starter investment portfolio, grad school, or even travel.
Step #4: Develop a college savings plan
After you’ve determined that you’re willing and able to pay for school, and you’ve articulated a Family Education Policy, it’s time to start saving if you haven’t already. Recalling our chart in Step #1, you’ll need to save about $400 per month (every month, from the day your child is born, per child, earning 7 percent on your investments) in order to cover the expected costs of tuition, room, and board at an in-state public college or university. You can double that for most out-of-state public schools and triple it for elite private and Ivy League institutions. Simple, but not easy.
Where, then, should you save money for future education?
Navigating Route 529
529 college savings plans deserve your first look, and there are two types—prepaid plans and investment savings plans. Prepaid 529 plans offer you the opportunity to lock in the cost of today’s tuition (only) in the state in which you live. The funds can typically be used for out-of-state schools, but the amount of aid will be based on the future cost of your state’s schools. This option can make sense for families with older children because they don’t have as long to save and wouldn’t, therefore, have as high a probability of benefiting from an investment savings plan.
If you’re getting started when your children are younger, consider a 529 investment savings plan, which offers a meaningful tax incentive and the opportunity to have the market pay off part of your kids’ college expenses. From a tax perspective, these plans work like a Roth IRA. You contribute after-tax dollars to the plan, and then your contributions and any gains (hopefully) will be disbursed tax-free.
In these plans, you invest in market instruments that come with a chance to outpace inflation, thereby reducing your net cost of college. Contributions are made after-tax, but gains are distributed tax-free for a fairly broad category of qualified educational expenses,8 according to the IRS.
But there are a lot of different 529 investment savings plans. Which one should you use?
Investment savings plans are administered by state. Each has its own set of rules, expenses, investment options, and tax breaks, if applicable. You can use any state’s plan, even if the student goes to a school out of state, but any applicable tax breaks may only be valid for your state’s plan.
The plan that best replicates the investment philosophy espoused in the previous chapter is likely the Utah Educational Savings Plan, which features Vanguard and Dimensional’s passively oriented, lower cost mutual funds. If your state’s plan offers no tax benefits—or if the benefits appear minor in comparison to a plan with better investment options and/or lower expenses—don’t feel tethered to your state.
Most importantly, I advise against using any plan that pays a broker a commission. Doing so cuts meaningfully into every dollar you invest. You can research all available 529 plans on helpful websites, for example, SavingForCollege.com. But be careful; they’re not immune to conflict of interest either. Their “Find a 529 Pro” widget directs you to commission-based brokers who pay to be featured on the website.
Another helpful resource is Morningstar’s annual roundup of, in their opinion, the market’s best 529 plans.9 You’ll notice that all the top-tier plans are “direct,” no-commission plans versus “advisor”-sold plans.
All that considered, 529 plans are still not a panacea. They don’t deserve to be the sole receptacle for all of your college savings.
The 50 Percent Rule
Even if you have the wherewithal to save 100 percent of your college savings needs, consider not investing all of that money in 529 plans for the following reasons:
529 plans aren’t perfect. Most don’t include optimal investment options or ideal allocations for those investments. And, of course, the market isn’t guaranteed to complement your education savings. You could actually lose money.
The states that administer 529s also aren’t perfect. They could change plan rules or investment options—and, believe it or not, if you’re using a prepaid plan, it’s entirely possible that your state could struggle to fulfill their pledge to you.10
And I know you’ll be shocked to hear this, but the federal government that presides over 529 plans—and their tax benefits, in particular—is also imperfect. In fact, in late 2014, President Obama put forth a proposal to tax 529 plan gains, which would have eliminated the primary reason for their existence. The outcry was loud and swift, and the planned tax hike was quickly but quietly dropped,11 but the mere threat certainly weakens the entire 529 plan system.
In addition, Junior might get a scholarship and complicate the extraction of the funds without taxation. Of course, Junior could also decide that college is for the birds and hope to use the savings to buy a Harley and drive cross-country.
The good news, in that unlikely case, is that Junior wouldn’t be able to withdraw the funds from the 529 plan—because it’s your money, not his. You’re the owner; he’s merely the beneficiary. And you could actually change the beneficiary to his more scholastically inclined sister. The bad news is that if she decides to skip college as well, you’ll be required to pay taxes and a 10 percent penalty on any gains in the plan in order to withdraw them. Or, you could always make yourself the beneficiary and go back to school.
How, then, can we account for all of this uncertainty? By invoking the “50 Percent Rule.” Save only 50 percent of your estimated college savings needs in a 529 and leave the remainder in savings or your mid-term liquid investment account (chap. 7).
The truth is that if you have the funds to invest in your children’s college education, after fully funding all of the financial priorities that stand before it (chap. 19), you’re in the minority. Our next chapter addresses one of those financial priorities—retirement.
But if you’re a parent, whether or not you can afford to fund your children’s education, you can’t afford not to address it.
Getting Creative
In determining the best course forward, for you or your student, it may well benefit you to get creative, to consider a course not prescribed by academia or your guidance counselor.
I’m a Tim Ferriss junkie. He’s addicted to finding the most efficient ways to learn. Everything. He’s the author of the bestselling 4-Hour series on work, health, cooking, and everything in between. He is an alternative education freak, which makes it all the more ironic that he received an undergraduate degree (in East Asian Studies) from Princeton.
If you’re yearning for alternative education outside of the classroom, Ferriss is a great resource, as is Chris Guillebeau. “You don’t have to live life the way others expect,” says Guillebeau, the author of three books (all worthwhile reads), including his most recent, The Happiness of Pursuit.
Chris Guillebeau was a high school dropout who hacked his way into and through undergrad and graduate degrees only to discern that he could’ve learned a lot more for a lot less staying off the mainstream path. His experience inspired him to outline “The One-Year, Alternative Graduate School Program,” a complete educational experience all for under $10,000.
“The point isn’t to disparage traditional education, but to provide an alternative for different kinds of learning,” Chris says. “You never have to put off learning, and higher education isn’t the only option.”12
If higher education doesn’t work for you for any reason, you have options. Trades, technical school, and—despite cultural messaging to the contrary—associates degrees are all viable alternatives that can lead to rewarding careers. Heck, even dropping out didn’t work out so badly for Frank Lloyd Wright, Tom Hanks, Steve Jobs, and Bill Gates.
If you do choose the now conventional path of college, know that creativity can also help in the application process. While private schools have higher price tags, they also often have more generous endowments designed to attract unique and gifted students with meaningful discounts and scholarships.
Regardless, you’ll get the most bang for your buck in any educational pursuit if you use the experience to enhance and magnify that which makes you uniquely you.
Simple Money Education Summary
1. Learning is priceless, but getting an education is a value proposition.
2. Yes, education can be very expensive, but it can also be surprisingly inexpensive. For the price of one semester at Harvard, you can get a degree from a prestigious state university as an in-state commuter who begins at a community college.
3. Parents, consider the following four-step plan to determine if and how to save for college:
i. Determine if you are financially capable of helping your children with the cost of their college education.
ii. Determine whether or not you will choose to offer “financial aid” for your children’s higher ed.
iii. Develop a Family Education Policy, the answer to the question, “So, how much will you pay for my college education?”
iv. Develop a college savings plan—how much you’ll need to save per month to meet your goals.
4. 529 education savings plans are valuable tools but don’t deserve all of your college savings. Consider using them for only 50 percent of your savings.
5. If the traditional educational path doesn’t work for you, you’ve got other options.
6. Use education to enhance what makes you uniquely you.
What INSIGHTS and ACTIONS did you take from this chapter?