529 · Education · Parenting

The Cost of College

The silver lining to the pandemic this fall was having our oldest home from school all the way from Thanksgiving to this week. This week, another semester starts and she’s back at school. During the holiday break, she put together a skeleton schedule for the next seven semesters. Simply taking a normal load each semester, she could complete her degree in only another six semesters.

While she planned her class schedule, I took a look at what it’s going to take to fund it. I had a rough idea last year, but I still needed to consider how much we’d cover of tuition and housing needs. In many ways, any plan we put together to fund her school will set a pattern for the rest of our kids.

The Cost of College

Tuition bill at my daughter’s university this past fall was $2,985. Judging from previous years, her tuition will rise about 3% each year. That’s not a guarantee, but with this assumption, eight semesters comes with a total tuition bill of $24,976.

What about housing? My daughter is staying in the dorms with a meal plan for the rate of $3,903/semester. Assuming she stays in the dorms for eight semesters–not very likely, but a great place to start our computations–the total housing would be $32,653.

Total for tuition + housing for eight semesters: $57,629.

Cost Of Attendance

Most universities are required to publish a “cost of attendance”, a sum of the expected full-time enrollment expenses that a student should plan for on an annual basis. This number typically puts an upper limit on what is considered “qualified education expenses” for purposes of 529s and federal loan programs.

My daughter’s university pegs the “cost of attendance” at $19,654 per year, or $82,225 for eight semesters.

After tuition and housing, what makes for the extra $24,596 of expenses? It’s in categories like “travel expenses”, “personal expenses”, and “books and supplies”. The first two don’t meet the 529 “qualified expense” requirements. Removing them adjusts the total cost of attendance down to $61,642, a couple thousand above the tuition+housing expense.

For my calculations, I’m going to stick with only the tuition-plus-housing expense, but it’s nice to know what the university expects us to spend as an upper limit.

Paying for College

So how to pay for it.

Last spring, I completed the Free Application for Federal Student Aid (FASFA) with my daughter. I wasn’t expecting much, maybe some unsubsidized loans, mostly because my AGI and savings put me out of reach of other aid options. The current rate for student borrowers is 2.75%. That’s pretty low, but it seems easier to pay for everything out of pocket, skipping loan origination fees and borrowing from my daughter’s “future self”. As her parent, I could borrow money at 5.3%, but borrowing from my “future self” seems equally unappealing. My attitude here is subject to change in the future, but that’s where I’m currently at.

I’ve written before about saving and paying for college using a college 529 account. In my home state of Virginia, I can reduce my state income taxes by contributing up to $4k per account, saving at a marginal tax rate of 5.75%. For maximum tax efficiency, every single dollar that goes to college should pass through my 529 accounts. I’m pretty sure loan money could pass though a 529 account, by first making a contribution using the loan proceeds, then immediately withdrawing to pay tuition and housing expenses. But the how and when of loan disbursement timing could make things tricky.

When my daughter started school this past fall, my total 529 account balance was a measly $10,764. Even though that was after an internal rate of return of 8% over the fourteen years since I opened the account, I realize that it is a far cry from covering all of my daughter’s university expenses. This past fall, realizing the shortfall, I opened two additional 529 accounts and injected another $8k.

If I end up covering her complete tuition and housing bill of $57,629, assuming an 8%/year return between now and her graduation, I’ll need to inject approximately $1,600 each month for the next seven semesters. Not crazy, but it still feels like a lot. If my assumed rate of return is too high, I’ll need to inject more, and if it’s too low–a good problem to have!–then I’ll roll the excess to her younger siblings.

Now multiply that by six kids and we’re looking at approximately $413,264 in tuition and housing expenses. That’s a big number! Yes, it’s spread over sixteen years, but that’s still an average of $25k per year.

Here’s a chart of the expected expenses each year for the next sixteen years as my children move through school. You can see the natural increase in college costs. My kids are mostly uniformly spaced out, but the age difference between my first two means that there’s a slight variation in the first part of the graph:

Conclusion

The university my daughter attends is relatively inexpensive compared to others, but it’s still not free. For example, compared to the local Virginia Tech with per-semester tuition of $6,874.50, paying only $2,985/semester is practically a steal! We’re still working on what portion we’re going to pick up as parents, but chances are good that we’ll pickup a majority of the bill.

In my next post, I’ll detail some of my ideas for creating appropriate incentives.

If you have thoughts about the costs of a college education, I’d love to hear about them in the comments.

Hasta luego!

12 thoughts on “The Cost of College

    1. There are some among the FI community that are planning to actively manage taxable income to “hack the FAFSA”.

      It’s not unreasonable, I don’t think, to conclude that if you quit your job you’d earn much of the lost wages back in the form of grants (e.g. Pell) or scholarships to your kids.

      There are certainly ethical implications, but I think it’s a fascinating economic question.

      These seem helpful:
      https://www.choosefi.com/hacking-the-fafsa/
      https://www.shmoop.com/college/fafsa-financial-aid.html

      1. Thanks for the links. I’ll have to check it out. Maybe by the time I get to number six I’ll be setup to quit my job. But given that they also include taxable accounts and non-primary residence real estate in your assets under consideration, I’d have to figure out how to deal with that as well.

    2. As I’m learning from “The Price We Pay”, it’s not doctors, it’s hospitals and insurance at fault for the escalating health care system. With the expense of college, everyone knows it’s greedy universities at fault!

      1. I’m stuck at 80% through that book and need to finish it. The dysfunction highlighted in the book made me feel sick to my stomach. There is a chapter or two that offers a glimmer of hope, but I mostly get depressed reading that book.

        1. I too get discouraged with the dysfunction. One take away is to not sign the “I agree to be 100% responsible for any charges” when in the emergency room, even when covered by insurance, mostly because of surprise billing. But boy, the system needs to be fixed.

          1. That indeed was great advice.

            I still can’t believe the repeated stories of the author calling hospital systems on his friends’ behalf to negotiate lower bills. The system is such a disaster.

            The economist in me isn’t surprised in the least. When prices go to zero — particularly for extremely expensive procedures — the system breaks down. Demand for services is near infinite when the price is zero.

          2. His insider status helped him know how to negotiate. 99% of everyone else would be in trouble, although a portion of that group might have some success talking it down. Before this, I would be in the group of screwed people.

  1. Thanks David.

    We are currently in state income tax (as long as I keep my dividends in check) free New Hampshire (live free or die) so I don’t think we will open one of these after our baby shows up in April. Am I clear that you plan on covering the cost of college for all your children, or is that decision point still being figured out based on your first?

    I was just speaking to my old boss down south and his kids are the same age (he has four). He mentioned his first two are going to the local community college. Think any of your children would consider that route to get those first two years covered at a lower rate?

    413k is a big number.

    I now need to check and see if the hospital tuition assistance plan can be used for family or just me. I have never taken advantage of it, but I could have funded several advanced degrees by now for myself. Perhaps that would be a better use of my time than this blogging hobby a picked up last year…

    Max

    1. I agree: 413k is a very big number. My next post will cover some of my current thoughts about how much I’ll contribute to my children’s college education. My goal is to be both fair and create incentives for them to get ‘er done and not come out saddled with a huge debt around their necks. This is my first child and I hope that I don’t create something that I can’t sustain with my other kids.

      I hadn’t thought much about community college. Tuition for the nearby community college runs about $5,400 for two semesters, saving me about $600 per year, so not a lot. She would be able to live at home, though, which would save a bundle on housing. The college offers a two-year degree that would prepare her for transferring later to a four-year school, but it would only shave off maybe a couple semesters or two, depending on how much the four-year school accepted. She had a bunch of AP credit going into her freshman year that took care of a significant chunk of her freshman year classes.

      When I first contributed to a 529, I lived in Washington state and I had no state income tax. This past fall, I rolled over that 529 into Virginia’s plan. I’ll be able to get a deduction for the contribution portion since I receive no tax benefit at the time of my original contribution. In hindsight, it worked out well. No need to rush the decision, though. Congratulations again on expecting!

      1. Thanks. Looking forward to the subsequent post.

        Interesting – I wouldn’t have never of thought thought about a future deduction in a different state. That’s a cool concept. We are on the fence on funding education, but I am sure I will get soft once we actually have a kid. Right now I guess I am more worried about funding the birth efficiently…

        Take care,

        Max

        1. Thanks for your followup comment. I too was surprised that I could roll it over and get a deduction. I believe it’s to make up for rollovers where the previous state claws back the deduction they first got. Of course, this varies by state and I have no idea how useful that is.

          I’m not going to lie to you: kids aren’t cheap. I totally understand the concerns you have. I know my world view changed when I had my first little person whose welfare was my responsibility. Weighty responsibility.

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