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:
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.