🎓 Why College Planning Is Core To Any Young Family's Wealth Plan
Celebrating as a family member graduates high school and attends college is a monumental event and the culmination of years of hard work. However, paying for college remains a significant source of stress for many households. It's no secret that college costs have risen much faster than inflation over the past 40 years, increasing the financial burden on families as they set money aside and on graduates once they enter the workforce. And yet, there are numerous professional and personal benefits to pursuing higher education for those who wish to do so. Weighing the costs against the benefits while considering personal priorities and the broader economic picture makes college planning a complex topic.
This is why saving for college is a core component of any family's financial plan, alongside other major goals such as retirement or buying a home. With all of the market and economic uncertainty of the past decade, customizing a financial plan to each individual or household's needs, ideally with the guidance of a trusted advisor, has never been more critical. What should those planning for college consider today?
There are many economic benefits to attaining higher levels of education
The rapid increase in the cost of education has led many to question whether college is still worth the investment. An important reason why tuition has risen so rapidly is that the economic benefits of college and advanced degrees have grown even faster. According to the Bureau of Labor Statistics, job prospects improve as educational attainment increases. For example, the accompanying chart shows that unemployment rates were 6.2% for high school graduates but only 3.5% for those with 4-year bachelor's degrees. Similarly, the median annual earnings of those with high school diplomas was $40,450 compared to $66,700 for college graduates. Not surprisingly, these patterns continue for advanced degrees as well.
Of course, these statistics are averages that don't consider individual circumstances or differences within each education level. Pursuing college and advanced degrees may not be for everyone, and many personal factors must be considered. For instance, today's very low unemployment rates may make the opportunity costs of attending a 4-year college less attractive to some, including those who attend trade schools or benefit from on-the-job training. In contrast, poor economic periods, such as during the global financial crisis, may make the benefits of college more pronounced.
Additionally, these particular statistics don't consider the choice of college major or type of employment. It's clear that those studying highly employable subjects, such as those related to engineering and financial services, will likely have greater job prospects. Regardless, the comprehensive data make it clear that higher education has many economic benefits.
The cost of a college education has risen much faster than inflation
The other side of the equation is that the sticker price of a college education has increased 800% over the past 40 years. Even after adjusting for inflation, college costs have increased dramatically across all institutions, as shown in the accompanying figure. The real, inflation-adjusted cost of a private 4-year college degree rose 176% from 1981 to 2021, while public universities saw prices climb 252%. The cost of 2-year degrees has increased more modestly but has still easily exceeded inflation in most years.
Unfortunately, these inflation rates for education have also outpaced wage gains. As a result, those saving for college will need to save earlier, save more, take advantage of investment returns, and potentially borrow. Certain investment vehicles with tax benefits, such as 529 plans, have been created to encourage earlier college savings in order to take advantage of compound returns over time. Recent data by Sallie Mae suggest that the average household pays for 43% of the total cost of college with the parents' income/savings, 11% through the student's income/savings, 29% via scholarships and grants, and 18% through borrowing. So, how families and students decide to pay for and finance the cost of college requires a thorough understanding of their particular circumstances.
Student loans are a major burden on consumers
Unfortunately, borrowing for college often results in high levels of student loan debt upon graduation. At the individual level, this burden on graduates must be factored into every financial and career decision. In the worst case, it may mean that graduates cannot take as many risks or pursue their true passions if they cannot generate the steady income needed to repay their loans.
At the aggregate level across the economy, student loans have ballooned over the past 20 years to $1.6 trillion, outpacing other non-mortgage consumer debt. This has led to macroeconomic concerns, with some comparing the size of student loan debt to the subprime crisis prior to 2008. While it's difficult to say precisely how this will impact the economy, subprime loans have significant differences, such as grace periods, forbearance, parent cosigners, etc. Still, high levels of student debt could drag the economy due to its influence on career decisions, reduced consumer spending, and other factors such as delayed family formation.
Of course, the student debt crisis has become a key political issue. The current administration recently sought to cancel up to $20,000 in federal student loans for qualified borrowers. However, the Supreme Court has ruled that this is an overstep of the executive branch and invalidated the action. Politics aside, this has resulted in uncertainty for those with student loan bills coming due.
The bottom line: Higher education continues to be extremely valuable from a financial and economic perspective, and deciding how to pay for college is essential to any financial plan. Saving early, making appropriate investments, and using attractive vehicles, ideally with a trusted advisor's guidance, can help increase the odds of financial success.
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