PracticalDad Economics:  A New College Paradigm

Seven years of college, down the drain.

          – Bluto Blutarsky

I went away to college and when I came to, I was on the six year plan.

          – High School Friend of the PracticalDad

There was a time when college was more affordable and financing was easier to come by.  The new – and lasting – realities from the recent financial turmoil are that further education is a necessity for economic advantage and that the student must find the most cost-effective means of obtaining it.  Viewing college as an opportunity to "grow" are long, long gone.  This awareness of cost and benefit is foreign to the large majority of most teenagers, so one of the jobs of a PracticalDad is to help frame the decision’s parameters for the teen.  They still might not make the best decision, but at least they’ve had the opportunity to do so.

So just what are the segments of the new realities?

First, no one can disagree that a typical high school graduate will outearn a high school graduate.   CNNMoney estimates are that a college graduate will make $20,000 more annually than a high school graduate of similar age.  With the shifts in the economy to a greater knowledge-based need, that will probably widen further.

But this information is incomplete without further examination.  The present circumstances now require even greater educational requirements in order to stay ahead of the economic curve.  According to statistics in CNNMoney, the average bachelor degree holder lost 4.2% in earnings from 2001 to 2006.  A graduate degree holder earned 4.6% more over the same period while the holder of a doctorate gained greater than 9% in average earnings.  So if your child is going to get ahead of the economic curve as an adult, they will have to prepare, if they are of that bent, to obtain even more than a Bachelor’s degree.  Not everyone is cut out for graduate education and not all graduate degrees are created equal, but an advanced degree is increasingly a necessity to get and stay ahead.  So why load up on the debt for the bachelor degree?

Second, the cost of obtaining a college degree has and will continue to expand greater than the rate of standard inflation.  www.finaid.org provides statistics that show the historic tuition inflation rate at almost twice the CPI general rate.  And the simple truth is colleges have little incentive to control their costs; the supply of colleges is largely set and they don’t just spring up or go out of business.  Demand for a college degree is rising however, as everyone jumps on the bandwagon.  And any basic economics professor will sketch out how price rises with demand when the supply curve is fixed.  A shining contrast to this trend is Harvard, which actually dropped it’s tuition cost in 2008 in response to the pressing financial demands on families and students.  Of course, Harvard has a $35 Billion endowment so whether this leads the way with other institutions remains to be seen.

Providers of higher education state that financing is certainly available for any college whether through scholarships, student and private loans, grants and work study opportunities.  This is true.  But the mix available has changed dramatically in the past decades.  Government grants have been overtaken by government loan programs and even these loan programs are now in trouble.  In March of 2008, the Pennsylvania Higher Education Assistance Agency (PHEAA) ran into the credit mess and found that it was unable to float a sufficient number of bonds necessary to support student lending.  Six months later, this PracticalDad knew of two local students forced to make changes in their plans to account for this financing failure.  Scholarship programs will also be affected since their investment returns will suffer along with everybody else’s returns.

So the cost of further education is rising and the financing options are narrowing.  What can a PracticalDad do?

  1. Early in the child’s life, decide what financing mechanism is best for your needs.  There are a variety of savings mechanisms available, ranging from UGMA (Uniform Gifts to Minors Act) accounts to various state 529 plans.  Then, as much as possible, utilize some of the college cost sites mentioned above to help plan what should be deposited regularly.  If that’s possible.
  2. After deciding on the mechanism, monitor it regularly and make the appropriate changes as the need arises or the environment changes.  Like your retirement savings, the plan has to be regularly checked and updated.
  3. Spend time figuring out what the generic college costs might be for your child at both a public and private college.  My recommendation would be www.bankrate.com, which is an excellent site for all manner of hands-on financial tools.  You can specify the length of time until college and also the estimated inflation rate.
  4. Start talking with the children early – and I measure early in terms of years – about what college is and isn’t.  What they see in the media doesn’t necessarily jibe with reality and for most anymore, it’s not an opportunity for self-exploration.
  5. When they reach high school, meet the guidance counselors and learn what materials the guidance group offers.  What’s available in terms of scholarship resources and what other programs are offered that would be of benefit.
  6. Utilize the other publicly available reading materials.  This PracticalDad recommends What Colleges Don’t Tell You by Elizabeth Wissner-Gross and How to Go to College for Almost Free by Ben Kaplan.  The former is a large collection of tips and "secrets" for successful admission provided by the author, who’s advised students and families on admission for more than a decade.  The latter is a "how-to" guide to maximizing scholarships written by a Harvard graduate who’s become one of the leading experts on working the scholarship system.
  7. And constantly reiterate to the kids about the need to keep up with the studies.  And then reiterate it again.

If you have a newborn, it might appear that you have an almost infinite time until she is ready for taking that step and from a financial standpoint, there is a lot of time.  But like anything else, it will pass faster than you know so use your time wisely.

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