How Much Will College Cost? Pt. 1

You’ve had a baby and you want to help pay for their college...

The first hurdle is realizing the time to save is now and that the benefits of saving take time to realize. Saving money can be hard and some people are better at it than others as the delayed gratification of saving is all they need to put money away.

Perhaps these folks find it easier to live by Benjamin Franklin’s famous axiom, “A penny saved, is a penny earned."

However, most Americans do not enjoy the pain of saving money. The emotional reward of spending is too great to overcome. As a result, we believe people need both a refined process and a little coaching to make the task of saving for college as easy as possible.

Thus, if you want to save for your child’s college, here are three steps to making the whole thing easier:

1.     Educate

2.     Automate

3.     Recalibrate

For this blog, we will start with Step 1. Subsequent blogs will highlight Steps 2 and 3. By the end of the series, we are hopeful you will have a more rounded understanding of what needs to be done to better prepare and save for your child’s (or children’s) education.

1.  Educate yourself.

How much will college cost?

(To simplify the analysis, we are going to assume your child will attend an in-state public university. If you would like other analyses, please contact us.)

Between 2006-07 and 2016-17, published in-state tuition and fees at public four-year institutions increased at an average rate of 3.5% per year beyond inflation, slightly lower when compared to 3.9% between 1986-87 and 1996-97 and 4.2% between 1996-97 and 2006-07.

The inflation rate from August 2006 to August 2016 was 1.68% per year. In other words, $10 in August 2006 had the same buying power as $11.81 in August 2016. (inflation calculator)

When we combine the increase in tuition and the inflation over that time period the average rate increase of a public four-year institution was 5.18% (3.5% + 1.68%) over the decade ending August 2016.

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The above chart is an estimated cost for attending the University of Iowa for one academic year as an in-state student. The student’s parents have college savings, so she is only eligible for an estimated grant/gift of $2,000. The rest will be funded by loans or in our case, college savings.

If we use the cost of college today, $19,533 per year, and forecast it forward using 5.18% college cost growth, the cost of a four-year degree at the University of Iowa in 18 years is projected to be:

$209,516.27.

However, we are using assumptions in the growth rate. Let’s look at a range of possible tuition growth rates in the below chart

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With the range of possible college cost growth rates, the cost of a four-year degree from the University of Iowa can range from $143,948.66 to $302,936.27.

How much should I save?  

The geometric average of the S&P 500 from 1928 through 2016 is 9.52% and from 2007-2016 the return was 6.88 percent on average per year.

For our analysis let’s assume the cost of school is $209,516.27 and we’ll be conservative and use a 6% return on our money per year.

So, how much do we need to save in order to pay for 100% of our child’s school at the University of Iowa?

$479 per month

$479 per month is a large number and not realistic for many. However, even if you are able to save half of that you will put your child in a better place than many Americans who come out of college burdened by debt.