How to Manage College Tuition Sticker Shock

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Golden Girl Can’t Afford College

Picture it – Sicily (Island, Louisiana). You are a young couple with a newborn baby. You are high on the joy of being new parents. You proudly show her off to all your friends and family.

Fast forward 18 years. Your daughter is ready for college. You are excited to get her acceptance letter in the mail. With excitement, she rips open the envelope and your jaw drops. Reality sinks in as you learn that tuition, plus room and board to an in-state, four-year school will cost $484,000.

This is not a nightmare, but an inevitable reality. The truth is that tuition to a four-year college has increased 8 percent annually over the last ten years. If the trend continues, today’s new parents can expect to pay nearly $500,000 for each of their children to get a non-Ivy League education in 18 years.

Why is this happening?

Everyone Is Getting a Raise (but You)

While stagnant wages and food, gas and housing inflation hurt middle-America, college presidents have seen salary increases only beaten by the 10.2 percent average annual salary increase of their corporate executive peers. The Chronicle of Higher Education recently reported that there were 180 college presidents who earned more than $500,000 in 2011, compared with fifty in 2004. That is a 260 percent increase in seven years. They, also, reported that forty-two private college presidents were paid more than $1 million in 2011. That was up from thirty-six college presidents in 2010, a 17 percent increase. While some college presidents saw their salaries increase two, three and four times from 2010, the average year-over-year increase was 3.2 percent. If only middle-America saw similar increases.

The fact is that American families, like cable TV subscriptions, have not seen similar increases. Median family income since 2002 has risen 1.9 percent annually. This requires parents to be more fiscally responsible when they save for college than is often feasible. As of 2013, the average cost to send a student to a four-year, in-state college was about $121,000.

Today’s parents with college-bound kids would have needed to invest $3,400 annually when their child was born in 1996 and then earned a 6 percent annual return until college starts, otherwise their kids will graduate with student loan debt. We must have danced the “Macarena” too much in 1996 because we do not remember many new parents with an extra $283 a month. In today’s dollars, that is $426 a month.

If tuition increases keep this pace, a degree that costs $121,000 today will cost $484,000 in 2032. That requires a $13,600 annual investment with a 6 percent annual return starting today. On your mark . . . get set . . . GO!

A Fading American Dream

Because of the quick rise in college tuition and slow increase in income, a college education has moved further out of reach for many students. One of the reasons why students who take out student loans will be saddled with debt for decades after graduation is because they can no longer reasonably work their way through college.

A Reddit post in which a user compared the cost of tuition per credit hour at Michigan State University (MSU) in 1979 to 2014 recently went viral. The user said, “A credit hour in 1979 at MSU was $24.50, adjusted for inflation that is $79.23 in today’s dollars. One credit hour today costs $428.75.”

The Atlantic elaborated and said that with 1979’s $2.90 minimum wage, a student with 15 credit hours per semester could have paid for all 15 credit hours with three weeks of full-time work or six weeks of part-time work. With today’s $7.25 minimum wage, it would take 59 work-hours to pay off 15 credit-hours. That equals 22 weeks of full-time work or 44 weeks of part-time work.

With youth unemployment about 15 percent, many recent graduates are underemployed and cannot find adequate jobs to help pay off their student loans. Many have jobs for which they do not need a degree, provide a low hourly wage and have little upward mobility. This will slow their gains in on-the-job experience, promotions and salary increases that will push the start of their peak earning years beyond their mid-thirties. Forties is the new thirties when it comes to money.

Many millennials continue to live with their parents and are not progressing through stages of life such as getting married, having children and buying a home that previous generations enjoyed at the same age. Fewer weddings, honeymoons, home purchases and renovations, and children have a negative impact on the economy of today and in the future.

The National Association of Realtors recently highlighted student loan debt as a major reason why many would-be home buyers have either delayed home purchases or dropped out of the housing market altogether. Student loan debt has slowed the improvement of a one-time shining economic star.

Not only has the widening gap between college tuition costs and incomes hurt the housing market in the near-term, it will have negative long-term consequences because millennials are not reproducing at a sufficient rate. You know we have a problem when 20-somethings are not having enough sex.

A little known fact is that there are more millennials today than baby boomers. Without sufficient population growth, millennials will not have a generation to adequately support them in about 50 years. They will be a burden on the economy because there will not be enough workers to adequately fund social programs such as Social Security and Medicare.

 Wolf of Campus

While young workers’ individual and company-sponsored retirement plans suffer, college and university endowments that range from $574,000 to $32 billion have seen returns that would make most investors as giddy as Glenn Quagmire. Endowments grew by 11.7 percent in 2013 and averaged 7.1 percent year-over-year for the last ten years.

In 2012, USA Today quoted Lynne Munson, an adjunct research fellow at the Center for College Affordability and Productivity, who said, “Colleges and universities are sitting on more wealth than has been amassed by any other group of non-profit institutions in the history of our nation – including private foundations. Tuition accountability is long overdue.”

To make matters worse, a new trend concerns us that ties college presidents’ annual merit raises to performance targets such as GPA and graduation rate. In theory, this sounds logical. In practice, this is as sound as U.S. Tax Code 162 that tied corporate executive pay to shareholder value. U.S. Tax Code 162 is why employees became a liability and shareholders became the bell of the ball over the last twenty years.

Just as tying corporate executives’ pay to shareholder value has given corporate executives a laser-like focus on quarterly earnings, tying college presidents’ pay to performance will likely lead to lower graduation standards and an inexplicable surplus of 4.0 GPAs.

 What You Can Do

Parents are often advised to save a lot, early and often. As we discussed, this is impossible for many and next to impossible for more. This advice is inadequate, abstract and outdated.

New parents must save more and save correctly for future college expenses. Sallie Mae recently reported that only half of all American families currently save for college. 45 percent of those that do save for college do so in low-yield savings accounts, rather than college savings accounts such as 529 Plans and Coverdell Education Savings Accounts.

High school graduates need to determine if a traditional, four-year college is right for them. Today’s high school seniors need to be more open to alternative education, such as vocational and trade schools. College-bound students must think creatively and take advantage of a combination of options to manage college expenses, such as advanced placement courses and college-level proficiency tests.

Consumers have the power of the purse. To take on more student loan debt only permits colleges to increase tuition more. Colleges and universities should better leverage their fat coffers to slow tuition growth.

Students must be more financially mature than their parents were at the same age. Personal finance is a topic that high schools around the country must add to their curriculum. To not teach personal finance in high school sets kids up to make financial mistakes that are harder than ever to overcome. If your local high school does not offer a personal finance course, petition them to do so.

Finally, we wrote the #MoneyConscious Student that is available for preorder on iTunes and Barnes & Noble now. It is an eBook for high school and college-age students to prepare them financially forany post-secondary school and manage expenses while there. We discuss viable alternatives to four-year colleges, creative ways to directly pay for and subsidize school and detail steps to keep expenses low so students have less debt to pay off upon graduation.

If you enjoyed this article, please visit us regularly at www.DebtFreeGuys.com, like us on Facebook and follow us on Twitter. Visit the Debt Free Guys’ Book page for updates on how to preorder and purchase the #MoneyConscious Student.

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