The Cost of College in 5, 10, and 15 Years
As a senior advisor for College Confidential, the world’s largest college forum, Sally Rubenstone is an expert on all things college. But last year, when her son Jack started at Tulane, she began to understand the subject from the perspective of a parent.
Despite the fact that Sally and her husband, Chris, had been saving for Jack’s college expenses since he was born, he chose Tulane over the more expensive University of Pennsylvania. This was partly because going to the Ivy League school would have meant taking out student loans on top of the robust college savings his parents had amassed.
“I think that sending a child to college is probably one of the biggest expenses that a lot of families are going to face,” Rubenstone said. “For some families, the cost of a four-year college education could be greater than the house they live in.”
While Rubenstone knew how much her child’s education would likely cost, many parents aren’t certain what price their kids will have to pay.
Mark Kull, a wealth management advisor with Northwestern Mutual, has parents come to see him all the time to get his advice on saving for college, and few understand how much they’ll need. But he believes it’s critical to know how much college will cost: “You need to know where you’re going in order to get there,” he said.
Whether your child will be going to school in 5, 10 or 15 years, it’s important to understand the costs to help ensure you’ll be able to save enough.
The Price of College Today
In order to understand how much college will cost in the future, you have to understand how much it costs today. According to College Board, the average cost of tuition, fees, room and board for 2015-2016 was $19,548 for one year as an in-state student at a state school and $43,921 for a private college. That adds up to $78,192 for four years at a state school and $175,684 at a private college.
Thankfully, financial aid reduces that cost for students who qualify. But for many families, paying for college is a struggle.
“It’s the middle-class families that can be the most overwhelmed,” Rubenstone said, “because they’re the ones who often qualify for little or no need-based aid. They end up taking on the most loans to cover the costs since they don’t have the resources to pay out of pocket.”
The Price of College for Your Child
When Kull helps clients determine how much they will have to save, he assumes that tuition will go up 5 percent per year—which is how much they have increased annually over the last 10 years.
If that trend continues, that means that in five years, a four-year college degree will cost $107,532 at a state school and $241,606 at a private school. Since many students now take five or six years to graduate, that could further increase the costs.
If you currently have an 8-year-old son or daughter, his or her college costs will be even higher: $137,241 at a state school or $308,358 at a private college. And if you have a toddler who won’t be attending school for another 15 years? Be ready to pay $175,159 for a state school or a whopping $393,551 for a private college.
Those numbers can scare parents. “The thought of how much college will cost keeps me up at night,” said Jennifer Bright Reich, who has two sons, aged 11 and 9. But Bright Reich, who owns her own publishing business, isn’t letting that deter her from trying to save as much as she can.
“As a parent, my job is to prepare them to be good, productive citizens,” she said. “One of the best ways to do that is to encourage and support their education.”
How to Save for College
The key to saving for college is to start as early as possible, said Kull, since compound interest will help your money go further.
Rubenstone managed to save for college for Jack by being thrifty and doing things like choosing to buy used cars rather than new cars.
Bright Reich, meanwhile, has been saving $100 per month in a 529 Plan for each of her boys since they were born. She manages to do this by getting her kids involved in budgeting. They sit down together to discuss what they can afford to buy each month.
Kull believes that a 529 Plan, which lets you save for college in a tax-advantaged account, is a great place to put college savings. But many of his clients also use non-traditional ways to save for their children’s schooling, such as buying permanent life insurance policies and utilizing the accrued cash value to pay for college costs. Since the money isn’t earmarked for school, there are no penalties if you don’t use it all for college, as is the case with 529 Plans, on which you’ll pay a 10 percent penalty on any money you withdraw after college costs are covered.
The Sacrifices Are Worth It
Helping children go to college is a key financial goal for many families. “It’s important to parents to help their kids go to school,” Kull said, “either because their own parents helped them or they struggled to pay off loans.”
But he cautions that parents make sure that they’re planning for their own financial future before they start saving for college. “It’s important that you have an emergency fund built up and proper insurance, and that you’re on track for your retirement first,” he said.
While Bright Reich still has a way to go before her sons are in school, she is happy to make the sacrifices necessary to save for school while still meeting her own savings goals.
“The sacrifices are worth it,” she said. “I know that I’m working as hard as possible to save for the future, and I’m doing my best to prepare for college and retirement.”
Northwestern Mutual Investment Services, LLC (NMIS) (securities), subsidiary of NM, registered investment adviser, broker-dealer, member FINRA and SIPC. All investments carry some level of risk including the potential loss of principal invested.
Each method of utilizing your policy’s cash value has advantages and disadvantages and is subject to different tax consequences. Surrenders of, withdrawals from and loans against a policy will reduce the policy’s cash surrender value and death benefit and may also affect any dividends paid on the policy. As a general rule, surrenders and withdrawals are taxable to the extent they exceed the cost basis of the policy, while loans are not taxable when taken. Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon policy termination or the death of the insured. Repayment of loans from policy values (other than death proceeds) can potentially trigger a significant tax liability, and there may be little or no cash value remaining in the policy to pay the tax. If loans equal or exceed the cash value, the policy will terminate if additional cash payments are not made. Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans.