$37,172

That is the AVERAGE student loan debt for a college graduate this year. [i] Considering that 71% of students graduating from four-year colleges carry some student loan debt, [ii] it is little wonder that an avowed socialist promising free college for everyone almost became the Democratic Party’s nominee for President.

Maybe we don't all agree on the policies for how to pay for anything, but it is hard to dispute the value of a secondary education. Researchers say college grads earn about $1 million more than those without degrees over their lifetimes.[iii] For that reason alone, we should try and encourage as many qualified folks as we can to go to college, right? If more students go to college, they in turn would earn more income. Earn more income, pay more taxes, take less public support, and generally feed a virtuous cycle.

The idea was so appealing to the masses that the Democrats have adopted free college and student loan relief into the party’s platform. Free college and no more debt. How could that be controversial? If you're getting the benefit, it sounds like a great deal.

Who isn't in favor of a government program that pays you money? I took the GI Bill and a paycheck from the US Army Reserves in college to help ends meet (with some strings attached). Just to be clear, I view taxes as a reasonable cost of living in a country that affords me and my family the freedoms and security we enjoy, albeit I sure wouldn’t mind if someone out there would like to pay mine. 

While we wait for that to be sorted out, I propose a more Accountable approach. One that doesn’t rely upon someone else paying their "fair share". 

Most of the time, when I discuss college planning with a client, we look at the cost of attending the schools that we think may be most appropriate based on Junior’s grades, ambitions, and preferences. We consider the type of school most likely to admit the prospective student along with the estimated costs of attending said institution. The average costs for college, according to my financial planning software MoneyGuidePro®, are $96,244 for an In-State Public College (4 years, including books, tuition, room/board) and $191,324 for a Private University.

Neither option is particularly cheap, but being flexible can result in dramatically different outcomes, financially speaking. Let’s look at a couple of scenarios that I’ve discussed with clients recently. Both had kids accepted into multiple public and private schools

The first student, we’ll call him Ken, wants to attend Baylor University. MoneyGuidePro® says it will cost $52,834 per year. Mom and Dad have saved up about $100,000 in a 529 plan, but figured they could contribute another $15,000 per year from current income. The difference of $51,336 over four years will have to come from either scholarships, Ken's earnings (yes, working through college is still legal), or loans. Because of their income level, they almost certainly will receive no tax credits or grants. It’s not hard to see how a loan balance approaching $40k for a typical student is easy to accumulate by graduation.

Let’s say Ken graduates in four years with $40K in debt. If he then pays it off over the following 10 years at an average interest rate of @ 6.5%, he’ll spend about $5,564 per year in principal and interest retiring the burden. 

The second student, Barbie, wants to attend Texas Tech University. Instead of going directly to Lubbock, she is open to staying home to attend Austin Community College for her first two years. The cost for ACC is about $10k per year, if Barbie lives at home. If she then transfers to Tech for her junior and senior years, her costs will increase to about $19k per year. Mom and Dad had been thoughtful enough and able to put away about $60,000 in college savings, so in this scenario, it looks very likely that Barbie will be able to graduate with no debt as long as she does her part academically.

Since she won’t have a student loan to pay off, she could spend the 10 years after graduation maxing out a contribution to a Roth IRA (currently $5,500 per year) instead of paying off a loan. Even if she decides to stop contributing at the end of that decade at age 31, those 10 years of Roth IRA contributions growing at 8% per year would be worth $1,272,281 at the current Social Security Full Retirement Age of 67. In other words, figuring out a way to pay for college with no debt could easily result in having $1,000,000+ more than Ken, all things being equal with earnings, by retirement age.

You know what they say? A $1,000,000 here (from being a college grad), a $1,000,000 there (from planning and discipline), and by retirement you could have some real money to Bern. 

At ATX Portfolio Advisors, we believe that education is one of the best investments we can make. To that end, when we manage college savings through a 529 Plan, we do not charge an advisory fee on those assets. If you would like to discuss college cost for a child or grandchild, get in touch.

[i] newyorkfed.org here and here and clevelandfed.org here

[ii]  Ticas.org

[iii] https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci20-3.pdf