By the time you finish this sentence, the National Student Loan Debt Clock will have ticked off another $25,000.
The average debt for a college graduate is now more than $37,000, up 6 percent from the previous year. Even if Johnny Grad is lucky enough to land a loan at 2 percent and pays off $300 a month, it will still take him more than 11 years to dig out.
So who can blame Mom and Dad if they abandon all college investment hope for a big bet on bitcoin? Or empty the chump change from a 529 piggy bank to buy a raft of Powerball tickets? Because tuition rates are soaring far out of control — with few, if any, in higher ed ready to shoulder responsibility for it.
[Read: How to Keep Track of Your Student Loans.]
But you could blame Congress, says Ric Edelman, executive chairman and co-founder of Edelman Financial Services
“By providing so much loan assistance, Congress gave higher ed the ability to raise costs exponentially,” Edelman says. “If you have to pay cash because loans are not readily available or affordable, you won’t agree to high prices — forcing sellers to keep their prices low.”
It’s a lesson plan right out of Intro to Capitalism 101 at the University of Hard Knocks.
“As long as there are consumers able and willing to pay increasingly higher tuition, universities will price their product accordingly and offer a discounted price to others, based on their ability to pay and level of demand,” says Scott Swartz, vice president at TFC Financial Management in Boston. “Schools’ pricing power also seems to benefit from a sometimes-held perception on the part of consumers that price equates to quality.”
Nor do many institutions make it easy with award letters that don’t seem to say what they mean.
“Most colleges actually have the temerity to label parent and student loans on their award letters as financial aid,” says Jack Schacht, co-director of the college funding team at My College Planning Team in Naperville, Illinois. He cautions that if parents read the fine print, the letters distinguish between “self-help” aid versus “gift aid.”
“Only that portion referred to as ‘gift aid’ does not have to be paid back,” Schacht says. “‘Self-help’ aid is nothing more than the government direct student loans, Parent Plus loans, and work study.”
Certainly, 529 accounts can make a dent in college costs. These tax-advantaged savings programs are formally known as “qualified tuition plans,” and all 50 states and the District of Columbia sponsor at least one form. Particularly advantageous is the prepaid tuition plan, which allows account holders to pay future tuition and fees at current prices.
Still for many, the collegiate conundrum boils down to this exam question: Is investing for college even worth it? The answer is yes, so long as it doesn’t interfere with investing for retirement. But like saving for retirement, starting early is better, especially because the costs of attending college keep rising.
In the early 1970s, a year of tuition, room and board at Michigan State University cost about $900. In 2018, an in-state student at Michigan State pays more than $29,000. Granted, $900 back then equals about $5,000 today.
[See: 10 Investing Themes to Remember for 2018.]
Mike Fanning, the head of MassMutual’s domestic U.S. insurance and retirement operations, says that his company’s college savings calculator “estimates that a family with a 5-year-old child entering kindergarten today can expect to pay a hefty amount when their child enters college in 2030.”
How hefty? For a private four-year college, try $368,739 — enough to buy two single-family homes in Springfield, Massachusetts, where his business is based.
But if your offspring has reached that tender age, now’s the time to get cracking.
“Age 5 is an interesting tipping point because that’s when many parents can stop paying for full-time child care expenses,” Fanning says. If a family takes $200 spent on weekly child care and starts tucking it away, then by high school graduation, “more than $135,000 will be saved for college.”
Yet that’s about $234,000 off the mark, a number that practically screams “second mortgage.” Nor is it easy to explain the value proposition of a college education in hot entrepreneurial fields such as high tech — not when Mark Zuckerberg, Steve Jobs and Bill Gates all made their billions without a single sheepskin between them.
Yes, but … “The reality is that the majority of Facebook (Nasdaq: FB), Apple ( AAPL) and Microsoft ( MSFT) employees went to four-year universities and many went to the most selective schools in the country,” says Chip Baker, head of decision intelligence and policy at Cinch Financial in Boston. “Statistically speaking, there is little to no chance that parents have the next tech titan living under their roof.”
Remarkably, there is another side to investing for college where you can buy equity in a student.
In this scenario, private investors give collegiates money in exchange for future income share, up to 10 percent over 10 years. It’s being tried at Purdue University under its president Mitch Daniels, the former governor of Indiana. While it might sound like indentured servitude, or a fancy-pants way of dressing the sow’s ear of student loans in a silk purse, it has a compelling equity-versus-debt spin that could bolster underfunded parents.
You can also turn underfunded into fully funded without so much as a single extra dime on the table.
“It’s often more a question of mindset,” says Beth Blecker, a registered financial consultant in Rye, New York. “Unless your child is a top-tier student attending a top-tier school, they might likely be better off at a state or community college. Why pay $40,000 per year when you can pay $25,000?”
Or you could pay the hard way, literally via the bargain basement.
[See: 7 of the Best Stocks to Buy for 2018.]
Blecker sums it up like this: “Families frequently don’t consider the ramifications until their adult child, thanks to the financially-smothering effects of college debt, returns to live in their basement.”
More from U.S. News
8 Cheap ETFs to Build Your Nest Egg
7 Investment Fees You Might Not Realize You’re Paying
The Top 10 Investment Portfolio for Millennials
Why Investors Must Start Early to Save for College originally appeared on usnews.com
