By Craig Erwin, Ph.D.
At a wedding yesterday, I spoke to a man with three daughters about how expensive it is to raise children. I joked that Mr. Smith’s (not his real name) three daughters would cost him and his wife a fortune (compared to my two sons) because he would obviously need to pay for three weddings for such beautiful daughters. But as we talked, I learned that some of his decisions and actions were likely to have an even bigger financial impact on the Smith family.
Mr. Smith teaches at a state university in Connecticut, like I do, which should enable him to save a fortune on college costs, because his daughters are able to attend any of four state universities or any of twelve state community colleges tuition-free. My older son, Stefan, is currently attending a private university tuition-free because his mother works there. Stefan lives at home and drives one of our old cars, but, since he has a job, the most noticeable expense Stefan’s mother and I have had during his two years at the university are his student fees, which amount to roughly $1000 per semester.
So, which state university is Mr. Smith’s oldest daughter attending? The University of Wisconsin in Madison. Why? His daughter not only refused to live at home and commute; she wanted to attend a university far from home, not a local one. Her parents agreed to foot the bill, but gave their daughter an ultimatum; she had to choose a state school, not a private one, to keep expenses down. Unfortunately, in assuming that state schools would be inexpensive, the Smiths forgot that their daughter would have to pay out of state tuition. The total annual cost to attend the University of Wisconsin for a nonresident is $53,613, not the $26,553 that residents pay. Of course, she could have attended a Connecticut community college or university practically free if she lived at home and commuted because there are several Connecticut schools near her home.
Instead of paying relatively little (e.g., daily commuting and lunch costs, student fees, and textbook costs) to send their daughter to a Connecticut school, Mr. Smith and his wife will end up paying $214,452 for four years. And they still have two younger teenage daughters to send to college. The total cost to send three children to the University of Wisconsin as nonresidents (without considering inflation) would be around $650,000.
Many college graduates have painfully high student loan debt, which can take decades to pay off. But transferring the college debt load from students to parents (as the Smith family is doing) is a terrible solution. It means that parents may approach retirement with sizable student loan debt taken on to send their kids to school.
Although the Smith’s daughter is likely to graduate from college with little or no debt, her parents may be saddled with plenty. If they also pay for her sisters to attend the university of their choice, Mr. Smith and his wife will enjoy a much less comfortable retirement than they might have otherwise and may even have to postpone retirement for years. Even without considering inflation (and higher education has seen consistently high inflation for many years), if the Smiths send all of their daughters to schools with costs similar to UW Madison, they will have to fork over more than a half million dollars more than they would have if their daughters had received free tuition and lived at home. In contrast, the average 401k balance in the USA, according to Fidelity Investments, is $123,900, far less than the college bill for just one of the Smith’s children.
If there was an easy way for me to avoid spending a half million dollars, I would jump at it because it could mean a lot more than an extra half million dollars to spend in retirement. If instead of spending a half million dollars on college, you invested it in the stock market over a twenty year period (assuming an 8% return), you could expect to end up with $3,029,622. That amounts to an extra $151,481 a year to spend in retirement (assuming a twenty year retirement). $151,481 is an awful lot of money compared to the average annual social security payment of $18,516 that retirees receive.
A few years ago a colleague of mine investigated why so few faculty at the University of Connecticut have sufficient retirement savings. He found that frequently, instead of having their children attend the University of Connecticut tuition-free, faculty send their children to expensive private schools. As a result, many faculty accumulate student loan debt when they should have be accumulating retirement savings. The end result of these actions is likely to be either delaying retirement, retiring with significant debt, or living far more frugally than necessary in retirement.
Wanting the best for your children is only natural. Of course you want your children to prepare for rewarding careers at the best schools and achieve their potential, but it is naive and short-sighted to fail to consider carefully the consequences of sending your children to expensive schools. It may cost you the ability to retire comfortably and may even cost you the chance to retire at all.