Believe it or Not, the Cost of College Is Declining

Pretty much everybody knows by now that the costs of going to college have skyrocketed nearly 400% over the past 30 years. These increasing costs have led to a lot of bad decisions, tons of student loan debt, and parents retiring later in order to help their kids pay for higher education.

The Cost of College Is Now Declining

It might be hard to believe, but the cost of going to college is finally declining. It simply couldn’t keep going up by over 5% per year. The word is finally out that the exorbitant costs of some colleges simply isn’t worth it and going into extreme debt usually isn’t worth it either.

The average outstanding student loan is now about $31,000. Incredibly, over 44 million Americans still have student loans today. This has turned into a true crisis as those graduating with a lot of debt are finding it very difficult to buy a home and save for emergencies, let alone saving for retirement.

Because enough parents and their children finally decided to say “enough is enough”, the net cost of going to college has declined lately. By “net” we mean the costs after taking into account grants and discounts by the colleges.

But this doesn’t mean that college is still affordable for most people. The decline in net costs has been small and it is still very expensive to get a degree, especially at private or out of state schools.

Planning For College

Because it is still such a large overall expense, it is extremely important for parents to plan for any help they might be giving their children in terms of paying for college. We like to use WealthTrace for all of our financial and retirement planning needs, including planning for college.

It used to be that you had to pay a financial advisor a lot of money to help with financial planning such as this. But with all of the great financial software that has come out in the last ten years, we can now do a lot of it ourselves.

One interesting scenario I like to run is seeing how a retirement plan holds up under various college cost inflation rates. I looked at a couple that is 45 years old and has two kids. The first child will attend college starting in four years and the second will start college in six years. The parents’ plan is to just pay for the kids’ tuition, which right now is $16,000 a year.

Currently this couple is projected to have about $700,000 saved when they retire in 20 years. But that is assuming college costs move with the rate of inflation, which is assumed to be 2.5% per year. Using these assumptions, plus an assumption that they will spend $60,000 a year in retirement, they are projected to never run out of money in retirement.

But what happens if we change the rate at which tuition increases? I ran some scenarios on this and the results are below:

In the more extreme case of 5% college tuition inflation, you can see that they run out of money by the time they hit their life expectancy, which I set to age 85. This just shows how important the inflation rate for large expenses can be.

As a side note, the same holds for health care expenses. Health care expenses have been increasing much faster than inflation for years. If we continue to see this, many people won’t be able to retire when they expect to.

Projecting Future Costs Is Not Easy

Nobody can predict the future and it’s difficult to say what college and health care costs will be in the coming years. That is why it is very important to run a lot of different what-if type of scenarios on multiple variables. Always plan for unexpected expenses and have a large enough safety buffer to withstand them. By doing this you can retire with a lot less stress and not worry so much about running out of money.