Is College a Worthwhile Investment in the New Economy?
by: Smith and Howard Wealth Management
If the 24-hour news cycle’s barrage of bad economic news is impacting your kids’ college game plan, I have some good news: our economic future is brighter than you think.
News reports supporting the idea that times are tough or that our country continues to be on a downturn don’t tell the whole story about our economy or the future our college-bound children can look forward to.
What the Data Tells Us
For example, you may have heard that job growth and incomes are stagnant or that college loan debt is higher than ever. But research by the Federal Reserve and the Brookings Institution tells a different story. In their Survey of Consumer Finances released in June 2014, they report that while the unemployment rate is quite high – 11% – for workers who fail to earn a high school diploma, it goes down from there, depending on how much education you have: 7.5% for high school graduates, 4% for a bachelor’s degree, and 2.4% for a professional degree (i.e., medicine, law, architecture, accounting).
What’s more, incomes track educational attainment. Those with professional degrees earn a median income of $89,000, a bachelor’s degree holder hits a median of $57,600, high school graduates average $33,900, and those with less than a high school education earn a median salary of $24,500. Workers who are more educated are also more insulated from the financial challenges of unemployment and they earn better incomes.
Doomsayers are focused on the notion that as a nation, we don’t “make anything” anymore, and when you look at the continuing downward trend in manufacturing, this can seem like a worrisome development. But look closer and you’ll see that, measured in dollars, the U.S. actually makes more goods today – high-tech goods like engines, turbines, and smart phones.
So, yes, those who fail to adapt to changes in the economy are more vulnerable to the globalizing economy and more likely to experience dwindling incomes, but prospects for college graduates are much brighter. And while it is true that the unemployment rate at graduation impacts grads’ earning potential for years, the good news is that currently that rate is low.
Investing Intelligently in Education
In spite of “news” to the contrary, there is in fact good value in a college education – and it can be achieved without crippling debt. If your child is a good fit for college, it’s going to be a wise investment, but it’s going to be expensive, and the advertised price does not include the cost of board, books, travel, or cost of living. If that advertised price is $35,000 per year (the current average for private, four-year colleges), once you factor in the additional costs and multiply by four (for four years in college), you’re looking at around $200,000 per child.
Fortunately, a good financial planner can help you develop effective strategies for reducing the cost. For example, our client and her son found the status of an Ivy League degree very compelling. The cost for that degree would have been significantly higher than for other colleges under consideration, and it would have caused the family to save less for retirement and work longer. While we acknowledged such a degree could open a door or two, we also pointed out the true value of such a degree in terms of career preparation may not be borne out in light of the high price. When you think about it, five or ten years after graduation, few of us are discussing where we went to college when we interview for a job. By then, it’s more about work experience.
Hearing this perspective helped our client engage in a more thorough decision-making process. Considering the earning potential and career prospects of the degree their son sought, they determined earning it from such an expensive school was not the wisest investment of college savings.
Weigh All Your Financial Goals
Be sure to think about your entire financial picture as you make your plans. Too often, we see parents commit to high education costs at the expense of their own retirement. That’s a recipe for tough times. Keep in mind: there are many different ways to pay for college. A student can earn a scholarship or grant, borrow money, do a work-study program, or start at a two-year college and then transfer to a four-year school. But there’s only one way to pay for retirement. You either have the money or you don’t. The bottom line is you need financial planning for both.
The More You Save Now, the More You Can Spend Later
There are lots of ways to save, but don’t let choosing between the various plans and investment vehicles stop you from putting money aside. The point is to live beneath your means and to start saving early, when there’s still plenty of time for savings to compound. And if you’re getting a late start, don’t let that stop you: Any savings are better than none.
Factor your timeline in to your plan as well. Funds for college should not be in the stock market if you’re getting close to your first tuition payment. Someone who did all the right things, started early and set aside funds every year, would have lost all that good work if their child started college during the crash of 2008. We often advise clients to gradually transition funds into more conservative investments as the student progresses through high school. And beware that even target date plans that are on “auto-pilot” are vulnerable to stock fluctuations.
Smith & Howard Wealth Management, Your Family CFO
It’s plenty to think about, but planning for college expenses doesn’t have to be complicated. At Smith & Howard Wealth Management, our objective advisors can help you organize your information, assess your specific situation and provide the insights you need to make the wisest choices for your family. An Atlanta wealth management firm for 15 years, and a top fee-only firm in the nation as ranked by CNBC/Meridian-IQ we’ve served as the family CFO to hundreds of families. We listen and help them understand what wealth means to them and what they want to accomplish with it.
Feel free to call me (404-874-6244) or send me an email if I can answer any questions about the value of a college education or how to ensure your family is ready for all the financial demands of college and retirement.
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