Note: This article is part of Morningstar's November 2013 Investor Starter Kit special report. This article originally appeared Sept. 9.
Christine Benz: We're talking about college funding today. Adam, give us the State of the State. You say one of the first questions that people should ask when they are thinking about college funding is just to get their arms around how much college will cost. What are the current statistics on how much college costs, such as with private schools versus public schools, and in-state versus out-of-state.
Adam Zoll: Christine, anybody who has been following the headlines knows that the cost of college has been going up and up, even beyond the rate of inflation recently, and currently the average of tuition, room, and board for a four-year in-state college is roughly about $18,000. If it's for an out-of-state school that climbs up to $30,000, and for a private school it’s higher still, close to $40,000. So, the rate of tuition inflation is continuing to outpace overall inflation. For public schools it's about 4% per year over the past decade and for private schools it's about 2% per year. But the good news is that rate of inflation does seem to be leveling off somewhat.
Benz: Why is it that schools can justify these very high costs? Because it is, obviously, a huge pressure for families attempting to afford this. What do schools say as sort of a rationale for charging such large amounts?
Zoll: One reason we're seeing families asked to contribute so much more to paying the cost of educating their family members at college is that state funding has decreased in a lot of cases, so therefore families are being asked to carry more of the load. That’s obviously not as much of an issue at private schools, but there are larger macroeconomic factors that play here also. There is competition among schools, where schools are trying to have the nicest facilities, and obviously the most prestigious faculty. So, there are real market forces at work here.
Benz: I guess a related question, Adam, given these skyrocketing costs is, does college definitely translate into a higher paycheck down the line?
Zoll: In fact, study after study does show that the more educated you are in general, the more lifetime earnings you're likely to have. For example, somebody who has a bachelor’s degree and then goes no further in school is likely to earn on average about $1 million more over the course of their career than somebody who stops after a high school diploma. As anybody who has looked at the want ads recently can attest, there are a lot of jobs out there that you have to have a bachelor’s degree at a minimum to even qualify for. So, at least getting that level of education is really likely to pay off down the road in your career.
Benz: You say that getting master’s degrees and professional degrees translates into an even higher payday down the line?
Zoll: Right. In general the higher your degree, as one might expect, the greater the salary you are likely to earn over the course of your career.
Benz: I know one question that a lot of parents try to get their arms around is this return on investment. So you often hear about the child who wants to go into social work, maybe it doesn’t make sense to pay $50,000 a year in tuition. What's your guidance to parents attempting to get their arms around this question, like how much is too much to pay given your child's career path?
Zoll: I think in a way you do have to use common sense. Somebody paying $50,000 or $60,000 a year to get a social work degree may not be a great return on your investment. I would really emphasize, there are lots of different paths to getting your education. The traditional path is going to a four-year school and getting a bachelor’s, possibly following up with a master’s. But more and more people are looking at alternatives such as going to community college, for example, or getting an associate’s degree. There are lots of different ways to get an education and to enhance your job prospects. So in terms of the return on your investment, you really need to look at what your final price tag is likely to be and consider what that is going to provide as an avenue for a career choice for the family member in question.
Benz: Adam, you also say it's important not to let your emotions cloud your decision-making. We see this in so many areas of finance. What are steps people can take to sort of keep their emotions out of the mix when they are attempting to afford college for their kids?
Zoll: Well, the decision about where to go to college, obviously, can be a very emotional one. Parents themselves may be emotionally invested in where their child ends up. The child itself, obviously, has a big stake in the matter. It's easy for that to cloud your judgment, and if the student, for example, falls in love with a school because his or her friends are going there or because the campus is beautiful, they really like the amenities…
Benz: They’ve got a great football team; I have heard things like that.
Zoll: Possibly a great football team, that is really not the core purpose of college, and for an investment that's likely to cost you possibly up to six figures. You want to really think about what your priorities should be. I would argue that the first priority should be, obviously, the quality of the education the student is going to get and also preparing them for the working world. I would just encourage people to be focused on those specific issues and not to be clouded by their emotional attachment to a specific school or what people they know are doing or whatever the expectations might be.
Benz: For families attempting to get their arms around what they'll have to pay for college and whether it's actually doable for them, what kind of recourses would you recommend?
Zoll: It depends. If you want a professional to help you, for example, you might go to a financial advisor. In fact, there are some financial advisors who specifically specialize in college planning. For people who are going to do it on their own, there are a lot of online calculators that are geared toward people saving for college. In fact, Morningstar has its own college-savings calculator. The college-savings calculator allows you to input how much you have already saved and how much you plan to save per year, and apply that to whatever your goal is, however much you expect to need once the student is entering school. So it’s a really useful tool in terms of not just setting your initial goal whenever you do start saving--and the earlier you start saving, the better--but also to sort of track your progress along the way and see if you are making progress at the rate that you are going to need to meet that goal.
Benz: Adam, thank you so much for being here to share these tips.
Zoll: Thank you.