Why College Planning Is a Core Part of Any Financial Plan 

Celebrating as a family member graduates from high school and attends college is the culmination of years of hard work and a joyous event. Paying for college, however, remains a significant source of stress for many households. It’s no secret that the cost of college has risen much faster than inflation over the past 40 years. This imbalance has increased both the financial burden on families while burdening many graduates entering the workforce with student loan debt. As a result, though there can be many professional and personal benefits to pursuing higher education, weighing the costs against the possible benefits makes college planning a more complex topic than ever.

This complexity is why saving for college needs to be integrated into most families’ financial plan, along with other major goals such as retirement or buying a home. What should parents and students planning for college consider today?

There are many economic benefits to attaining higher levels of education

The rapid increase in the cost of education, particularly at elite institutions, has led to questions about whether college is still worth the investment. In general, the answer to that question still seems to be ‘yes,’ though increasingly the devil is in the details. According to the Bureau of Labor Statistics, general job prospects improve as educational attainment increases. For example, the accompanying chart shows that unemployment rates were 6.2% for high school graduates but only 3.5% for those with 4-year bachelor’s degrees. In addition, the median annual earnings for college graduates were $66,700, compared to $40,450 for high school graduates. Not surprisingly, these patterns continue for advanced degrees.

That said, these statistics are averages that don’t consider individual circumstances, differences within each education level or the relative merits of various institutions. Post-secondary education is simply not the best choice for every student and in all circumstances. For example, today’s very low unemployment rates may make the opportunity cost of general education at a 4-year college less attractive, while increasing the attraction of trade schools or industry-specific on-the-job training.

Overall statistics also tend to obscure large differences in the market value of different fields of study. It’s clear that those studying highly sought-after subjects, such as engineering, the biological sciences, and business will likely have greater job prospects, making the cost of their education a better long-term investment.

Finally, both families and education advocates have begun to question the cost of elite institutions relative to other quality alternatives. For example, it’s difficult to guarantee that computer science graduates from the Ivies will fare any better economically than their counterparts who graduated from excellent public universities and have performed well in their careers.

The cost of a college education has risen much faster than inflation 

Though benefits can still be had, the sticker price of a college education has increased 800% over the past 40 years. Even after adjusting for inflation, the cost of college has increased dramatically across all types of institutions. The real inflation-adjusted cost of a private 4-year college degree rose 176% from 1981 to 2021, while public universities saw prices climb 252%. The cost of 2-year degrees has increased more modestly but has still easily exceeded inflation in most years.

Importantly, and sadly, much of this increased cost has been ‘paid for’ through increases in student debt burdens rather than through cost efficiencies or greater educational effectiveness, such as one might have hoped for in the industrial sector. As hard as it is to admit it, an investment in higher education is more difficult to evaluate than ever before in the past 50 years.

Thus, those families planning for college costs will be well served by starting to save earlier and by saving more in order to take advantage of investment returns. Investment vehicles with tax benefits, such as 529 plans, have been created with these goals in mind. Recent data from Sallie Mae suggests that scholarships, grants and relatives typically cover 29% of a student’s costs. Education consumers are increasingly shopping for value among institutions. Yet almost 20% of the total cost is still typically borrowed.

Student loans are a major burden on consumers 

Unfortunately, borrowing for college often results in a burden on graduates (and sometimes families) that must be factored into every financial and career decision. In the worst case, it may mean that graduates are unable to take as many risks or pursue their true passions if it means they are unable to generate the steady income needed to repay their loans.

At an aggregate level across the economy, student loans have ballooned over the past 20 years to $1.6 trillion, outpacing other non-mortgage consumer debt. This has led to macroeconomic concerns, with some comparing the size of student loan debt to the subprime crisis prior to 2008. While there are important differences between student debt and subprime loans, it’s likely that high levels of student debt will act as a drag on both individuals’ finances as well as on the economy in general.

As a result, the issues of both extending and forgiving student loans have become a political as well as a financial topic. Whatever course these questions may take, one thing is certain: higher education is an investment decision just like any other. And like other investment decisions, it’s important to evaluate the value (i.e., likely return) of the purchase as well as to make sure that its price is both reasonable and affordable. Such assessments, of course, can be highly individual, depending on the families and individuals involved.

We encourage you to speak with your Griffin Black advisor if you have questions about school choice, savings strategies, and other financing options regarding college planning.

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