By Dr. Jim Dahle, WCI Founder
We have seemingly endless discussions around here in the blog comments section and on the forum about paying for private school, both for K-12 and for college. We had an awesome discussion after a Pro/Con post a few months ago (Should Your Kid Go to a Private School?) that was particularly enlightening. The bottom line in the comments section was that the differences from one public school to another and from one private school to another probably dwarf the difference between the average public and the average private school. Not to mention the entire discussion delves into serious life topics including religion, politics, child-rearing, race, upbringing, culture, and even financial philosophy. Today, however, we're going to focus entirely on the financial aspect of this decision. Everyone acknowledges that private K-12 is a “big rock” when it comes to your finances so with this post I'm going to discuss just how big that rock is. As you read, keep this caveat in mind: If you can afford private school while meeting reasonable financial goals and you value it, spend your money on whatever you like. That's economics- we splurge on what matters most to us and (hopefully) economize elsewhere in order to afford it. Okay, on to the post.
Public or Private Is the Wrong Question
When discussing private vs public school, I think most people are asking the wrong question. They're asking a simplistic question:
Should I put my kids in the public schools or should I pony up and pay for private school?
Should my kid go to State U or Fancy Private University?
I think the right question is this one:
Would my kid prefer
- A private education or
- A public education and a choice between a free, comfortable retirement at 50 or a luxurious retirement at 60?
The Opportunity Cost of Public vs Private
You see, paying for private school very early in life involves a cost that many don't consider- the opportunity cost of that money compounded over decades. So while I acknowledge it is quite possible that a private school could provide a superior education to a public school in many instances, my argument would be that the education often isn't sufficiently superior to justify the cost. Let me explain.
The local private K-12 closest to my house is $24K a year. If we assume 5% real returns on that money, by the time that child is 60 years old, the cost adds up to $3.5 Million
- =FV(5%,13,-24000,0,1) = $446,367
- =FV(5%,42,0,-446367,1) = $3,464,516.55
Multiply that by 4%, and that's an annuity that pays $139K a year in today's dollars starting at age 60 (or $85K at age 50). That's like a nice military retirement without that pesky 20 years of military service. Quibble with the numbers all you like, but it's a massive sum anyway you look at it, especially in a multiple child household.
What If You Include College in the Cost?
It gets even worse if you include the cost of college. Consider the cost of in-state tuition at the flagship state university here in Utah. It's about $7K a year. If you live at home, your living expenses should be very inexpensive, perhaps a few thousand. We'll call it $10K for ease of calculation. Or your kid could go to NYU at $52K a year, plus another $18K in living expenses for a total of $70K. Let's consider the difference ($60K per year) How does that change the figures?
- =FV(5%,4,-60000,0,1) +FV(5%,4,0,-446367,1) = $814,100
- =FV(5%,38,0,-814100,1)= $5,198,417
Multiply by 4% and that's $208K a year. Or retire 10 years earlier on $128K a year. I don't think I need to add grad school into the calculation to make my point. Most physicians don't retire on $200K+ a year.
So really, it's your choice. Fund your kid's private education or fund their public education AND their early retirement. It's the same price. I know which one I would have chosen as a kid if it had been presented to me like this.
Now, to be fair, most parents with kids in public schools aren't saving the difference and giving it to their kids for their retirement. They're spending it themselves on wakeboats, vacations, Teslas, or their own retirement. But they could. And doing the math illustrates just how big a rock that a private school education represents. It likely costs more than your own professional education, your big fancy doctor house, and even your transportation costs. It's a big resource commitment, so make sure it's worth it to you.
Comparing Big Rocks
What if we compare this “big rock” to other big rocks? The typical big rocks cited by white coat investors include the following:
- Location (State taxes and Cost of Living)
- College Education
- Private K-12
Let's take them each one by one and try to make some kind of comparison or ranking.
Yes, the ticket price is large and the maintenance cost (typically 2% of its value), upgrade costs, insurance costs, and tax costs are not insignificant. But working in its favor are two factors- # 1 it is consumed over many years and # 2 you get a fair amount of the value back out when it sells. Consider a $500K house. Let's say there's a $400K 4% mortgage and a $10K annual property tax bill. The 30 year mortgage payment is =PMT(4%$,30,400000,0,0) = -$23,132 per year. Add on the taxes and it's $33,132 per year. Add a couple thousand in insurance and $10k in maintenance costs and you're at about $45K/year. Maybe it appreciated 3% this year, so that's $15K added back in. Plus even in year one you paid down about $7K in principal with those payments, so we'll subtract that too. That leaves you $23K per year. Let's compare to private school. We'll just use the local one close to me, although there are obvious more and less expensive schools around the country. $24K/year. I've got four kids, but let's assume this is for a family with just two- $48K/year, more than twice the entire cost of housing.
A big part of location-related expenses is the cost of housing, addressed above. If you're in a place where you have to buy a million dollar house (or more) then that could get you into the range of having two kids in private school. But another big consideration is state income taxes. In Nevada, a doc making $300K is paying $0 in state income taxes. In Utah, that same doctor is probably paying something like $12K in taxes. In California, that tax bill is probably more like $24K in state income taxes. That's only one kid in private school.
What about expensive cars? Well, I think you can drive a beater for a cost of about $1K/year (including depreciation and repairs, but not gas and routine maintenance.) A much nicer car bought new likely costs about $5K/year, a $4K/year difference. Even in a two car household, that's only $8K/year, 1/6th the cost of private school.
Let's say you plan to have a very nice 529 for each kid- $200K, by the time they turn 18. If you assume 5% real returns on your savings and you start when they're born, that'll cost you =PMT(5%,18,0,200000,1) = $6,800 per year, or $13,600 for two kids. Far less than the $48K/year private school bill.
You can spend a lot of money on vacation. If you rarely go, and drive your car and either camp or stay with family when you do, perhaps you can get away with $1,000 per year. Two international trips for four? That could be $30K/year, a $29K difference. Still less than the cost of private school tuition.
So where does that leave us if we're trying to rank these in some kind of objective way?
Big Rock Rankings
- Private School
- Fancy vacations
- Location/State Income Taxes
- College Education
Yes, this is a process that is very individual to every family. Some families will have four or more kids in school. Others are talented travel-hackers who go to Asia for cheap. Others live in Manhattan and scoff at what a mere $1M would buy and don't think a $75K car is “nice.” But any way you slice it, private school is nowhere near the bottom of the list of “big rocks.”
What do you think? Is it fair to look at it this way? Would you actually consider giving your kid the money you would have spent on their private education? Why or why not? How would you rank the big rocks in your life? Comment below!