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?
or
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
Public school defeats private school when you consider opportunity cost.
- =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:
- Housing
- Location (State taxes and Cost of Living)
- Transportation
- College Education
- Private K-12
- Vacations
Let's take them each one by one and try to make some kind of comparison or ranking.
Housing
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.
Location
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.
Transportation
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.
College Education
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.
Vacations
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
- Housing
- Location/State Income Taxes
- College Education
- Transportation
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!
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Some private schools have gotten ridiculous. I grew up in Baltimore City and we didn’t have much money, but my parents knew that if they sent me to the public schools my life would be essentially decided for me (that would include a criminal history, likely jail, and having kids as a teenager, among other things)
So I’m thankful beyond all words that they sent me to private school. But in the 70’s it wasn’t too expensive to be honest.
Your math shows the consequences of private school today as related to early retirement and it’s shocking, but in many places public schools are still horrendous. In those cases geoarbitrage is probably the best option.
Those number are certainly eye-opening to say the least. Private school is definitely a big rock, didn’t realize just how big a rock it was compared to the other big ticket items. I have only 1 child and send her to private school (she’s in grade 8 now) with tuition at 18k and probably with the all the extras bringing it up to $20k.
I have justified this expense similar to what Accidental fire just mentioned using geoarbitrage. I bought a home in a a pretty rural area and the public school system available was not ranked as high in the state. I figure that because of the geoarbitrage savings could more than compensate it, private school tuition was a good option.
Same here. Geoarbitrage. Low to medium COLA offsets 3 kids in private school and NYS taxes.
Fully recognize the opportunity cost of the post tax 24k all in (for 3 so not as bad). My kids are so happy there so I look at it as a luxury expense. One less international trip.
Or three 🙁
We are lucky to have this problem.
$24K for 3 is very cheap.
I know. We lucked out.
Still wouldn’t do it if we couldn’t save at least 20% of gross for retirement though.
Appreciate the post. You did a great job putting it in perspective. It’s more than “just 2k/m.”
A doc friend in Dallas pays 20k for one. If I moved down there it would be more expensive than NYS taxes! Granted, we’re as upstate as you can be.
I think it’s fine to make the decision to spend the money on private school. I just think it should be a conscious decision with ALL the information in hand. Many docs make enough that they absolutely CAN afford this big rock.
Agreed.
I am so pleased you wrote this article and reframed the question to include the considerable financial cost-benefit analysis. So many parents don’t see paying for private as the huge financial opportunity cost that it is. I hope that your excellent analysis encourages parents to include all the variables, and for those who choose public to actually save that money for their kids.
Education is a sacred cow to so many, but most jobs (including law and medicine) don’t require much more than a mediocre education, and last I checked reading books was still free.
It is like you said WCI. “As a physician we can afford just about anything, but we can’t afford everything.” This is a great example on how important it is to choose wisely.
Missed homeschooling in the poll!
Missed Homeschooling in the poll!
I did, didn’t I. Shame on me. Although in some ways, that is private, just really cheap (except for opportunity cost) private.
Homeschooling can run from true homeschooling (parents develop the curriculum and need to register with the state…can be very economical though time consuming) to versions of online homeschooling which range from public school district provided (can be free) to online private school (which can run up to $1000 bucks per SEMESTER COURSE….if a student takes 4-5 courses per year or more…..it’s not necessarily “really cheap”…..
Good point.
Yes to above about the poll! You’re not even mentioning homeschooling. With even the high estimates of about$1000 per child that’s far better cost to value than the above options. Even if you throw in a couple thousand more for fancy curriculum and extra curricular activities the cost difference is still staggering.
For a Family where one spouse is staying at home already, homeschooling is a very viable option and can be a tremendous way for that spouse to add financially to the family.
If the spouse went to work and earned 50k and saved it all while the kids went to public school, how would those numbers work out? How about 70k or 100k or more? The point of WCI is that all nonpublic school options have opportunity costs. Doesn’t mean you shouldn’t do what’s best for your family.
I agree unless it means an orthopedist staying home to do it.
A handful of states even kick back some public school money to home schooling families.
It’s an important conversation to have. But like you are alluding to, the most important part is making intentional choices with your money. You can do private school… But not private school, the doctor house, doctor cars, and expensive lifestyle… Unless you have done some due diligence up front.
Our kids will go public, but my wife is also a public school educator. Wouldn’t be “buying what she’s selling” if we did any different.
TPP
We had a big rock ( and another big rock not even listed)…..private school K-6 (25K/year), 7th grade homeschooled free (but traveled that year), 8-12 (55K/year). The last two years of high school were actually hybrid private school with private homeschool (those aren’t cheap by the way) I always looked at it this way in our situation…funded by passive income…Lots of physicians can successfully save for retirement on their physician income. We had a military pension coming in which started when my kid was in 3rd grade. I pretty much looked at that money as completely subsidizing all our our educational needs (nearly all of it), meanwhile our usual retirement savings never missed a beat out of our regular incomes.
Got to love a good future value calculation to show you how big an opportunity cost a purchase realy is…. It drives my wife crazy when I whip out one of these.
One of the problems with thinking in these terms is that you soon don’t want to spend any money on anything. The future value nearly always seems to dwarf the current value especially when you or in the 40 to 50yr time range.
For those seeking their own early retirement in a high cost of living area adding another “rock” to the big three is a great way to add a decade or two to your career. Big decision.
We are fortunate to live in an area with good public schools so will likely go public and fund our own early retirement instead of private school.
Excellent criticism and completely agree. However, if you spend too much, these are an excellent way to help yourself cut back. Now that meal out isn’t $100, it’s $800.
You’re giving me GERD.
I would add that there’s nothing wrong with spending very little.
Conclusions follow logically from assumptions. So when you start the calculation with $24k per year per kid for private school tuition, it follows that the opportunity cost is going to be prohibitive. In my neck of the woods, we pay $6545 for four kids to attend private school (K-8). Total of $6545, not per kid. Meaning first kid is $2500 and there are discounts for subsequent kids and fourth kid is no additional charge. Makes a big difference to the calculation. Especially since we are rural and the public schools are not good. I agree with geoarbitrage comments above. I make more because of the location of my practice and part of that goes toward my children’s education. If I were in a location with $24k/year private schools and good public schools, my decision might be different. This is not a one-size-fits-all argument. Have to take into account the specifics of each situation.
That’s a heck of a deal. Unfortunately not available in many areas.
As others have said, geoarbitrage is one of the largest factors here, because the cost of private school is absolutely offset by not only the cost of housing, but the cost of living overall. It is a very difficult argument to make for someone in Manhattan or San Francisco to pay $60k per year per child for private school k-12 and then a typically expensive private undergraduate and possibly graduate school (which is the route most go, because kids going to Columbia Prep probably aren’t going to a state or city college) unless they have bank or serious family money, but private schools themselves tend to be more affordable in LCOL/MCOL areas. There are also some LCOL areas with seriously terrible public schools or unsafe schools that make private almost a necessity, which is hard to argue against.
One thing to consider is exactly what is your expectation of private school? Anything in life deserves a cost/benefit analysis. Now that cost/benefit analysis for sure can involve more than just money, but money is at least one of the top 3 things to consider. Exactly what are you getting for a private school education and/or private college?
I went to private school up through 5th grade and also went to an expensive private undergrad. Now my parents planned well and paid for all of that and still retired at 59 and are living well. But from my standpoint, they really got ripped off. I’ve been working for 11 years now. I think I’m fairly paid. However, my same-level colleagues all went to public school and public undergrad. Same with my own boss! Do you think I’m getting paid more because of my fancy education? no! So one of my lessons learned is that it’s not worth it.
Now I did love my undergrad education, and no doubt it helped me get into a great graduate school, and that great graduate school by happenstance gave me a great network and contact that got me my first job after school. But I left that job 6 years ago. My two previous jobs I got through regular old applying online and interviewing, so not through knowing someone. Did my educational background give me a leg up over other applicants? I like to think so! But I have no idea, and I do know that I’m certainly not paid more because of my education.
My education gave me the confidence to be picky about where to accept a job, and also the confidence to look for and amazingly find jobs during the Great Recession. That is certainly worth something. But I’m not paid more b/c my parents shelled out roughly $200k (probably more…it was awhile ago). Should I be? If I shouldn’t be, why did my parents “invest” $200k when other parents invested far less actual money and their kids are doing as well as me?
All great questions. I think it matters more to some people and in some fields than others.
Different characteristics in different children also matter. The conversation thus far seems to presume an average child. Our older two (now 25 and 21) were late bloomers (my euphemism for lack of drive) and they would have become lost in a 40+ student classroom. Private school, as challenging as it was for them, raised the expectations for their performance without letting them get lost in the crowd.
My youngest, on the other hand, would’ve done well in any school setting.
We sacrificed on the kitchen and the cars to afford 25-30k annual tuition, but still were able to put away 25% of gross to retirement..
This is the key argument of even starting conversation about private vs public.
We won’t be talking about private education if we could not afford it.
Finances are important but not the MOST important aspect of this since we CAN afford it. If it were he single most important aspect than we can argue why think about finding any education. Save all the money from undergrad and grad school as well and teach your kid about financial steward ness and let them retire as early as 30’s. Why send them to college even unless it is free.
I think bigger argument or talking point should be “education”. Which often depends on your kid and his personality. If you have more than 1 kid then often just for convenience especially if you are a working couple you end up putting both kids in private school. Sometimes to make sense out of this you sacrifice small “house or lifestyle projects”.
I have no doubt that one would not “save” the money that he or she otherwise would have spent on private education. Money will get spent on something else if not on private school which for some people may not be important.
Of course, this is only a point of discussion because we can afford the private education.
All great points. It’s also important to note that the ROI on traditional education may be declining. Jobs that require education and degrees (lawyer, professor, doctor) are becoming less and less remunerative and more and more unpleasant, and many jobs (software engineer) are competency, not degree, based. While it’s true that someone might not get a 5% real ROI, it’s also possible that the ROI of traditional education will become less and less over time (it’s already happening in many fields) and that inherited wealth (see Thomas Piketty’s work) will increase in importance.
BTW, this was a FANTASTIC piece, and one of the few that has looked at the true cost-benefit equation of public vs private.
Great point- thank you for reminding me of that. I went to very average public schools but still got a scholarship to a great university and was very well prepared for college, Med school and residency. I struggle with the decision about public vs private for my own kids but I seem to forget that my husband and I have always been at the top of all our classes with all public schooling start to finish.
I’ve never bought into the argument that private school is inherently better than public school. We paid more for a house in a good school district, but our house is an asset in a desirable location that will always be desirable. Our best in state private school costs what you quoted above. I compared college matriculation data from our local high school and our local private school and learned that we have as many kids entering top schools from our public school as the local private school; there is also a lower (but not low) graduation rate from the public school and some other offsetting factors, but 20-30% of the student body qualifies for reduced lunches and may come from more difficult family situations (and we as a community do a lot to try to prop them up). If you just compare data (AP scores, national merit scholars, college acceptances, D1 athletes) of kids from similar families at both schools I believe our public school is at least as good, and possibly better. And as a family we do invest the difference in 529 accounts (though we don’t count on 5% real growth compared to tuition growth).
People should not send their kids to private schools if they cannot afford it.
Prioritizing is definitely the key here.
I worry that some may use this analysis to say “See, private school is not worth it for our kids, no matter how poor the local public schools are. But we can afford fancy vacations and early retirement”
This is an individualized decision. You have to look at the opportunities available to your kids, in your town, with your public schools, with the private schools that are in reasonable distance, considering what you can attempt to project to be the best interests of your children. It is impossible to come up with an overall answer for everyone.
Two families in the same neighborhood with similar kids (whatever that means) could make different choices if one family had a much higher income. For some that $24,000 figure, each for several kids, just would not be enough money to worry about. Maybe put off buying that second airplane. For others, that might mean not fully funding their retirement accounts. Of course they would have different decisions.
Geo arbitrage is not so simple. Where you practice can determine how you practice. If you need to be in a major academic medical center, then your choices are limited. Yes, there are some great ones in small towns, but not that many. If you think you need to be in a big city for the cosmopolitan environment, or simply to avoid being the only physician of your minority at the hospital, then those great centers in small towns may be out of the question. If the best programs for your specialty and research interests are in Boston, New York and San Francisco, then cheap housing and inexpensive private schools are not going to be options.
To a large extent the expected pay off is not financial. You want your children to get the best education, within your practical ability to deliver that. You hope this will set them up better throughout their lives and open the best choices of career and life satisfaction. Those goals are not necessarily the ones that make the most money.
Maybe it is fair to measure the top MBA programs by how much money their graduates make, since making money is such an important element of career success in that field.
But, to take an extreme example, the best law school in the country- everyone agrees it is Yale- distinction NOT because of the income of its graduates, but the prestige and influence of the jobs they hold. Federal judges and law school professors do not make nearly the money of successful Big Law attorneys. But those judges and professors could have Big Law careers if they wanted them.
The best options does not necessarily mean those that will result in the highest incomes. For income, choice of field is far more important. Study economics and engineering to make money. I don’t know whether there are advantages to doing this at MIT instead of Berkeley. If so, I suspect they are minor effects.
I share the OP’s view of the high cost of private school when you add it all up. But I think some of the comparisons put your finger on the scale.
1. I would calculate the opportunity cost of private school tuition for the parents’ retirement, not the child’s. After all it’s the parents’ money.
2. The college costs are calculated with annual 529 contributions and 5% growth. Since 529s can now be used for paying $10k of K12 private school tuition, that benefit should be included in the calculation.
3. 400k seems to be on the low end for housing for a family sending their children to a relatively expensive private school. If you increase the house price and consider a 30 year mortgage, housing costs exceed private education.
As an aside, I don’t understand how some private schools mentioned in the comments have such a low price tag. Many public school districts spend $15k/ student. Do the cheap private schools have big endowments or parochial support?
I think our district spends at least that amount per pupil.
Our property taxes reflect that reality unfortunately.
Our school is Franciscan, so no diocesean support. They make do on a shoestring and do a great job. Those of us who can donate more than just the tuition.
It does bring to light that those who choose private school are essentially paying two sets of tuition when prop taxes are factored in.
Many of the well known and long established private K-12 schools do have a significant endowment. Some private schools also receive federal funds and can further benefit from voucher programs that allow public school funds to be used to pay for the private school education. Similar thing with charter schools.
However, the reality is a hefty chunk of public school spending per pupil is simply money down the toilet. It’s a giant bureaucracy with the wasted dollars to match. Our school district (Boulder Valley School District here in Colorado ) has an annual budget of almost $300M serving 57 schools with 31,000 students. That’s not even particularly large for a school district. Denver is 4x larger with an annual budget near $1B and that’s still pretty darn small compared to highly populated states like CA, TX, NY, etc.
The typical private school serves only a couple hundred students.
You can imagine how far a donation goes when it’s applied to a far smaller group of kids.
Good points about the original article.
I totally can see paying $50-60K per year for private high school if the name is Exeter, Andover, Deerfield, or Choate [potentially libelous comment deleted]. However, I can’t see paying $40-50K per year for the local private high school that has no name recognition one time zone away.
Likewise, it seems crazy to spend $20-30K per year for private kindergarten unless you have an eight or nine figure net worth.
I find it interesting that I have no name recognition for any of the schools you mention. Maybe I’m a couple of time zones away though.
Agreed for Exeter, Andover, Milton Academy, a few elites in NYC, Boston and DC, that place in Switzerland all the politicians seem to have attended, Eton, and Harrow.
Podunk private definitely not worth it unless you are in a situation that’s most unlikely for a doctor (rural south, for example.)
1. The point was the money is going to (benefit) the child. It can go to them for education or it can go to them for their retirement. So I think the comparison is fair.
2. What? What benefit are looking at if you’re spending the money you put in each year? Are you thinking a state tax deduction (which was ignored in the original calculation?) If so, you’d have to add it both ways.
3. Sorry, just used the figures around me. Houses in my neighborhood went for the 400s when I moved in (a little more now) and the local private school (which some of the kids attend) is $24K. If you want to run the numbers in your location to see what the cost would be for you, I think that would be a good idea before making your own personal decision.
I don’t know either how they can do it so cheaply. However, I understand that Utah spends the least per pupil on their public schools and that’s $6,500, so I guess $5-10K/kid is enough to run a school system and even make a profit doing it. NY spends $21K per pupil. Beats me why there is a 3X difference between the cheapest and the most expensive other than the usual cost of living stuff.
National average is about $10K per student according to Salman Khan (founder of Khan Academy).
Wired Magazine recently published a lengthly article about an *extremely* pricy middle school ($54M) that opened August 2015 in San Francisco. Although it’s a public school, many local entrepreneurs kicked in big bucks to make it “state of the art everything” in terms of technology with high expectations of transforming the education experience. Unfortunately, there was considerable turnover in school personnel (management and teachers) leading to poor results since good teachers and principals are about the only good correlation with decent student outcomes.
The typical school district spends about 70% of budget on education salaries and the balance on infrastructure. California allocates 61% of the budget for education salaries. San Francisco allocates only 43%. In one of the wealthiest cities in the country, some teachers were making only $43K and the four rotating principals hovered just over $100K. Not exactly a living wage in SF. Wherever the money is going, it’s certainly not to the only people that could make any difference.
That’s what I meant earlier about small private schools being able to operate more effectively with far fewer dollars.
Teachers are better qualified in New York and receive vastly better benefits and pay. Building and capital improvement costs are much higher and there are more robust special education programs. You can substitute teach in much of Utah with only a HS diploma, and while the schools are fine, they don’t have the specialized schools NYC has which require a lot of money. It’s not cheap to run a school like LaGuardia, for example.
I definitely agree that private school is a big expense, but I have to quibble with a few things.
1. You assume a real 5% rate of return, which comes out to about 8% nominal. Achievable but certainly not guaranteed, and I think you should probably use a rate of return that is more conservative when making this kind of comparison.
2. You say the true question is private schools vs retirement at 50 or 60 for the parent, but then make the future value comparison when the *child* is 50 or 60, allowing compounding to take over and make the difference even larger than it already would be. 55 years of compounding? And at a high rate of return, as above. I don’t see this is a valid comparison. 55 years from now anything could happen–would you believe cash flow projections from a company pro forma that went out to 50 years? I certainly wouldn’t.
3. You state that the parents who choose public schools are not necessarily saving that money and investing it for their children. I agree. The flip side of that coin is that you don’t take into account the parents who choose private schools often sacrifice in other ways for their children. My parents sent me to private schools, but they drove old cars, spent little on clothes, lived in a modest home, and had an amazing overall savings rate. So the true number that matters is not the cost of the school itself, but how it adds to overall expenses. If they don’t save in other ways, then yes that cost just gets added onto the total.
Again, I don’t dispute that it’s a significant cost. We are sending our children to private schools though, because we think it is worth it, and we are in a position to afford it without sacrificing our other other financial goals. Others may not be in that position or feel the same way. But this is an extremely personal decision. The reason people get fired up about it is because some of the posts/comments (not necessarily from WCI) come across as judgmental, and the underlying theme seems to be that choosing private schools is financially irresponsible when the parents who choose this are trying to do what is best for their children.
All great points.
It’s also important to note that the ROI on traditional education may be declining. Jobs that require education and degrees (lawyer, professor, doctor) are becoming less and less remunerative and more and more unpleasant, and many jobs (software engineer) are competency, not degree, based. While it’s true that someone might not get a 5% real ROI, it’s also possible that the ROI of traditional education will become less and less over time (it’s already happening in many fields) and that inherited wealth (see Thomas Piketty’s work) will increase in importance.
BTW, this was a FANTASTIC piece, and one of the few that has looked at the true cost-benefit equation of public vs private. Thank you.
Interesting information. I agree that inherited wealth is going to become more and more significant as people became wealthier.
For your listening and viewing pleasure: http://www.hup.harvard.edu/catalog.php?isbn=9780674430006 and https://www.glassdoor.com/blog/no-degree-required/.
Being educated is important, but formal education may be becoming less so, at least in terms of remuneration, I think.
1. Feel free to run the numbers with your own favorite rate of return. I tend to use 5% for retirement and college and anything long term which seems reasonable to me given my long-term returns are higher than that in both types of accounts.
2. No, you misunderstand. I’m comparing public school + early retirement FOR THE KID to private school. If you don’t like my “pro-forma” create your own. The point is that you have a choice- you can pay for your kid’s retirement or you can pay for your kid’s education. Money is fungible.
3. Not sure other spending is relevant in this particular comparison, but it certainly is relevant in the overall decision of whether to spend on private school or not.
I believe I said at the top that if you can afford it, feel free to send your kids to private school. But do run the numbers and consider just how much it costs.
“400k seems to be on the low end for housing for a family sending their children to a relatively expensive private school. If you increase the house price and consider a 30 year mortgage, housing costs exceed private education.”
Depends on where they live. Multi million annual income uperstar NFL quarterbacks who live in small towns have nice houses for about that price.
I doubt the people who use private school will ever consider the numbers. Most of the doctors I speak with did not decide on private school because of the numbers. Other factors drive the decision. I have never been able to convince someone who is struggling financially to remove their kids from private school, despite showing them the numbers. I did get an e-mail recently from a past financial makeover client who told me they put their kids in public school this year and thought I would like to know of their change of heart. They were the first that I know of who changed plans.
Dr. Cory S. Fawcett
Prescription for Financial Success
I’m going to show my ignorance here and ask – can someone explain the formulas to me?=FV(5%,13,-24000,0,1) = $446,367
=FV(5%,42,0,-446367,1) = $3,464,516.55
also, is this assuming you start investing the money you would otherwise be paying for private school from the time they start public school (thus your investing period is about 55 years?). I tried to make sure I wasn’t missing the explanation in the post but I may have just looked over it.
The first formula is calculating the future value of the yearly tuition payment at the end of 13 years (k-12 = 13 years) had that money not been spend on private school tuition but rather invested with a 5% rate of return.
The second formula then takes the result of the first calculation and pushes that forward 42 years (since he is taking the calculation out to age 60, assuming one is 18 years old at the end of high school).
The meaning of the foum
=FV (rate, nper, pmt, [pv], [type])
rate – The interest rate per period.
nper – The total number of payment periods.
pmt – The payment made each period. Must be entered as a negative number.
pv – [optional] The present value of future payments. If omitted, assumed to be zero. Must be entered as a negative number.
type – [optional] When payments are due. 0 = end of period, 1 = beginning of period. Default is 0.
Wow. I get to teach something to Jason Mizell! Awesome.
That is the Future Value function in a spreadsheet like Excel. In the first function, 5% is the rate of return, 13 is the period or number of years, 24,000 is the payment or amount you put in each year, 0 is the amount you have now and the 1 means you put the money in at the beginning of the period rather than the end (it would be 0 in that case.)
In the second function, you’re no longer adding money but you’re starting with $446K.
Hope that helps.
Ha! you’ve been teaching me good stuff for years…now add Excel formulas to the list. Thanks for the clarification. I had no idea Excel was that helpful for something like this.
That is the expression that you would use in Excel.
Yes, he was assuming you invested the tuition each year, got a 5% return, and continued this all the time the child was in school. That gives you the future value at the time they graduate high school. The second expression is for taking that money, investing it all at graduation, getting a 5% annual return and letting it ride for 42 years.
Effectively, this assumes a 5% after tax real return, which is possible but optimistic. One could use more conservative assumptions but the idea is the same. It is a lot of money.
Makes sense. Thank you!!
Interesting article and I get the point. But how are you calculating the $2,126,913 figure? It doesn’t match the formulas you show below it.
I agree . I am not sure where that number comes from either.
So you guys plug this formula into Excel:
FV(5%,13,-24000,0,1)
and it doesn’t spit out
$446,367.17 ?
One of our Excel programs is broken.
Which formula do you think is wrong? Did you plug them into Excel or another spreadsheet?
Your post says “If we assume 5% real returns on that money, by the time that child is 60 years old, the cost adds up to $2,126,913
=FV(5%,13,-24000,0,1) = $446,367
=FV(5%,42,0,-446367,1) = $3,464,516.55”
The formulas are fine, but is the $2,126,913 supposed to say $3,464,516.55? If not, what does that number represent?
Ahhh…there’s the error. I must have changed a variable or something and not gone back to update the original. Fixed now.
We just made this decision ourselves (though a bit premature given my son is one) because we were buying a house and needed to decide which district to buy in. For us public school made more sense. When we sell our house the school district likely wont change a ton and the house will hold its re-sale value better based on that. A quick search on amazon and ebay suggests you can’t get a lot of re-sale value for a diploma from a private elementary school. The house in the good school district may have more upfront expense, but you have a better chance of recouping it when it is time to sell compared to no chance of getting your money back on a private education.
To be fair, our property taxes are kinda nuts, but it’s still cheaper than private schools around here. Plus high property taxes is part of the bargain when you live in Texas. No state income tax, but the government will always get their money in some form or another.
One of my sister lives outside of Memphis. I want to say the tuition for 4 kids was about $24k, which is a heck of a deal given how some of the other private schools compare. They don’t live next to a “great” public school, but I’m of the belief the family unit matters more than the school’s ratings. Of course, there are a ton of factors at play. She briefly pulled the youngest 3 out to do a cheaper private school when she taught there a year. Whenever she talks about moving them to public school to save money, the kid will actually scream in protest. :/
3 daughters, public the whole way. All three MD’s. Money saved has been applied to helping the entire families financial planning. Left over assets in 529’s have become a skip generation investment. We also optimized Roth IRA’s, HSA’s, and other obvious cost reductions suggested by WCI. Only be reading a few years, but had implemented 95% of the strategies prior to Reading WCI. Was once frugal, now value buyer! Have the house, boat, vacations and toys. But, have always lived like a resident at least 3/4 of the time. Some things, you just gotta HAVE! Have been able to help others, with my financial assets too (usually a bad idea, don’t lend what you can’t afford to lose). Reading WCI, reinforces good strategies toward financial success.
Yes, best to give money rather than loan it. Not only do you not expect it back, but you’re likely to lose less. You might be willing to lend $100K, but would only give $10K. So you give the $10K and the relationship is preserved.
Private school for my kids (not a doctor)
Both of us parents went to private schools through “junior high” (where they ended) then to public high schools, and frankly found our public schools lacking in academic rigor.
Not expensive since my spouse teaches at the private school where our kids attended Kindergarten – 12th grade. 🙂
Both kids went on to private schools for undergrad.
The private schools offered much better financial aid (via campus-based ROTC scholarships) than any public school to which they were accepted.
One “big rock” not mentioned is the $12k per child “spent” on public schools. For those with unsafe, poor performing public schools, wouldn’t it be great to be able to use that money for private school?
I really see homeschooling becoming the norm over the next decade. With gangs, fights, porn addicted adolescents, standardized testing, wasted time, inedible lunches, no morality, and no parental control over public schools becoming the norm, and private schools being too costly for many parents when they’ve already paid for the public option, I see more and more parents pulling their kids home and then setting up co-ops for socialization and activities. Add a few teachers paid by the parents and were back to the 1800s. Given that the students going through 8th grade in those days were better educated than many college graduates today, that might be a good thing.