[Editor's Note: Today's post is from an article I wrote for ACEP NOW. I've written about the plan for how my kids will pay for their college, but in this article, I introduce the concept of The Four Pillars (a nod to Bernstein) of Paying for (your kids') College.]
By virtue of their high income, a physician's family situation is likely to differ significantly from that of the average student's family. Average students and parents will fill out a Free Application for Federal Student Aid (FAFSA) or the similar College Scholarship Service (CSS) application and discover a difference between the parents’ Expected Financial Contribution (EFC) and the cost of attendance at their chosen school. That is not the case for the typical children of physicians.
College Financial Aid Isn't Likely for High Income Families
What this means is that your children will not receive any need-based grants or scholarships, nor will they be able to take out federal and state student loans, at least as undergraduates, unless they are able to be considered independent from you (marriage, military service, or children). The exception to this is with a Direct Unsubsidized Loan ranging from $5,500 to $12,500 and available to students regardless of financial need.
Children of high-income professionals may still want to fill out the FAFSA just in case, especially if there are multiple children attending expensive schools at the same time, but don’t expect much. In addition, some schools require the FAFSA to be filled out in order to receive merit-based scholarships.
Financial-aid planning is the process whereby some middle-class families may benefit from making the difference between the EFC and the college’s cost of attendance as large as possible. This requires an understanding of what counts on the FAFSA (or CSS) and what doesn’t. Then you transfer your assets from those categories that count (taxable investing accounts, savings accounts, 529s) to assets that do not (paying off debt, retirement accounts, life insurance).
The theory is that this will allow students to get need-based grants and scholarships as well as to be eligible for loans. Most physicians will not benefit much from this process due to their high income. They will be much better off spending their time, effort, and money increasing their savings to help pay for college.
There are four pillars to successfully paying for children’s college education. Every situation is different, and it is likely that one or two of these pillars will be more important in your scenario than the others, but the larger the contribution from each of them, the easier the task will be.
The Four Pillars of Paying for Your Children's College
#1 School Selection
Far too many parents together with their children choose a school without paying attention to the value received for the price paid. The cost of tuition and fees varies dramatically from one college to another, not to mention the cost of living in the city the school is located in and the price of travel between your home and that city. There is also some variation in the quality of education and peers at each school. But paying no attention whatsoever to the price tag is a huge mistake. High-school seniors have chosen their college for reasons as silly as, “I thought the houses in the town were pretty,” or “The dorm rooms seemed nice,” or “My friend is going there.” In reality, if cost isn’t one of the top three considerations in choosing a school, a mistake is likely to be made.
This approach argues for attending a state university in your home state most of the time. Exceptions can be made for inexpensive private colleges and, perhaps for a very bright child with particular career goals, one of the premier national private universities, assuming it can be afforded.
An even less expensive option can be attending a community college for the first two years prior to transferring to a state university to get the final degree, but there is usually a significant drop in educational quality that comes with that approach, which will make a difference for some students depending on their educational and career plans.
#2 The Child's Contribution
This includes merit-based scholarships for athletics, academics, musical ability, or anything else. It also includes the child’s savings, part-time work during the school year, and full-time work in the summers. Many students have learned their spare time as high-school seniors is better spent applying for hundreds of scholarships than working for $8 an hour scooping ice cream. However, an 18-year-old is an adult and could be expected to work for pay. College is a busy time, but it is rarely so busy that students cannot work part-time while attending. An education may be appreciated more when part of it is paid for by the student.
#3 College Savings
Hopefully, most physicians will be able to save something for their children’s college in between the time they pay off their own student loans and the time children enroll. The federal and many state governments have offered to help via tax breaks.
The two main types of savings accounts used are:
Contribution Limits
ESAs are hampered by a low contribution limit ($2,000 per year) and no state tax break. Contribution limits to 529s are much higher and vary from one plan to another. To stay under the Federal Gift Tax exclusion, you'll want to contribute no more than $15,000 per year for each spouse. 529s have another useful option where you can even “front-load” up to five years’ worth of contributions.
529 Savings Plans vs Prepaid Tuition Plans
Each state offers a 529, but some are better than others. While most 529s are “savings” plans, which can be used at any school in any state, others are “prepaid tuition” plans. With prepaid tuition plans, if you do not attend a school in that state, you may not be able to transfer the full value of the 529 to an out-of-state school. For this reason, tread very carefully when choosing a prepaid tuition type 529 plan.
State Tax Deduction
To make matters more complicated, some states offer a state tax deduction or credit for using their plan, some states offer a deduction or credit for using any plan, and other states offer no deduction or credit at all. When choosing a plan, first see if your state offers a tax break and, if so, whether it requires you to use your state’s 529. If so, use that plan first. If not, or if you have already maximized the state tax break, then choose one of the top plans in the country with good investment options such as those of Utah, Nevada, New York, or Ohio.
Tax-Free Growth
The largest benefit of an ESA or 529 plan is that the money, once contributed, grows in the account and is withdrawn from the account tax-free, as long as it is spent on legitimate education. If the money ends up not being needed, the beneficiary can be changed to another family member, including yourself. Unneeded money can also be withdrawn penalty-free, although not tax-free, if the child gets enough scholarships to pay for school.
The earlier you start saving for college, the more of the heavy lifting the portfolio can do, thanks to compound interest, and the less you will need to save.
#4 Your Current Earnings
The final pillar is your current earnings. This is the main reason the FAFSA or CSS calculates your EFC to be such a high number. Typical physicians will discover that their EFC is something like one-third of their annual income plus 6 percent of their non-retirement investments. It is true that for most physician families, a significant portion of the college expense can be simply cash-flowed.
Unfortunately, one of the main benefits of cash flowing at least some of the cost of college is that tax credits and deductions are phased out for many high-income professionals. The American Opportunity Tax Credit ($2,500 per year) starts phasing out at an adjustable gross income of $90,000 ($180,000 for married filing jointly). The Lifetime Learning Credit is a 20% tax credit on the first $10,000 of eligible tuition and related expenses ($2,000 maximum). The LLC phases out between $58,000 and $68,000 ($116,000 and $136,000 MFJ).
Should High Income Families Use Student Loans to Pay for College
Notice that there is no pillar called debt. There is little reason for any student to have student loans when finishing a bachelor’s degree, especially the child of a physician. Certainly, there is no reason for the physician to take on additional debt such as Parent PLUS Loans or a home-equity line of credit to pay for school. If the cost cannot be covered with savings, the earnings of the child, and the earnings of the parent, consider choosing a less expensive school.
If you put it all together, college education for the children of a physician should not be a terrible financial stress. Consider a school with tuition and fees of $21,000 per year and a cost of living of another $15,000 per year, for a total cost of attendance of $36,000 per year. The child should be able to make $5,000 in the summer and another $4,500 during the school year with relative ease. Perhaps there is also $2,000 in scholarship money. If the parents also saved up $50,000 prior to enrollment, an additional $12,500 per year can be spent. That leaves just $12,000 per year, or $1,000 per month, to cash flow. That should be easily doable on a physician income.
What do you think? How will you pay for your kid's college? Which pillar do you think will be the most significant? Did your children qualify for any need-based aid? Why or why not? Comment below!
Just curious. Do you have any evidence to substantiate that claim. ‘. An even less expensive option can be attending a community college for the first two years prior to transferring to a state university to get the final degree, but there is usually a significant drop in educational quality that comes with that approach, which will make a difference for some students depending on their educational and career plans.’
I just wonder if a 2 year community college student who transfers to a university and graduates really has any disadvantages.
I don’t know of any hard evidence, but during ugrad I helped a family member with their science coursework at the local community college, and the rigor of that class would have left them woefully unprepared for the MCAT. Also research is almost a requirement now for med school entrance, and community college has no such opportunities. I suppose you could try and get some in 3rd year before applications go out, but you certainly won’t have a pub and most PIs won’t want someone they’ll only have for a year.
Depends on what you mean by disadvantages. I suspect if you do well at the CC and go on and do well at the university that no one is ever going to look at your transcript and hold that against you. But I have a hard time buying that a CC course is taught at the same level as a university course. The caliber of students is generally significantly different. Can I prove it? Nope. Do CC administrators argue all the time that because there is no research focus they actually teach better? Sure. Do I buy that argument? Nope. I know the kids going to CC and the ones going to university. They’re not the same caliber of kids. Is doing CC for a couple of years in order to dramatically reduce educational debt probably a good idea for many? Sure.
The caliber of the students and their likelihood of success at university is more a reflection of the socioeconomic reasons that have them in cc instead of university. Usually meaning poorer, working, other home obligations and no outside help. These things just make it hard. I dont think its the caliber of kids as the underlying driver as it is their circumstances for the most part. This will of course have a major impact on what happens to them regardless.
CC can actually be great for the first couple years, classes are smaller and there is more interaction with teachers. Agree most cc probably dont have amazing education, but probably true of many run of the mill universities as well.
I actually went to a cc for the first two years, and it was excellent. I was supporting a family and working full time and wasnt up to college level education yet. I had just decided that being a doctor was a good idea. Where I went was great. Transferred to university which seemed a lot easier than cc courses, but that was likely reflection of knocking out prereqs etc…
Can it save money? Probably, but dont follow it up by going to one of the most expensive private medical schools in the country and a very long training program, because that will ruin any tiny up front savings.
I agree with WCI here. I hate the argument at CC for two years and then transferring to a four year program is equivalent to staying at the same program for four years. I went to a four year in-state university. While there I worked 20 hours a week to help support myself because I have no parental support. I also volunteered at the same medical clinic for four years and I had four years of the same extracurriculars. I had professors that knew me all four years to write a letter of recommendation from those extracurricular activities. Without a doubt being an active member of the same four year institution allowed me a leg up on medical school admissions.
I worry that the current advice to do two years at CC and then transfer does a disservice to lower socioeconomic students without great mentorship like myself. I worry even more that if I were an 18 year old high school grad today that I would not have been able to afford my alma mater’s in-state tuition with grants and working 20 hours a week and I would have been forced to take out loans for undergrad.
I would never suggest two years at a cc as a “good” idea, especially when considering a competitive profession. The upside is small and negligible long term and the downsides though may only be perception. are however real. Does anyone actually advise this? Why miss out on the university experience if you dont have to, cc is something that is done because you have to, not for any other reason. If you’re doing maybe something less serious than I can see the appeal, but even then, more fun times at a university.
If you’re a determined and good student it really doesnt matter what you do, your results will speak for themselves. I really dont think the majority of people looking even realized I had gone to a cc, they just scanned the grades, mcat, and letters.
Only speaking as a university guy with no experience in comm coll, I have a hard time thinking you’re gonna get a lot more out of Chem 101 or Bio 101 where there are 400 people in the class compared to a community class, assuming you use the same textbook and you study. It so happened that our orgo prof wrote the textbook. Well, for his lectures, he just read the textbook to the class of 300+. What a rip-off.
The grade curve at a university will force you to learn the material better. My local CC has a graduation rate of 12%. People from my state U that couldn’t pass organic, inorganic, or physics would take them at the local CC, ace them, and get transfer credit all the time.
We hope to lean primarily on the 529 plan to pay for college (Pillar 3). Pillar 4 will be used if Pillar 3 falls short. We plan to save enough to be able to pay for private school, but there will be a gap between the private school we’re willing to pay for vs. state school (i.e. we would pay for Harvard over state school, but not a private school that’s only slightly better than the state school). Most doctors think their kids are amazing and will go to a top school, so it’s hard not to plan for that possibility.
My plan. I went to an Ivy on financial aid because my parents are bad with money; why should my kid be denied that because I’m good with money/ have a high paying profession? But as an Ivy grad the kid’ll have a hard time convincing me to pay as much for a private midlevel school. State would be as good IMO and we can buy a bigger sailboat.
Excellent post.
In my experience, many parents (and students) don’t pay much attention to the cost of their chosen college. Then once the bills start rolling in, the parents are shocked at how much it actually costs them. Tuition (+R&B) should always be considered in choosing a school.
As you stated, physicians are unlikely to get any need-based financial aid, so we need to plan ahead.
There’s nothing wrong with a kid bearing some of the cost of college. Even if it’s just their own spending money. I waited tables all through college (and even part of med school). I think you value the education more if you have ‘skin in the game.’
We have 529s for both of our children. The oldest is in college (state school) and it hasn’t been a hardship at all. We planned ahead and have her funded through college and at least part of graduate school, if necessary.
WCI, would you also comment on the money needed for education after Bachelor’s? Medical school, law school, MBA etc. How to plan or budget for that?
We’re actually considering halting GI Bill coverage of senior, part of junior year if kid is set on law /med school etc. but not clear to me if the timing will net us much. And since she went out of state where they charge in state to GI Bill students, senior year could cost more than law school. Hope she’s established residence by that time if that is the plan.
I think another aspect is to consider how going to a 2-year CC will affect your overall scholarship at the next university. If you enroll in a 2-year and then transfer, you will be eligible for transfer scholarships, but not for first time freshman scholarships. The latter tend to be better in my experience, but clearly some math would have to be in play to make the best decision. Also, you will have to check that each credit received at the CC will actually count at the next University. Just for full disclosure I enrolled straight into a 4 year state university out of high school, and finished with no debt and probably a little over 20,000 dollars paid to me. I had the scores to go to a more “prestigious” school, but my decision paid off since I am now nearing the end of my second year of medical school. I have a sister that went the 2-year, then transfer route, and it certainly does have some of the problems I mentioned.
Correction sent in my email: Apparently even with no difference between the Cost of Attendance and the Expected Family Contribution, you can still borrow with a direct unsubsidized loan for undergraduate up to $5,500 per year.
DIRECT UNSUBSIDIZED……….That’s the identifying logo on the student Tshirts at my daughters med school.
The one comment on the article was enlightening. Even as high income doctors it sure is easy to feel put upon.
WCI,
Any comments regarding a physician family where one partner is unemployed or makes significantly less income. If the child is the sole responsibility of the lower wage partner and they are not married I believe many of the tax credits and need based scholarships come into play. This is just another example of “the marriage penalty.” This may be particularly helpful in some of those high end private schools that do not offer merit based scholarships.
The FAFSA asks about parents, not who lives in the home and who they’re married to or if they’re married. So if the two parents are unmarried in the same house, no benefit there.
Correct. I would add that the CSS profile (required by nearly all private schools ) asks about parents and step parents and adds the income of all to calculate family income.
Even if they are estranged?
Yes
Then what do the kids with single moms who have no idea who the daddy is do?
Depends on birth certificate
I doubt there are a bunch getting over on the system like you proposed
If the parents are divorced, and a low earning parent has custody of the child, then the child is likely to qualify for need based scholarships and tax credits. (If the custodial parent is an unmarried partner of a high earner, then the child is still likely to qualify. Just don’t marry the high earner until your child has finished college!!)
Interesting. I don’t think I realized this, but you’re right that if the parents are divorced and separated, only the custodial parent’s info goes on the FAFSA. I guess there’s a strategy there.
+1 for not getting married.
🙂
I find it interesting that there are always so many docs who are willing to spend an extra 30k for a more luxurious SUV but figure there is no additional value in some of the higher priced schools. Unlike car purchases where you could get it right next time, you really just get one shot with this. Trying the community college route for money purposes only is a bad choice in my view for those who could afford more. If you cant then absolutely work hard and make the most of things. Frankly there just arent as many “great deals” out there any more when it comes to college where you get absolutely the same thing for tons less. It is also becoming more and more competitive to get into things like medical school. Doing research and community service and the such takes a lot of time. Most admissions arent going to care a lot that you also flipped burgers to reduce your parents costs or to avoid debt. IF the child has the free time after establishing good grades and extra academic projects then working is great or IF they arent involved in other academic stuff during the summer. Sometimes i feel people make too many decisions based strictly on money. This site is primarily about good monetary decisions but it can be taken too far. I personally am an ivy league grad. I spent 8 years on active duty and additional loans to make that all happen. Great decisions all around as far as im concerned. The funny thing i find is that when people google me even to this day and come in as patients they talk about my ivy league undergrad or my military service. Nobody ever asks about my medical training.
oh and the divorce for money gain thing doesnt work. they require both parents financial info.
Spot on. Long term differences in cost for 2 years just doesnt make any sense, not when doing a professional program. Its all risk no reward.
In ’08-11 when my older kid was old enough for summer work I asked she not seek it- if she did 20 hrs/wk at Sonic etc she’d be depriving one of our neighbors primary wage earners (or at least their kid without our help brains and money wise for college) of 30-100% their income. Sure wish though I’d enforced her learning Japanese or whatever she had proposed to do instead; but that binge series watching and sleeping had her ready for harder work all school year.
I know not everyone will share my opinion, but I will not consider FI/retirement unless I had funded my child’s undergraduate education. I also consider funding their education a higher priority than paying for mine (it’s financed at 2.6%). It would be nice to fund graduate school if they go, but at this point I’m not sure if that’s realistic given the costs for 3 children. I’m planning on saving enough in 529s to cover a private education if need be. I do agree with one of the comments above – I’ll pay for Stanford or Harvard if my kid can get in (unlikely), but I’m not willing to pay those rates for Random Private University over a solid in-state school.
Regarding the student working to pay for college. For me, it makes sense to the point I can match a Roth IRA for their earned income and give them a head start. Wish my parents had done that for me. Beyond that, they have their entire lives to work, pay taxes, get sick and die. I worked 100% of my summers from 8th grade on and will not force my kids to do the same.
I worked summers from high school through start of second year med school and part-time jobs during the year in college and through second year of med school. I still had plenty of time for fun.
My parents didn’t make me work, but I simply assumed that I ought to work, and I hated asking my parents for money when I considered myself a grown man.
I worked every crappy job you can imagine alongside a wide variety of colorful individuals, and I think those experiences benefited me.
I feel like this topic really puts the personal in personal finance 🙂
Pillar 1 = Obviously the first hurdle is to actually get into a prestigious school. But I’m pretty sure my wife would sell everything I own if I suggested price be the determining factor between School A and School B.
Pillar 2 = This is where my wife and I differ. My wife believes in having our child work to at least have the knowledge of how hard it is to make money. While not everyone ends up this way, my parents paid for almost all of my education and I feel I have a rather strong appreciation for money even if I never had to learn the hard way. With just schooling and extracurricular activities alone, it harder and harder for a kid to be a kid. And to tack on a part time job or a summer job? I’m just not sure I could do that to my kid.
Pillar 3 = Like many others posting here, I expect the 529 to do most of the lifting. I plan on having it cover 3 years of a private school and cash flowing the rest so I don’t overcontribute.
Pillar 4 = I do plan on cashflowing the 4th year and any graduate schooling as I don’t want to overcontribute to a 529. I suspect I’ll have slowed down even further (as I’m part time already in terms of work). But I don’t see myself retiring completely before my child is done with schooling. If I really really started to hate my work, I’d clamp down on the spending and make sure to have enough money put away all the way through graduate school before retiring. We tend to prioritize education above everything else. (I’m sure this is a cultural thing for many people too)
You’re not sure you could ask an adult child to work when he isn’t in school? Seems like a pretty low ask to me.
My kids wanted to work. Lots of fun jobs out there: lifeguard, fitness class instructor, and personal trainer, for example. It helped my daughter immensely on job interviews during her senior year in college that she had these experiences. They were often brought up in interviews.
We were lazily funding 529 some, then oldest got tuition scholarship to state and we realized we might be holding 529 funds for our grandkids (I have no nieces/nephews dang those siblings) forever to avoid penalty withdrawals so we ate up her and her sister’s 529s for her room and board. Since youngest has GI bill already so we might not even empty her ESA (nontransferable). If you have a lot of young relatives (or kids) and are generous, well okay, but smart kids/ few of them might mean 529s are just a lousy retirement plan. (But research helps: “With a few exceptions, such as when the beneficiary receives a scholarship, the earnings portion of non-qualified withdrawals will incur federal income tax as well as a 10% penalty.” from google- guess I could’ve left the 529s alone?)
You can also roll an ESA into a 529 for the same beneficiary then change beneficiary.
I’m leaning on Pillar 3, followed by Pillar 1. Hopefully my kid is able to get a merit-based scholarship, but I’m not banking too much on Pillar 2.
My plan is to save up using a 529 plan, and whatever is in the plan at the time of matriculation is what junior gets. He’ll have to come up with the difference, if there is any, on his own.
Really enjoyed the article WCI!
Agree with others – put this in context of your other expenses as a high income family. The average American family earns $50,000 a year and survives just fine. We earn way more than average. Why would I let my kids education seem like a lower priority than nice cars, expensive vacations, bigger homes, or any of the other items that make the difference between “average” and “high income”?
For us, the best use of our modestly high income was saving for retirement and for our kids education first, then enjoying a select few of the other perks – great but not too fancy vacations, reliable but not too fancy cars, etc.
I have no problem with you sending your kids to college with your money. I do have a problem with you or your kids borrowing to pay for it.
Copy that!!! Agree completely.
I guess my poorly stated point was that with a modest (for an MD) lifestyle and some planning, if you WANT to fund your kids’ educations it is completely do-able. It only gets hard if you grow into your income without planning for whatever is important to you…
I have civilian friends with McMansions & BMWs who complain about college costs. My kids are going/did go to their first choice schools because we committed to it early on – even while having a nice lifestyle.
Good article. I think the key message is to view college as an investment in your child with an ROI. One thing that I advise friends who have kids thinking about med school is to NOT SPEND a lot on college since where you go to college and medical school have no bearing on your future salary on an MD. However, for other fields like say business a MBA from Wharton or Stern carries more weight than an MBA from a random school. This leads to more opportunities and more $$. In this case it maybe worth the extra investment.
Our plan was/is to drop $25k for each kid in a 529 upon birth and allow that to grow. When they are old enough to work I will also help them fund Roth IRAs starting at 13 till they are ready to go to college. So another $27,500 in todays dollars. Anything extra will be funded from cashflow since we will be financially independent by then. BTW, we live in a state with no state income tax therefor the 529 is not that beneficial. I also expect them to take out a $5k loan for the 1st semester so that they can see what debt looks like, how it grows and how to manage it if they don’t get that education earlier and in other ways. School loans suck, but the education on how to manage debt is worth some interest on such a small loan. Hopefully they get some merit scholarships and they can hold onto their Roths. We shall see. This plan may change depending on how the future looks.
What I am really hoping for is that over the next decade the education bubble finally bursts and prices drop to appropriate levels. Although high income earners can afford these high costs, most of the population will need to take on massive debt. It is not right for a student to accumulate $100k school loan and only make $50k/yr after they graduate. Something will eventually have to give.
Be careful with taking out that loan too early that you don’t unknowingly teach them how easy it is to ignore student loans. Our son plans to take out loans his last year in med school because he says we’ve done enough. He will get the experience of debt right before he is able to commit to paying it off.
Good advice. Thanks.
I struggle with figuring out the best way to instill good financial practices in our kids especially when we are fortunate enough to live comfortably.
It is a struggle. My oldest son did a paid internship during college. He called in a panic after he received his first paystub, asking what happened to all the money. Since then, he has become somewhat more fiscally conservative.
It’s fun to watch people learn about taxes for the first time. It’s even more fun the day they realize just how progressive the tax system is.
I am already paying for my oldest to got to an expensive (but highly ranked) private college. He loves it and I am thrilled to provide the funding. I went to an Ivy and am really glad I did and grateful to my parents for paying.
I would gladly work another year before retiring to make this possible for my kids (one more in high school)
I did 529s for both kids and they have worked out great. I put regular donations in and also all the various cash gifts they got when they were young. I got a tax break where we used to live but not currently. Still the fact that withdrawals are tax free is saving me a good bit
“go to” not “got to” in the first line. Maybe that Ivy education was a waste of money!
🙂
When I was helping my unmarried partner’s son apply for college, I was surprised to learn that many private schools (other than the top Ivy League colleges) do offer significant merit scholarships. This may make an expensive private school much more affordable. (In our case, merit scholarships provided about $18,000/year of the cost of attendance. We got similar merit scholarship offers from two small liberal arts colleges.)
Parents – check out the book “Colleges That Change Lives: 40 Schools That Will Change the Way You Think About Colleges”. It pointed us to some wonderful small liberal arts schools that are much easier to get into than the Ivies, and that provide an outstanding undergraduate experience.
The problem with a lot of those scholarships is they are big for freshman year, then are easily lost or scaled back for later years when you’re kind of already committed.
I can think of no other product than college education in which what you pay for the exact same product is determined by how much money your parents make. My parents made money, but made it clear no way were they paying for a private ivy tuition. I realized taking out huge personal loans for such a high amount even in the 90s made no sense. So i made money with a merit scholarship at a state school, it worked for me. I really have a hard time understanding though given my background how it is fair to price discriminate so much based purely on parent income. Its like private ivy education tuition is like a highly progressive income tax where you have no vote.
Can anyone come up with another product where price paid is so dependent on income aside for income tax?
One could point to the extremes of the (low) income bracket and say that they don’t pay the equivalent (or anything) for phones, utilities, food, housing, and healthcare expenditures. But you’re very right – there are few other products that I can think of that price discriminate like higher education does. What universities do belongs in every economic text under first degree price discrimination. There are several reasons for this.
First, the universities simply CAN do this because they’ve fooled everyone into thinking that the value is there. Second, they are incentivized to this based on two competing metrics that underlie their rankings. Few colleges can make active decisions to differentiate themselves based on selectivity or SAT scores. Therefore they turn to the other metrics they CAN control that determine their rankings in US New and World Report. The first is spending. Simply put, the more they spend per student (faculty salary/benefits, total amount), the higher ranked they are. Faculty salary is 7x more important than faculty to student ratio. Look it up. This incentivizes higher and higher costs per year. But they know they can’t pass these on to all income levels or they’ll turn people off and hurt both selectivity and the second component of the rankings – financial aid. The more aid they give in an average package the better their overall ranking and value rankings are. Thus, colleges want to milk the hell out of those who can afford it and they want to give high aid packages to those who can’t. Not only does this create price discriminating behavior, but it encourages steep drop-offs in aid.
What is more, colleges (and this goes for all of them) don’t price their degrees based on the underlying value. At my alma matter (a very highly ranked school and master of the above discrimination game) you pay the same amount for a degree in Romance Studies as you do in Computer Engineering. All of this is pathetic and displays poor leadership. It’s also why I wrote a nasty letter to them this year explaining why I stopped giving them my money this year. A few notable exceptions (Utica, Rosemont) are hacking their tuition by 43% and ending the discrimination game. Let’s hope others follow.
This is one reason why I’d love to see the federal government get out of the loan business and make that the role of the universities: let them bear the risks of their high tuitions and student loans. That would control the tuition inflation as much as anything. Or if not that, at least freeze all federal money for student loans on universities that raise their tuition more than the rate of inflation. Of course, that would also encourage these new D.O. for-profit medical schools to start their initial tuition fees at sky-high figures.
I like the idea of making the universities responsible.
Completely agree. But I would take it one step further. No federal funding PERIOD for any colleges increasing their tuition by more than inflation. No federal grant money would destroy a university and their endowment. Call it a game of chicken, but they’d change their tactics before the president’s pen hit the paper. Take a look at the financial statements of some of these bigger name institutions. They rake in hundreds of millions in federal grants every year. It’s not a game of chicken when you know the other guy is going to flinch first.
I have been (or rather will be) on both sides of this issue. I grew up middle class and it was surprising to compare financial aid offers when I was choosing colleges. Rice was a “top value” at the time, but even though its tuition was $10-15k lower than other schools it would have cost my parents no less out of pocket. Even the EFC at Harvard was pretty close, though I would have doubled my undergrad debt there because their package had both Stafford and Perkins loans. I ended up at a top-ranked liberal arts college and loved it. I am still grateful that the school (and, indirectly, the parents of my wealthier classmates) subsidized a good portion of my education.
My kids are still a decade away from college but if they/we end up going the private route it looks like I’ll be paying forward the help I got to someone else’s kids. So I guess I look at it that the system is set up to increase the socioeconomic diversity of colleges and universities because they see a value to that (and, more cynically, it helps their rankings). Yesterday at my son’s cub scout meeting I wrote a $280 check so that a needy kid from the community could participate in scouting. The big difference is that was voluntary (although I guess you could choose a different/cheaper school).
It will be interesting to see if the economics of higher education has changed by the time my kids go to college. Will some of these middle-of-the-road private schools go bust because parents don’t see the value/ROI? Will the proliferation of online degree programs accelerate this, or will they continue to be viewed as inferior? (For all I know in some fields they aren’t viewed as inferior even now.)
I think that’s exactly what we’ll see. The colleges no one has ever heard of will slowly disappear. Princeton isn’t going anywhere and neither is your local community college. But the newer for-profit colleges and lots of these tiny liberal arts schools without much of an endowment will be the canary in the mine.
How about health insurance? Maybe not your parents, but you. Lots of “progressive” things in life.
https://www.whitecoatinvestor.com/its-not-just-our-tax-system-that-is-progressive/
I would add a 5th pillar and call it “shorten the college experience”
With a motivated and smart kid, there is no reason they can’t get a semester or even a year or more of college credits in high school by taking the CLEP exam, AP courses, etc. There are even many hybrid classes now that count for college credit, often a collaboration between the high school and local community college.
Shaving a year off college is a huge cost savings. I would rather my kids use this tactic than work a minimum wage job every minute of their free time (although small amounts of earned income are healthy) or take out loans.
One thing I would also add, it’s getting tougher to graduate in 4 years due to availability of classes. This is a sneaky way college costs are increasing. Paying for a more expensive school that actually has the class availability and gets the kids a degree in 4 years make be the better value than a cheaper school where everyone graduates in 4.5 or 5. There is opportunity cost here in addition to financial cost.
Great point, and another sneaky tactic they use. My alma matter is probably going to stop allowing the lowly 2 AP credits max. This is going to inspire more summer courses (of course at more tuition), or an additional semester. Highly ranked colleges know they can get away with this because their 4 year graduation rate is ridiculously high (see also research on grade inflation at those schools) and adding another semester or summer of courses isn’t going to hurt them in the US News and World Report ranking metric that looks at graduation rates. This is all a game. Speaking to WCI’s pillars, the first is perhaps the most important. With 529 savings left over it can be extended to graduate schools or certificate programs that are becoming increasingly necessary or in vogue. First pillar makes the others go a lot further.
That’s my hope. I’m hoping between # 1 and # 2, my # 3 can go mostly toward grad school especially since # 4 may be minimal in grad school.
I would also add that the use of the various pillars will depend on how many children you have and how far apart they are spaced. For children who are close in age, paying for college from current earnings would be more challenging, especially if attending private schools.
We have 3 kids, with 4 years and 5 years between them (not intentional). We committed to paying for undergrad (primarily with 529s), but not necessarily for grad school. Our oldest is graduating this year from an awesome private regional engineering university on the East Coast. He’s graduating in 5 years because this school requires a full year of paid internships (co-ops). He spent that year working at a defense contractor and an aerospace company making $20-25/hour, and he even had a match to a 401K and living expenses! Since he only has about $5k left in his 529s, he’ll use the money he made to help pay for his masters. Hope the younger two follow suit.
Yes, tough to cash flow multiple kids at the same time isn’t it?
My brother and his daughter earned engineering degrees in five years with co-op programs, and they had terrific experiences. They earned great money in college and had virtually automatic job offers.
I went to the University and the CC at the same time, cut a year off college that way. University wouldn’t allow more than 18 credits a semester, so I had to enroll at the CC to eek it out. Then went to a 3 year dental school. Only regret was not doing High School in 3 years.
I never understood the 5,6 or even 7 year bachelors many kids are getting now .
I’m in the lovely position of having my oldest stepdaughter start college in what will be a grand total of 3-years after I finish training. Nothing like saving for a home downpayment, having 2 teenage drivers, paying down my own student loans, and paying for college expenses at the same time, right? 🙂 Thankfully she is going into nursing and that our in-state university only has a tuition of $6300 per year. For anyone moving to a new state or in a similar position, be sure to check and see how long funds need to be in a 529 account before they can be used for college expenses. My state will take back the state tax deductions if it hasn’t been in the account for 3-years. Unfortunately, by the time I caught it, we won’t be able to use 529 plan until second semester of Sophomore year, but so it goes.
Interesting. First time I’ve heard of that issue.
That is Montana’s 529 plan. I have seen other states who have “claw backs” if funds are used within a certain time frame after opening them.
Long time lurker. Probably posted a few times, many moons ago. Tow kids, so beginning to think about college.
A couple of posters commented that they would pay for Harvard or Stanford, but not for other expensive pvt schools. I too am of the opinion that a degree is a generic product (and I am an academic :))and other than Harvard for private equity/wall street jobs, or HYSP in general, is there any point in going to a more expensive Ivy such as Cornell? Some people say that the undergraduate pedigree matters, but I am not sure?
In the unlikely event that my kids will get into HYSP or MIT (for eng), I would not mind forking out (although it will be an extreme sacrifice), but not sure about cost/benefit of Cornell, Brown etc. Do others have any insights?
My prejudice is it’s not worth it. Harvard for me wasn’t really a convincing benefit. Throughout life people have voiced that they’re impressed with my CV eg Harvard, but maybe that’s just interview small talk. For all I know it made some people think I wouldn’t be a good fit or they wouldn’t like me. (It lost me a job at the tire factory on a semester off living in NC. They thought I was a union organizer.) So at a subsidized rate due to my parents’ lower income it WAS worth as much as I’d’ve paid since every college except my dad’s employer would cost the same or more.
One interviewer was most impressed by my paratroop wings. He said he had to offer me a job lest I kill him. (in the UK, where paratroopers are more Green Beret than ‘only’ five time or repeat parachutists)
Nice summary, as usual. The first pillar is always an interesting conversation. I think it may have the widest potential variance (but also potentially the most important). Do you want to go to medical school but go into family practice and go out into a rural setting? Probably best to go state school for undergrad, state school with good FP program for med school and residency in low COL area. But do you want to go into business and work for a Fortune 500 company right out of college? Probably best to go to a top 20 private school with a top business program. Obviously those things are opposite ends of the spectrum, but everything in between is relative too.
I went to a top private undergrad, which I’m certain helped me get into a top private med school. One of my cousins went to state school undergrad, state school med school, state school residency and now practices in same said state. Both very happy with our choices. Another cousin went to second tier directional state school due to getting a full scholarship, graduated with a 4.0 from there but could only get into one med school and flunked out first semester due to being poorly prepared for the academic requirements. That cousin is not as happy with life choices. So future plans/goals certainly should play a huge role in college and grad school choice, potentially in lieu of (but not disregarding) cost.
I work with students in a top quartile medical school and from what I have seen, there are usually many drivers for a student to leave or fail out of med school. Lack of ability, especially if they were a 4.0 undergrad, would be very uncommon. I have worked with excellent students and surgical residents who went to low ranked universities, and I have worked with mediocre and entitled residents who went to Harvard and Yale.
What list are you referring to when you refer to a school as “top quartile?”
US News and World Report and Startclass rankings. I will be the first to admit that rankings are artificial, and many administrators attempt to game the system for rank. True for med school, and true for undergraduate education as well.
It wasn’t lack of ability that was the issue. It was the poor preparation received at the division II lower tier school. My cousin was only the second person out of the school to even get into a med school over a three year span. That alone tells you all you need to know. My small enrollment private school puts 80-100 kids into med school every year.
There are missing elements to this story. Plenty of people go to low-ranked/no-name undergrads and do fine in med school. It takes pretty unusual circumstances to fail out so quickly.
I think getting 4.0 because you’re much smarter than classmates, and never needing to study/ learn to study because that 4.0 comes so easily, could be a cause. As a smart kid I did 4.0 high school then ?3.5 college with minimal study habits (job and social life took up a lot of time). Smart enough not to flunk med school with my poor habits but my ‘dumber’ classmates might be better doctors for their better diligence (plus sometimes better med school grades for competitive residencies) and I more often I bet have to Google musculoskeletal and dermatome schema when I want to avoid embarrassing myself with Ortho and Neurology referrals. So if you hit med school with my crap study habits but only the brains to get in to low-ranked college I could understand purely academic failure.
Really important and great read as my wife and I have planned for our 2 kids education. They are only 2 and 1 years old but my experiences show just how important it is to plan ahead. I took out loan for the full cost of my private college education as there was poor planning on my parents’ part (who are not physicians but were moderate income earners). I got some scholarships for academics and sports and also worked part time but these loans have certainly been a burden.
Contrast this with my wife who was awarded a Gates scholarship that paid for all of her undergrad and graduate studies and it’s quite a difference.
One note though regarding school choice. This is a tough one for me because I certainly could have decreased my loan burden by choosing a cheaper school. But would I have ended up where I am today? So in the end I don’t regret that I went to the best school I could. But I recognize my orients neglecting important pillars and will not make the same mistakes!
The Prudent Plastic Surgeon
The data suggests that yes, it is more than likely that you would have ended up “where you are today” but that is obviously not absolute. For some small percentage of people it is entirely possible that the school made a difference. The tricky part is that it is impossible to know in advance if you are in that small percentage!
Community college: I know of upper class kids (not doctors’ kids though) who wash out away from home. (Alcohol, etc.) If no local U such a kid might need a year or two closer watch from home at a CC. But if parents didn’t provide that adequately to make the kid responsible in high school, kid might have to leave town before Mom and Dad see the need.
In reverse though- my dad prejudged kid 3 as not worth paying for college out of town. (Kid 2 coming back home partly to blame, dad’s money issues also) I think that was a mistake- her personality and resentment? of not getting same chance to leave town might be reason she didn’t complete college unlike kid 2 and I (#1).
I always find the idea that an 18 year old who can vote and die for her country needs to be “watched by her parents” interesting. I left home at 18 without looking back and am continually reminding my children that they will be adults at that point and have the power and responsibility to make their own decisions and suffer the consequences. Obviously an 18 year old is not a 30 year old, but I’m amazed at how many people have a different idea about this sort of thing than I do. Maybe those who are footing the bill for college feel a need/ability to have more input on their childrens’ lives.
I am fortunate to live in a state with truly excellent state schools. Therefore I see almost no reason to pay for private or out-of-state, unless a merit scholarship brings the cost down to the level of a state school. My parents had the same deal with me and I thought it was more than fair. I do think it’s worthwhile for the student to have a job, if nothing else for spending money like going to the movies or buying nicer clothes.