College Planning IS Retirement Planning: The True Costs of College

College comes at a very inconvenient time for parents.  At a time when they should be saving for retirement they are often going into debt or dipping into their savings to pay for their child’s education; and expectedly so.  We all love our children and desire the best for their lives.  But we really need to understand the costs and, more importantly the losses we assume taking on this task.

In another article we show factual information that upward of 50% of students will not finish in four years.  In fact, studies show a great majority of those who don’t finish in four years will end up taking 6 years or more.  Here’s a quick rundown of those stats:

  • According to the NY Times, 1 in 3 students will transfer to another school.  Most of these transferees will require additional courses to be taken that didn’t transfer from their first school.
  • Eighty percent of college-bound students have yet to choose a major.
  • According to an msnbc article, “50 percent of those who do declare a major, change majors — with many doing so two and three times during their college years…”
  • According to the College Board, five- and six-year students are not uncommon. Roughly 40 percent of those who start a four-year degree program still have not earned one after year six.

Assuming your student is that 1 in 2 students, let’s take a look at what that looks like in terms of costs over the six years for an average state school (avg cost of $22,300)

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$22,300 $22,300 $22,300 $22,300 $22,300 $22,300

Total Cost of 6 Years         $156,100                
Cost Of The Extra 2 Years         $44,600  

Consider also, this is just one student!  I know many of you have at least two, and some have three and four.  But let’s stick with one for now to help bring all this into perspective.

The Cost College Inflation

Inflation of college is typically twice the rate of our national inflation rate.  That works out to roughly 6% a year.  And that’s not simple interest; that’s compound interest!  When we add in the cost of college inflation, those same numbers look like this:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$22,300 $23,638 $25,056 $26,560 $28,153 $29,842

Percent Change:                    32%   increase               
Dollar Change:                       $7,542                
Total Cost of 6 Years:            $155,560                   
Cost Of The Extra 2 Years:    $57,995        

College Is Paid For With AFTER Tax Dollars

Now let’s REALLY put things into perspective.  College is paid for with after tax dollars.  It’s not how much the college costs, it’s what you have to earn to pay those expenses.  As it currently stands, the average tax rates for the middle class family is around 25%, including federal, state, and local taxes.  Not to mention tax on the sale of products, property tax, and tax on your car.  Some of you are in a significantly higher tax bracket.  Let’s take a look at the same figures above adjusted for earnings needed to pay the net cost of college at a 25% tax rate

Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
$22,300 $23,638 $25,057 $26,560 $28153 $29,842
$29,770 $31,557 $33,450 $35,457 $37,584 $39,839

Total Cost of 6 Years         $ 198,979
Total Earnings Needed     $ 207,658
Difference in Earnings and Cost     $   52,109     

WOW!  What was supposed to be a four year, $89,200 investment in education is now a 6 year, $265,302 dollar monster!  But were still not through!  Let’s take a look at something we call “lost opportunity cost”
Lost Opportunity Cost
Remember how we said parents should really be saving for retirement during those college years?  Well this brings that point home.  Let’s assume that rather than giving that $198,979 dollars to a college (investments are still after tax), you put that same money into an investment vehicle.  Let’s also assume you got a modest return of only 8% annually.  Many of you average about 20 years until retirement hits.  Let’s take a look at how much this would grow to using these assumptions.

Year 1
Year 5
Year 10
Year 15
Year 20
$155,549 $228,553 $335,819 $493,429 $725,010

A difference of $569,460!

So this education isn’t just costing you money now, it’s taking your ability to invest that money.  This is the power of compound interest and it’s critically important you understand these concepts.


We have a saying, “You can borrow to pay for college, but you can’t borrow to pay for your retirement”.  We understand your devotion and desire to provide for your children, but we need to be realistic and understand the true costs of what we’re dealing with.  Before you make a decision on where to send your student to college consider the following:

  • What’s the four year graduation rate at this school? 
  • How many years should I plan for?
  • What does that cost me after inflation?
  • What do I need to earn to pay that?
  • Will I have enough money to retire?

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