College is too dang expensive!
The Washington Post writes today of a recent study (commissioned by Sallie Mae, not exactly a disinterested party) that finds Americans are struggling to pay for college: "The study, which was conducted by Gallup, found that the percentage of families who planned to make little or no contribution to tuition increased, while the percentage who expected to cover more than half of expenses decreased."
That's not surprising, given the economy and all that. (I was surprised by other findings in the survey, which I'll get to later.)
But the problem isn't just the economy; the problem is college is too expensive, with tuition rising faster than overall inflation for many years now. Why is it too expensive? Here are my guesses:
1. Parents and their kids believe a college education is essential. This is likely true; as economics professor Todd Gabe said in this CNN/Money article, "There's a very high correlation between earnings and educational attainment." (That article ranks "America's brainiest cities," giving the No. 1 spot to the Washington, D.C., region -- my current home. It might also explain why I left my hometown of Tampa, which is ranked as fourth-least brainy. Go Bucs!)
2. If people believe it's essential, they'll pay any price or take out loans, if those loans are easily available. The cost of college, therefore, is missing some important market-based price controls.
3. Call me a curmudgeon, but colleges look more and more like country clubs. My daughter is a freshman at my alma mater, and the place has all kinds of amenities it didn't have when I was there: elevators (that talk!), big-screen TVs in dorm common areas, a student union with a Starbucks, and several large workout rooms. Anyone else have that experience?
Now, here's what surprised me about the study:
"On average, families have saved about $28,000 to pay for college. About 12 percent of that money is in 529 plans, while 14 percent comes from general savings accounts or certificates of deposit. Another 21 percent comes from investments, but the largest portion of that money - 23 percent - is in retirement savings."
The average family has $28K socked away for college? That seems high to me. The study also found that "low-income families saved less money than wealthy households, they still put away an average of $1,788 annually toward college." Am I the only one who finds it hard to believe that low-income families save anything at all for college?
Anyway, let's get to the "financial lesson" portion of the show: Unless you've over-saved for retirement, resist tapping IRAs and 401(k)s to pay for college. Your kid will be able to get a degree, either by attending less-expensive school (or even community college), scholarships, government programs such as ROTC, or taking out loans (though no loans is much better). However, if you reach your 60s or 70s without enough retirement savings, you won't be able to retire. There's no such thing as a geyser scholarship.
Robert Brokamp, CFP®, is the senior advisor for the Fool's Rule Your Retirement service.