collage of money, charts, student working and graduating

A College Example

The other day, I was asked to do a short presentation with respect to financial literacy on a college campus. Out of curiosity, I did some research to find that when I was a student at MIZZOU, the annual tuition was $540 for my junior year (1973). (The data didn’t go back far enough for my freshman year – that is too prehistoric!) Today, data from the University of Missouri System indicate that tuition for the current year at MIZZOU is $9,415. That is quite a change and represents a rate of price inflation of 7.22% per year. At that rate, college tuition will be $164,152 per year in 2054, a comparable 41 year span (! Clearly, the market will not allow that to happen!

The above says more about the change in how colleges are funded, than it says about the future. According to a report by the Delta Cost Project, per-student state and local appropriations decreased by 24 percent in research universities, 24 percent in master’s institutions, 20 percent in bachelor’s colleges, and 20 percent at community colleges between 2000 and 2010. Geiger and Heller (2007) estimate that for public colleges between the years 1990 and 2008, the percentage change in per student state revenue was a negative 10%, while the percentage increase in per student tuition was a positive 81%. Many argue that this is a positive trend, as the benefits of a college education accrue to individuals and not to the state. Of course this is only true, if one does not value having an informed electorate, an educated workforce, and/or better prepared parents. Yet, I digress.

The good news is that, this week, the Associated Press published an article indicating that public college tuition and fees increased by a meager 2.9% and by 3.8% at private colleges. These lower rates, if they continue, would result in a price for one year of tuition and fees for MIZZOU to be $30,402, instead of $164,152! (Feel better, now?) The article also pointed out that the cost to the student has been increasing, as grant aid has not increased to keep up with the increase in the costs of attendance.

What is a family to do in this situation? The answer is the same as it was since the beginning of paid tuition. One must save money for college. One must defer consumption today, to save money for investments in the future. The choice of how to pay for college tuition should be considered the moment one conceives or adopts a child – not when you’re loading the car to take them to university eighteen years later. Let’s consider how this simple act, the act of saving for college, can be a positive nudge toward our goals.

The goal for a family is for their child to graduate from college. It does little good to attend college, if one doesn’t finish a degree. Given this, I found the following statistics to be wildly supportive of the act of saving for college. Research conducted by the University of Kansas demonstrates the power of the act of savings. For low- and moderate-income children qualified to attend college, 45% of those with “no college savings” attended college but only 5% of that 45% graduated from college in six years (2.25% of the “no savings’ group). For those with a meager college savings, between $1 and $499, 65% enrolled in college but 25% graduated (16.25% overall graduation rate). Finally, for those with $500 or more saved, 72% enrolled and 33% graduated (23.76% overall graduation rate).
I agree, these numbers are still too low. That is not the point. The point is that some parents believe that their kids can and will attend college and they start a savings account. While the account balances were relatively low, this act of faith in their children increased overall graduation rates by 622%, for $0 savings to under $500 in savings, and 46%, for savings under $500 to savings over $500. Incredible!

So, does financial success imply that your children attend university? If so, when you decide to become a parent, discuss with your spouse, if present, how much you can afford to save each month for that child’s education. Children are a huge responsibility. We all want our children to do well but they don’t do well in a vacuum of indifference. Clearly, the power of positive psychology and believing in our children is a key to a financially successful child. And successful children are important to the financial success of all.

– Rob Weagley