How to Pay for College while Early Retired
One of the top questions I’m asked when people see “retired at 33 with 3 kids” is “yeah, but what about college?”. The truth is I never really gave it a lot of thought because the total cost is well into the future (though closing in fast for our oldest kid) and not huge relative to our total net worth. I had a very vague goal of being able to cover the tuition and fees for four years of in-state tuition for all three kids.
We funneled some cash into 529 accounts when North Carolina offered a tax credit for doing so. We earned a $350 tax credit for contributing $5,000 per year to the 529. When that tax credit was eliminated, I stopped contributing to the 529s and stopped thinking about college funding. Paying tens of thousands of dollars for college is no biggie when you have a million or two, right?
It turns out my lazy attitude toward college funding won’t spell disaster for my children’s higher education future. Between what we have saved in 529s, our large investment portfolio, and a plethora of other funding sources, the kids will be perfectly fine when the college tuition bills start piling up. You’ll have to read on to find out why I’m so confident (or is it cocky?).
How much does college really cost?
“It works out to just pennies per inspiring moment” reports the University of North Carolina at Chapel Hill’s Cost of Attendance page. While technically true (it’s about six cents per minute assuming all the minutes are “inspiring”), a better way to look at the cost is dollars per year. For the 2016-2017 school year, the cost of attendance at UNC is just under $25,000.
|Univ. of NC Tuition & Fees||$8,834|
|Books & Supplies||$1,442|
Here in Raleigh at North Carolina State University, the total Cost of Attendance is closer to $23,000. NCSU doesn’t include health insurance (something we would likely provide at near zero cost after subsidy through the Affordable Care Act) which explains $1,000 of the difference in cost (the other $1,000 being meals; Raleigh is cheaper than Chapel Hill I guess).
UNC Chapel Hill and NC State University are two great local options for school where the sticker price is under $100,000 for four years. We pay for these institutions through our tax dollars and we’re hoping to get a nice return on our tax dollars when our kids attend one of these two flagship research universities (Mrs. RoG and I are alumni of one or both schools. Go Heels/Pack!).
Breaking down the approximately $24,000 cost of attendance further, we see the actual academics cost around $10,000 between tuition, fees, and books. The remaining $14,000 covers personal expenses like rent, food, transportation, and beer. For those living on campus, that’s probably a good number to use since the dorms and meal plans cost what they cost and that’s the bulk of the living expenses. Off campus living costs vary greatly based on whether you own a car, whether you split a house or apartment, and whether your college crash pad is luxury, slummy, or somewhere in between.
For those students living at home, the cost of college is the $10,000 cost of tuition, fees, and books plus whatever the parents have been spending for the past 18 years.
I don’t know whether my kids will live at home, attend NC State University and commute the 12-15 minutes to school by car or live on/off campus at whatever state school they attend. With either choice, the total cost for college will be between $10,000 per year plus whatever we already spend on them as part of our $40,000 early retirement budget and $24,000 per year.
A quick note on college cost inflation. Yes, tuition increases at a faster rate than overall CPI inflation. But tuition is less than half of the total cost of attendance at the two schools I’ve mentioned. The room and board, while subject to inflation, isn’t increasing at such a rapid rate. For example, when I started college in 1998, tuition at NCSU was $2,364 while it’s $8,880 in 2016. That’s an average annual 7.6% increase. Holy smokes! All other costs of attendance totaled $6,672 in 1998 while it’s $14,159 today, a more modest 4.3% average annual increase. The total cost of attendance increased 5.3% overall during the past 18 years. CPI inflation averaged 2.2% during that period of time. Tuition outpaced inflation by 5.4% per year whereas room and board outpaced inflation by only 2.1% per year, with the overall cost of attendance outpacing inflation by 3.1% per year.
Keep that in mind when you see the headlines that read “college tuition increases at 8% per year on average for the past X years”. Room and board aren’t going up at nearly the same rate, and if you live and eat off campus, your room and board will probably track CPI very closely (because you’re paying the same prices baked into the CPI that all of us are paying outside the university). It’s also worth noting that the quality of room and board has increased greatly in the 18 years since I started full time higher education. We didn’t have tikka masala or sushi in the dining hall for example, and many of the dorms didn’t even have air conditioning back in 1998! You pay more, you get more. Or you can eat 6/$1 ramen noodles off campus like all the broke college students did in 1998 (back when it was 8/$1).
Life often throws curve balls, so it’s quite possible our kids will attend some other in state public university (which all cost less than NCSU and UNC), a private U, or an out of state school. It really depends on what will work best for the kids, and what kind of financial aid a particular university offers. We are still seven years out from the oldest kid starting college, so for planning purposes I’m focusing on the costs for the two best in-state universities that routinely rank well for great values in public universities.
Nobody pays sticker price for college
Like the MSRP on a new car, the college sticker price is the starting point for negotiations. If you’re early retired and don’t have a high Adjusted Gross Income or huge assets in taxable brokerage accounts, you’re in luck. You’ll probably get a nice financial aid award.
The University of North Carolina offers a Net Price Calculator to estimate what kind of financial aid package you’ll receive.
After roughly estimating our numbers and filling out the calculator, the results say we’ll get $4,250 in grant money when one kid is in college. One year later when our second kid enters college we’ll get $10,250 PER KID. That’s almost half of the total cost of attendance right there, before we even start talking about other sources of financial assistance offered such as work study or student loans.
Is this an equitable result? Probably not. But that is how the system works. We look poor on paper because they don’t ask about retirement account values and that is where 75% of our net worth resides. Therefore we get a lot of free money for college. And this is with us making zero effort to game our assets and income to maximize free grant money!
If those grants work out, we’ll be paying a maximum of $14,000 per kid half the time and $20,000 per kid the other half of the time.
What do we have saved for college?
We invested in 529 accounts for several years to snag some state income tax credits. The older two kids have $18,000 each in 529s while the youngest kid has $7,000 in his 529.
The older two kids have UTMA accounts at Vanguard with about $2,500 per account. This is their money but could be used for college, or something like a new (used) car to commute to college if living at home.
The remainder of college expenses will come from our main investment portfolio. As of mid-September 2016 we have about $1.45 million in the investment portfolio (including the 529 accounts) and another $50,000 cash in a money market account. I’ve mentally set aside $200,000 (including the 529 account values) to cover college, car purchases, higher teenage expenses, and some adult gifts like house down payments and weddings.
That will leave about $1,250,000 to fund the remainder of our early retirement expenses (which, if we spend $40,000 per year according to our budget, will equate to a 3.2% withdrawal rate). If our portfolio does well, we will feel more free to spend the $200,000 and then some. If things don’t go well, we might not part with all of that $200,000 if we need it to cover core living expenses. In a way we’re taking a wait and see approach to deciding exactly how much we’ll pay for college.
Money is fungible and we can move it around all we want. We’ll likely spend enough on college expenses to deplete the $43,000 in the 529 accounts, so I’m not concerned about paying a 10% penalty to withdraw any balance remaining after they finish college. But I don’t want to save a significantly higher sum in the 529s because I expect they will obtain college funding from numerous other sources (to be discussed later in this article).
Will the kids help with college expenses?
Yes. And we have talked with them about this starting around age 9 or 10. Exactly how much they will have to pay is uncertain, although we plan on paying (at a minimum) the tuition and fees (and maybe a lump sum for books) which will total around $40,000 per kid. That leaves them responsible for room, board, transportation and miscellaneous personal expenses, though some of that would be covered by us if they drive one of our cars and/or live with us.
There’s a strong incentive to save when it’s your money you’re spending and not someone else’s. There is plenty of moderately priced off campus college housing around NCSU. With roommates, monthly rent is $250-400 per month plus a share of utilities ($50-75/month per person). A private bedroom in a shared apartment (with kitchen) rents for 12 months for around $4,000. In contrast, shared dorm rooms cost around $6,500 per person for the fall and spring semesters (summer session costs extra).
A full year of off campus housing is much less than the price of a shared dorm room on campus for nine months, and would allow the option of a full semester of summer studies for only $3,500 tuition and fees. Two or three summers of that would lead to graduating college in three years (or less!). Paying for three years of college is a lot cheaper than paying for four.
The same logic applies to the food budget. Pay the rack rates for on campus dining plans and it costs $8.61 per meal IF every single meal in the plan is consumed during the school year. I’m pretty sure my kids can figure out a way to pay less than $8.61 for some fruit, cereal and milk, oatmeal, and yogurt for breakfast. Rules vary by university, but it appears that NC State University requires first year students living on campus to purchase an overpriced meal plan (“looking out for their best interests” and all that), but beyond the first year students have the choice to skip the meal plan and pay a la carte (or dine off campus as often as possible like everyone did when I went to NCSU).
Having the kids pay part of their own way through college isn’t just a devious way to remove some of those costs from my cash flow statement and lower the overall costs for all parties involved. There’s also a real benefit to the kids. They will learn crucial money management skills in a sort-of real world environment with a parental safety net stretched underneath them in case they take a tumble. It’s better to fail when the stakes are small (calling mom and dad to make up their share of the month’s rent) instead of when they are enormous (calling to say they are $50,000 underwater on their mortgage and will lose their house without help).
Sources of college funding
But it’s cruel, you say, to make kids pay for any of their college when they should be studying hard. That would be true if they didn’t have nights, weekends, breaks, and a huge 3+ month summer vacation to figure out a way to make a little money.
15 possible sources of funds for the kids:
- research assistanceships
- teaching assistanceships
- work study
- formal co-op program
- resident advisor (free housing + meals + living stipend)
- on campus jobs during school year
- summer jobs between college semesters
- jobs during the school year in high school or during HS summer breaks
- UTMA investment accounts
Parental source of college funds:
- 529s (currently have $43,000 total for all 3 kids)
- our main early retirement portfolio
- doing something productive that pays money (part time job, freelancing, more blogging or consulting, entrepreneurship)
As you can see, the kids have more options for funding college than us parents do.
I wanted to elaborate on a few great ways to cover half or more of the total cost of attendance:
Resident advisor or RA – I strongly considered becoming a resident advisor but decided to move off campus and split a $700 per month apartment between four people for extremely cheap rent instead. The Resident Advisor lives in a dorm room for free, gets a university meal plan, and receives a small annual cash stipend (currently $1,735 or more at NCSU). The room, board, and stipend are worth about $12,400 per year at NC State (more at UNC), which is over half the total cost of attendance. You aren’t supposed to work other jobs while working as an RA because they claim it’s a 20 hour per week work commitment, though in practice many of those hours have you chilling in your room in the evenings for “office hours” while you do your homework (or whatever kids do in college these days). At 20 hours of “work” per week for a $12,400 benefit, that equates to somewhere between $17 and $20 per hour, almost all of which would be tax free. Becoming an RA is an option after your first year of living in the dorms.
My freshman year resident advisor, George, was an overseas engineering student from Ghana paying his way through undergrad primarily by being a resident advisor plus getting some small grants and scholarships. I could totally see my oldest daughter being an RA and loving every minute of it!
ROTC – I didn’t have any personal experience with ROTC but it sounds like an incredible opportunity. I reached out to Doug “Nords” Nordman, a retired nuclear submarine officer who blogs at The Military Guide and an occasional guest poster here at Root of Good. Doug’s daughter Carol recently graduated from college after completing the Naval ROTC program. Here’s what Doug had to say:
Every student who’s the least little bit curious about the military should join a ROTC unit just to try the first year for free. At the very minimum they’ll get priority registration (for ROTC classes), lots of new friends with peer tutors, and a summer tour of their career options. Parents will know that their freshmen are getting a good start with plenty of career options.
NROTC paid over $160K of Carol’s tuition, fees, and textbooks at Rice University. She also earned $2K-$5K/year in stipends and summer training pay.
Carol also landed a well paid position as a commissioned officer in the Navy straight out of school. Doug reports her net worth is significantly higher than her peers even though she’s only a few years out of college. Sounds like another early retiree in the making!
ROTC provides funding for everything but room and board. Students can drop out of the program at any time during the first year without penalty and don’t have to repay the ROTC funds (that’s what Doug meant by “free”). There’s very little risk for joining ROTC for one year. Starting in the second year of ROTC, the grant recipients are on the hook for repayment of any additional moneys received if they drop out of ROTC. Alternatively they can enlist in the military later to discharge that debt.
How I funded my college
If you’re a long time reader you won’t be surprised to learn that I managed to finish college on the cheap. First up was entering the fall semester of my freshman year just a few hours short of being a junior upperclassman. Through AP credits, taking several courses at the state university during high school, taking several more during the summer after graduating high school, and taking one course through credit by examination, I managed to enter the university as a full time student with 56 credit hours (FYI most bachelor degrees require around 120-132 credit hours to graduate). With all that credit, I managed to graduate with two bachelors degrees in three years. And I managed to bum around Mexico for six weeks one summer.
Considering I finished 120th in my high school class, my experience wasn’t atypical for the upper level students at my high school which is the exact same high school that our two daughters will attend in a few more years (one of the reasons I like our public schools here). So far both kids are academically on track to follow the same general path that I did, therefore entering college as a sophomore with 30+ credit hours is very possible. If that happens, that’s $48,000 saved (minus costs of AP exams and several thousand dollars for university courses during high school and summer sessions).
Once I was in college, I received some parental help with tuition, books, room and board, and other living expenses the first year (but I couldn’t tell you exactly what my parents paid for the first year). I also took advantage of the subsidized college loans offered to me.
During my first year of college I landed a position as a DJ at the college radio station. In addition to being as cool as it sounds, it also paid very well if you took the boring shifts that included running the control board during men’s baseball and women’s basketball games (read: 2-3 hours to do homework punctuated with 2 minutes of work each hour to run station identification reels plus a couple of advertisements). I didn’t suck at DJ’ing so I got promoted to production manager and became a member of the board of directors where I made $200 per month producing commercials and other on air spots. Overall, the college radio experience was mostly jamming out to music while doing some homework during my shifts. And getting paid cash money for the privilege.
By my second year of college I won a number of scholarships that more than paid for all of my expenses (I guess doing all that homework while working at the college radio station helped my grades). I also started teaching an intro to engineering class for incoming freshmen ($25/hour) and landed an internship in the university’s facilities engineering department ($10/hour). I quit the facilities department internship when a professor hired me on a research assistanceship ($13/hr) that later morphed into a grant ($3000 for a semester). These progressively more challenging jobs qualified me for an $18/hr research engineer position during the summer between undergrad and law school. All these dollar amounts are in the 1998-2001 time frame, so you can inflate them by 40% to arrive at values in 2016 dollars.
During law school I founded my own business that initially didn’t make more than $400-500 for an occasional small job. Then I made $30,000 profit in five weeks (mostly working 12-16 hours per day). I wish I had a $99 course explaining the secret to making that much, but it’s really common sense. I did a great job on the smaller projects which led to my selection for a massive job that included some add on work because my quality was better and my prices were lower than the other team in competition with me. Skip the $99 course fee, just do good work and profit. And then there were the summer jobs during law school that paid between $0 and $23/hr.
Overall, I made a ridiculous amount of money by the time I graduated from undergrad and even more by the time I graduated from law school. For the curious, here’s all 20 jobs I held between being a paper boy at age 12 and retiring as an engineering director at age 33.
In addition to making money and learning how to hustle, all those jobs provided invaluable experience that helped me land a professional job right out of school.
Will my kids find as much employment success as I did during college? Even if they don’t, they can still make quite a bit of money to help pay for living expenses during college.
A four year degree doesn’t have to take four years, nor does it have to cost $100,000 to $300,000.
For those students that excel academically, they can start college as a sophomore or junior. Focus on AP classes, credit by examination, summer school before college, and university/community college courses during high school. If you can’t find resources online, then starting around 8th or 9th grade ask your kid’s guidance counselor what programs are available to earn college credit while still in high school. I recall getting bored on summer during high school so I grabbed a course catalog from NC State University (pre-internet days, folks), and that’s when I realized they have very specific guidelines on what AP test scores get you, and what basic educational courses I should take to apply toward an engineering degree.
Another classic college hack is to attend community college for two years in a college transfer program. Then, apply to a four year college and transfer in those two years of community college credits. This way you only pay for two years of the more expensive university tuition.
I’m a little skeptical of this one after running the numbers. In our situation, tuition runs $2,768 per year for full time at Wake Technical Community College, a $6,112 cost savings versus NC State University’s $8,880 per year for tuition and fees. Not too bad but it might be a money losing proposition for students that miss out on financial aid and merit based scholarships (the engineering college at NCSU was awash with scholarship money and often had a hard time finding applicants for all that free money in my experience). Community college is probably a better bet for students in an academic field with little prospect for discipline specific scholarships or for “average” students that graduate high school without credit for many of the freshman level college courses.
I also worry about how well those two years of community college credit would transfer into some four year degree programs that require very specific coursework (NC State University College of Engineering, I’m looking at you).
Ed Mills of The Millionaire Educator fame has figured out a way to hack a college degree in 12 months from a real, accredited four year institution for just $7,500 in tuition and fees. It’s a little circuitous and requires discipline to study on your own then pass third party exams to demonstrate competency. But well worth the effort for someone that needs a bachelor’s degree and doesn’t have a lot of money nor four years to waste. Mr. Mills hones in on a few universities in the US that allow the bulk of the required credit hours to be taken through various credit by exam options. You might want to add a second year to your course of study to allow time to actually learn the material that will be on your exams (or what the heck, take the exam and maybe you’ll pass it without studying!).
Other thoughts on college
I still wonder whether college will be relevant in another 10 years. And at what cost will it remain relevant? Is it worth a quarter of a million dollars? Half a million dollars? If college costs continue their meteoric rise to the moon, at some point we can jump off that vertically asymptotic crazy train by simply skipping the whole college charade and handing our kids a huge portfolio full of investments and let them join us in FIRE at age 18. Then they can read Chaucer and learn Laplace transformations at a more leisurely pace.
To put the absurdities of growing costs in more stark contrast, there are so many free or extremely cheap educational options available today that continue to grow in quantity and quality. Harvard, Yale, MIT, and Stanford (among other top tier schools) offer tons of free undergraduate and graduate level courses in every academic field imaginable. Education is mostly free already, it’s just that diploma – that piece of paper that says you’re educated – that you need to get a job.
There also educational consolidators like Coursera, Udacity, Codecademy, and Khan Academy offering courses from a variety of instructors. If you have $300 for a laptop and access to an internet connection, it’s hard to stay ignorant if you’re motivated to learn.
Will all this easily accessible free education ever supplant the need for a traditional four year degree? That’s the $64,000 (or $99,592 at University of North Carolina) question that remains to be answered. It’ll take a paradigm shift in hiring practices and corporate mindsets away from a strict requirement for a four year degree toward a more fluid skills-based or portfolio based assessment of job applicants. Or a willingness to accept credentials from a different kind of educational institution.
Perhaps one day smart kids will brag about a set of certificates from Coursera instead of a diploma from Harvard. That day isn’t today and I don’t know if we’ll see it before oldest two kids graduate college in 10-12 years. But it’s a valid question to ask as you’re planning on college costs for a newborn today. 18 years might be enough time for an educational revolution.
Jeremy at Go Curry Cracker put a lot of thought into college funding for his newborn. The most interesting take away from his article was the fact that investing college savings into a stock index fund like the S&P 500 is a smart way to combat escalating college tuition if you start early. He looked at a 34 year period from 1979 to 2013 and found that
[f]rom 1979, consumer prices increased 3.4x. Tuition increased 10x. The S&P500 increased 18x. And with dividends reinvested, the S&P500 increased 45X!
The stock investment grew 4.5 times as much as the cost of tuition. Even with a much more mediocre stock market, it’s still a good bet that stock returns will at least keep up with inflation. That’s why I’m not too worried about the inflation we’ll see between now and 7-8 years from now when my oldest two kids enter college. Their 529s are invested in an aggressive mix of equities, though I’ll be slowly dialing back on the risk as the looming tuition payments draw near.
The bottom line
My kids will be able to attend college and somehow we’ll pay for it. And we can remain early retired.
I see the best case scenario playing out like this:
$24,000 cost of attendance for 3 years – BEST CASE SCENARIO:
- $4,000 – cut costs on room and board, misc. expenses (live at home with us?)
- $6,500 – average need based grant (probably free money but maybe some loans)
- $4,000 – merit based scholarships and grants
- $6,000 – various jobs and internships
- $3,500 – spending from our 529 accounts
If this rosy tinted picture plays out, we’ll have three years of spending at $3,500 per year times three students. Our total outlay will be $31,500 in today’s dollars, and our kids might leave college with a small dose of those dangerous student loans. That’s about $10,000 less than we have in 529 accounts today, so we are well prepared if this scenario occurs.
But what if my kids end up being “average” and deviating from the path their old man followed? And what if they can’t or won’t economize on housing and food?
$24,000 cost of attendance for 4 years – WORST CASE SCENARIO:
- $6,500 – average need based grant (probably free money but maybe some loans)
- $4,000 – various jobs and internships (they’re average; the earnings are lower than the optimistic scenario)
- $13,500 – spending from our 529 accounts and investment portfolio
In this scenario, where our kids are very average, can’t economize on costs, get no merit based grants or scholarships and deliver pizzas or bus tables instead of engaging in paid activities related to their field of study, we are left with a $13,500 bill every year. That means we’ll be paying a combined $162,000 for three kids for four years of study. That figure exceeds our existing 529 balances by $119,000, so we’ll be digging deep into our investment portfolio to cover the shortfall. I’ve mentally set aside $200,000 in my portfolio to cover some variation of this worst case college funding scenario plus other big, lumpy one time kid expenses, so we’ll be okay financially.
I suppose I should mention the beyond superlative worse than worst case scenario (though in purely financial terms, the least costly). There’s a chance that one or more of our kids won’t attend a four year college at all, which means that $3,500 to $13,500 per year spending figure drops close to zero (spending tons of money on adult children is a topic best left for another article).
Whether our kids excel academically and need very little parental financial assistance, or whether we end up paying for the majority of their college costs, we’ve got it covered in our early retirement financial plan.
What is your plan for kids’ college funding? How did you fund your own college experience? Anything you would do differently?