This month thousands of high school seniors will graduate and in a few months thousands of freshman will enter college, and many parents -- including you -- may be footing the ever snowballing bill. Like retirement planning I’ve met many physicians that vastly underestimate what it takes to send their kids to college. Their “plan” is to pay for college through current cash flow. But with physician income stagnant, the math just doesn’t work out especially if you send your kids to a private university or an out of state public university (usually these charge out of state prices almost as high as private universities).
Let’s take an example. If you live in Georgia and send your kid to the University of Georgia (a fine public university) the published 2015-2016 total cost is $25,134 (source: https://www.admissions.uga.edu/prospective-students/tuition-fees).
2015-2016 Total One Year Cost of Two Colleges (Publlc vs. Private)
Instead if you send your kid to Yale you’ll shell out $65,725 (source: http://www.yale.edu/tuba/finaid/new-students/index.html) -- a whopping $40,000 difference.
Suppose you are physician making $300,000 in annual income and pay about 30% of that in taxes (federal, state, and payroll which are the big ones). You would be left with about $210,000 in after tax income. Assuming you want some sort of decent lifestyle and you spend $10,000 per month ($120,000 annually), that only leaves you with $90,000 to pay for college and fund your retirement.
How’s that private university looking now? How many extra days and shifts are you willing to work to make it happen?
But wait there’s more.
That cost is only for one child. Suppose you have two kids that are 4 years apart. You’ll now have almost a decade long commitment of tuition payments, and this will happen when you’re around 45-50 years old. Either that or you’ll mire your kids in a mountain of debt.
If that doesn’t concern you, then this will:
Total 4 Year College Cost For Newborn Child (Public vs. Private)
Here are the estimated 4 year total college costs for a new born child if he goes to the above institutions assuming that the annual college inflation rate is 5% (see bar chart on right):
You may think those numbers sound crazy, but consider this. When I graduated from college at Johns Hopkins over 20 years ago, the total cost was under $20,000 annually and now it's over $65,000 -- it's gone up faster than the general inflation rate. That's true for most colleges.
I’m not suggesting that you don’t send your kids to college, nor am I questioning the value of a college education (OK, maybe I am -- hey I'm sure those sociology and philosophy classes have some value in life I guess). The point I’m making is that just like funding your future retirement, if one of your goals is to pick up your kids’ college tab, then relying on your future income isn’t going to cut it. You’ll have to plan far ahead for that obligation and coordinate your own retirement and current lifestyle into a well thought out financial plan.
The decision to go to a public in state school versus a private one boils down to a personal preference in many cases. Just realize that the financial pressure you'll be placing on yourself or your kids may be far higher than you think. Many physicians I meet don't realize this until they actually start paying the bills.
This is why keeping track of your finances on a micro level (cash flows, income, spending, savings, taxes) and a macro level (how that relates to your goals) is so important. Every expense affects other expenses. Every goal affects other goals. Looking at those relationships gives you a better picture of what to expect and how to plan for it.