Be A savvy high education consumer

Understand the time value of money

Written by Tod Fothergill and Tom McGrath of Strategies for College

College tuition and fees rose approximately 4% for academic 1998-99, according to two studies recently released by the College Board. According to Trends In College Pricing, for 1998-99 undergraduates at American colleges paid, on average:

Consider the following three scenarios:
	Family A	Family B	Family C
Parents Paid for College/yr	$6,000	$12,000	$18,000
Equivalent monthly payments	$500	$1,000	$1,500
Assuming that these families have sufficient cash flow from current income to support the monthly amounts noted, the table below shows how much each could have accumulated over a five year period by investing the same monthly amount in an investment that earned a hypothetical 10%. In other words, what you see below in year 5 is an estimate of the time value of what college costs today...That is the real cost over five years.
	Family A	Family B	Family C
Year 1	$6,335	$12,670	$19,005
Year 2	$13,334	$26,667	$40,001
Year 3	$21,065	$42,130	$63,195
Year 4	$29,606	$59,212	$88,818
Year 5	$39,041	$78,082	$117,124
But let's take this one step further. If after investing for five years, assuming no further deposits to the account, and no withdrawals, they could accumulate:
	Family A	Family B	Family C
Year 15	$101,262	$202,525	$303,789
This Virginia, is the REAL cost of college. Understanding this can help you become a better judge of educational value as well.

4% more at four-year public colleges
5% more at four-year private colleges
4% more at two-year colleges
Students also paid 3-5% more for room and board at all institutions.

With inflation less than 2% for the past several years, many policy makers are wondering why increases in college costs continue to outpace inflation by over 100%. You should be asking that question, too, because many of your hard earned after-tax dollars are footing part of the bill.

The colleges themselves don't seem to be worried about it. Since the $30,000 per year ceiling was broken a few years back, a 4% annual increase adds roughly $1,200 per year to the tab for each student. That means a college with 4,000 undergraduates brings in almost $5 million more dollars per year by raising prices in this manner. Yet families continue to pay these increases, our students continue to borrow at record levels, and it gets justified with the belief that "everything will work out" in the long term.

Despite the fact that most families to not pay the full sticker cost aside, these questionable price increases make college the single most expensive burden most families will bear. So let's take a minute to examine the real cost of college in terms of the time value of money. In other words, if families had no college costs and instead were able to invest their money in a tax-deferred investment for retirement, what could be accumulated? And correspondingly, how might this analysis help you become a more savvy consumer when it comes time to decide on a college for your youngster?