My Kid Got Accepted to an Expensive Private College — Now What?

My son recently got accepted into a college program that would cost about $45,000 per year for tuition, room, and board. This is exciting news — but also potentially expensive news. At what point does the cost of college outweigh the likely economic benefits?

Of course, the value of college goes far beyond simply allowing someone to prepare for a higher paying job. College can help you discover your path in life, develop your mind, and open doors to experiences that are not available to most people. But how much is too much to pay for college, from a purely financial perspective?

College's cost in dollars and opportunity

The main costs of college are tuition, room, and board. The average total cost of attending an in-state public university is over $20,000 per year, and the average cost of private college is over $40,000 per year, according to the College Board.

Opportunity cost is another cost of college that is easily overlooked. If you spend four years attending college full-time, you miss out on four years of full-time income that you could have earned instead. You also potentially delay starting to build investments and reaching financial independence.

The most insidious cost of going to college is probably lifestyle inflation. Almost everyone tends to spend more as they make more. Even though college graduates will likely make more money than those who don't go to college, college grads will probably also spend a lot more on a more expensive lifestyle. Just because you make more money doesn't mean you'll end up having more money in your bank account or a higher net worth. (See also: What to Do When You Can't Afford Your Child's College Education)

College will boost future earnings by a lot

Even though the costs of attending college can be prohibitive, the benefits in terms of increased salary can easily add up to millions of dollars over a career. Let's say you are 18 years old and decide to start working full-time at an entry-level job that pays $20,000 per year. Your earnings over your career until age 65, with a 3 percent raise every year, would be $2,007,930.

Now let's say instead of starting to work full-time at age 18, you attend college for four years. You start working full-time at age 22 with a starting salary of $45,000 per year, which is a reasonable expectation for a wide range of college majors. If you work until age 65, assuming a 3 percent raise each year, the earnings over your career would be $3,846,775.

Taking into consideration that you delayed starting your career for five years to attend college, you would still earn over $1.8 million more over the course of your career from the benefit of your college education.

Of course, expected starting salaries vary with college major. According to the National Association of Colleges and Employers, engineering majors are at the top of the pay scale and can expect to start at an average salary of around $65,000. Education majors have average starting salaries of around $35,000, and almost all other majors are somewhere between $35K and $65K. But no matter what you major in, your salary earnings potential over your career will likely get a big boost by going to college. (See also: 5 Jobs That Pay Over $50K and Don't Require a Bachelor's Degree)

How much should you pay to go to college?

The return on investment of going to college can be quite favorable in terms of increased lifetime salary potential. As we saw in the example above, earning over $1.5 million more from a higher salary after going to college is a realistic expectation.

The limit on how much you should pay for college is not constrained by the value of your higher salary with a college degree, since your increased earnings would probably far exceed the cost of going to college. Instead, the limit on college cost for most people is driven by how big of a student loan they can afford to pay back after graduating.

Even though a college degree could boost your income by millions of dollars over your career, you'll need to start making student loan payments shortly after graduating. By estimating how much income you expect to earn after you graduate, you can figure out a ballpark figure for the maximum size student loan you can afford. (See also: 6 Questions to Ask Before Taking Out Student Loans)

Here's how to calculate your maximum affordable student loan balance.

  • Estimate your starting salary based on your major. For example, $45,000.

  • Divide your anticipated starting salary by 12 to get monthly pretax income. For example, $45,000 / 12 = $3,750.

  • As a rule of thumb, use 10 percent of your pretax monthly income as your maximum affordable student loan payment. For example, $3,750 x 0.10 = $375 per month.

  • Calculate the loan amount that a payment of $375 would support. For example, using the loan balance calculator from CalcXML, $375 per month would support a 10-year loan of $32,586 with 6.8 percent interest.

  • Divide the loan amount by the number of years of college. For example, $32,586 / 4 = $8,146.50 per year.

The second to last step gives you an idea of the biggest student loan balance that you could afford to make payments on. The very last step gives you the biggest student loan amount that you should take each year.

If you want a quicker way to estimate the maximum affordable student loan balance, take 75 percent of your anticipated starting salary. Using the same salary as in the previous example, $45,000 x 0.75 = $33,750. That would be your maximum affordable student loan balance.

But what if the numbers don't add up?

I started off by saying that my son was accepted into a program that costs $45,000 per year. Over four years, this would add up to $180,000. This greatly exceeds the maximum affordable student loan amount for a new college graduate. For an expected starting salary of $45,000, we calculated that the maximum affordable student loan balance is around $33,000. This wouldn't even cover one year of my son's program.

Fortunately, there are some ways to reduce college expenses and bring the cost into an affordable range. My son was offered a big scholarship, which makes the sticker price a lot lower. Here are some other possibilities your child can pursue to help keep college costs affordable. (See also: How to Pay for College When You Didn't Get a Scholarship)

  • Choose an in-state public university instead of more expensive private schools.

  • Consider starting at community college for two years and transferring credits to a four-year institution later.

  • Work summers or part-time to help pay some college expenses and reduce the burden of student loan debt.

  • Consider going into a major that pays well to be able to afford a more expensive college program.

  • Consider financing student loans for a longer repayment period to reduce the monthly payments. (You will be in debt longer, but could still come out ahead in the long run.)

  • Consider military service before college, or an ROTC program at college. Benefits can cover college expenses.

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My Kid Got Accepted to an Expensive Private College — Now What?


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