Monday, July 16, 2007

False Alarm on Rising College Costs

MSU's Campus
College Life

Sky-high rising costs
Tuition, housing and books!
Football and beer bongs.

Gadabout is throwing up the Red Flag concerning the rapidly ringing alarm bells over the costs of higher education. On the surface it seems to the average American that 9% increases in tuition fees are unjust, appalling and out of control. Nonsense, college is still a bargain. A 9% increase in Tuition does not equate to a 9% increase in total college costs, because related costs of housing, food, books and other fees are not increasing by the same amount. The reason that tuition costs exceed inflation rates is because Americans keep saying NO to increases in state taxes, resulting in flat contributions by the states to their university systems.

I ran the numbers for Michigan State University (MSU)—Gadabout’s Alma Mater. MSU recently announced an increase in tuition rates by 9.4% for the 2007/08 academic year. Yep, Michigan is in the dumps and the State has actually REDUCED contributions to MSU. The facts (note: I had to manually adjust tuition costs since their website still posts 2006/07 rates):

Average in-state tuition for undergraduates per credit hour: $282.00
Cost of 15 credit hours (a semester): $4230.00
Housing with meal plan: $3,022.00
Registration and Matriculation fee (per semester): $564.00
Books (a guess here): $500.00
Mad Money: $1,000
Car: Screw ‘um, they don’t need one
One time prep fees for computers, travel and registration: $2,000

Total per semester: $9,316
Total per year: $18,632
Total 4 year cost: $76,528

Is this out of reach for many Americans? No, not if you plan properly, and insist contributions and some sincere effort by little Johnny and Debbie. Here’s how:

Open a college savings plan and contribute $50 per month. If a family were to have started investing in a tax free plan 18 years ago, they would have about $17,460 available NOW for college.

Children can save too. By working for 11 weeks after graduating from High School, at $9 per hour and 40 hours per week, then they should be able to save $1980.

Undergrads can work 10 hours per week while attending college. At $9 per hour that amounts to $2,300 after taxes.

Student loans are a maze, but they are available for students and whether they are tax deferred or not, just about every student can take-on a minimum of $3,500 per year and that amount generally ramps up by a $1,000 per year.

Let’s add up the numbers:
Savings plan: $17,460 (based on 5% rate of return)
Student Contributions: $17,120
Student Loans: $18,000
Total: $52,580

That leaves a deficit of $23,948 that mom and dad will need to cough up, and they only set aside $50 bucks a month in the first place! This equates to only $5,987 per year, and I never touched upon scholarships, increased savings rates, Military Academies, community colleges, Grandmother, contracts with universities to “lock-in" lower rates and so forth. And the $50 per month savings plan was based on money market returns. If that money was invested in the S&P, you would have taken a huge chunk out of the deficit! A 10% rate of return would have compounded to $30,028 over 18 years!

It’s all about the facts, and the facts of life! Stop whining, America, and start planning!

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