The 4 Year Myth -- Hidden Costs

March 28, 2017

$600 million dollars a year in unanticipated, if not unnecessary college education costs due to students transferring from one college to another. According to Complete College America's "The Four Year Myth" 60% of undergraduates transfer at least once prior to completing a four-year-degree track. In so doing they lose credits for courses taken, and extend their length of stay in college by a year or more.

Six hundred million dollars is an eye-opening number, yet it still leaves you thinking about "all those poor people," rather than, "That's me!" Furthermore, there are other, often hidden costs associated with lingering around the ivy-covered walls longer than prescribed.

In a previous blog, The Four Year Myth A True Story (March 20, 2017; scroll to read it), there is cited the costs of two extra years. That includes cost of attending four extra semesters plus income not earned over that same period of time. The dollar figure cited ($220,000) is not theoretical, but actual and is borne by one family for one student for one undergraduate diploma.

Other hidden costs, seldom considered, include the time value of money, also known as opportunity cost. Here are two examples:

1. Jack and Jill use retirement funds to defray education expenses. They take advantage of the IRS exception permitting a penalty-free withdrawal from their 401k account. But they still owe the tax due on the amount withdrawn. Even that, however, is not the hidden cost to which I allude. Let's assume J&J were earning, without a hiccup, 6% annually as their return on investment in a well-managed retirement fund; and they withdrew $40,000 to cover education costs of $10,000 per year for four years. If J&J are 45 years old, and retire at age 67 they lose 6% compounding growth on $40,000 for 22 years. What does that add up to?  One hundred forty-four thousand, one hundred forty-one dollars and change ($144,141.50). That amount may well equal their entire tax obligation on the full value of their 401k at retirement. Assuming their student is attending at the average cost of $23,000 per year, and assuming it takes only four years to graduate, the college education they are telling everyone cost them $92,000 in fact cost them more than $236,000.
2. And now the example becomes even more hair-raising. Assume they avoided raiding their retirement fund and, instead, took out a line of credit on their residence (HELOC), paying 6% for the privilege. Let's also assume that, following the four years of college they got that loan repaid in ten years, totaling fourteen years of debt service.  Principle + interest equals $59,219, plus origination fees and other incidental costs. Add that onto the lost, compounding growth they could have gained had they invested $40,000 instead of borrowing it, and the cost of a four-year education approaches $300,000.

My question is, "What else could you do for your student with $300,000?" Until that question is answered it is hard, if not impossible to answer the question, "Four years of college: how much is that worth?"

Granted, there are other virtues beyond the "sheepskin." Many students find their life partner at college, enter into a career path that is fulfilling and remunerative, and develop a network of strong relationships that serve a lifetime.

I advocate, therefore, it's not just price, but value. Determining value takes work that, I believe, most families would do if they knew to do it. You've read this so now you know.

Posted in College Planning, College Planning Strategies, Retirement Planning.