When it comes to children and finances, what is every parent's goal? It's to raise young adults that can become financially independent. Unfortunately, surveys have shown low success rates. Only 23 percent of 20-somethings consider themselves financially independent, according to a survey by PNC. One of the largest barriers to achieving independence is the rising costs of college tuition.
According to the US Department of Education, the average cost of a year at public school is $15,100 and $32,900 for private institutions. Those costs are more than outpacing inflation and wage growth. Today, there is more outstanding student loan debt than credit card debt. More than 11 percent of graduates have racked up more than $50,000 in student loans, according to a 2009 survey by Sallie Mae.
If you are the parent of a young child, it's only going to be worse by the time your child is ready to enroll in college.
What Will College Tuition Cost in 2030?
Congratulations! You are a new parent. It is time you are baptized into the world of diaper changes and midnight feedings. You also might want to brush up on your financial calculator skills.
Assuming junior is going to opt for a value education from a public school, you'll want to know what the cost of college will be in 2030. According to the US Department of Education, the average annual cost of public school increased 6.5 percent each year over the last decade. That means that by 2030, annual public tuition will be $44,047. The total cost for a four-year degree will be more than $205,000.
How Much Should a Student Take Out in Student Loans?
We are trying to raise financially independent children. So how much student loan debt can your future young adult handle?
It's not an easy question to answer. If you were to look at expenditure data, you'd see that the average young adult ages 18 to 24 spends about 7 percent of their budget on education expenses. Using the median starting salary for a college graduate of $42,500, a young adult should be able to support a loan payment of about $250 per month, today. What does that mean for your future 2034 college graduate?
Let's guess that wages increase by 3 percent each year. By 2034, you child has a good chance of earning a starting salary of $80,900 and sustaining a student loan payment of $470. Assuming a standard 10-year loan and an annual interest rate of 6.8 percent, your child should borrow up to $40,850. This leaves a large gap between student borrowing and the $205,000 needed to complete a four-year degree.
What's the Average Parent's Share of College Costs?
The good news is that you aren't the only one suffering from sticker shock. Most families don't need to cover the full gap between student borrowing and full tuition cost. In fact, a study from Sallie Mae shows that students currently cover about 24 percent of their college expenses, which is in line with our guess on sustainable student loan borrowing. Another 31 percent is funded by scholarships and relatives. Parents foot about 45 percent of total college cost through savings and borrowing. However, even at 45 percent, the cost of financial independence for your child will cost you $92,250.
Financial Independence is Expensive
Helping your children reach financial independence is costly. Even if you started saving every month since your child's birth and earned an annualized average return of 7 percent, you have to put away $215 each month for college savings--and that's for only one child attending a public college.
These numbers might seem discouraging, but they are important to know and understand. Being honest about the cost of a future college degree will help you and your children plan ways to lower costs. As a result, you and your kids can avoid missing important opportunities before college, like taking college courses while in high school, applying for scholarships, and working hard to attain merit-based financial aid from colleges.
Filling in the gap between the rapidly rising tuition and financial independence for your children is going to be a challenge in 2030. However, it is a feat that is much more difficult to accomplish when starting later than sooner.
JP is the author of the money blog My Family Finances, a site dedicated to helping families make wise financial decisions. He is also an MBA and works in corporate finance.