From the start, it is clear that the cost of tuition for a private college is double what you can expect to pay for a public in-state school, with a narrower spread between the two public options. Take for example a sample family with two children, who are two years apart in age. Let’s imagine our family chooses to send both of their children to private colleges or universities. Using the averages provided, each child’s total cost (assuming a year to year annual average 6 percent tuition inflation rate) for four years at a private college or university is $215,756. Over the six years, noting two overlapping years, the actual out-of-pocket cost is approximately $458,180, which is no small number, even to high-net-worth clients. If those same children both opted to attend public in-state colleges or universities, the total cost would be $228,625, which is a difference of $229,254—a significant cost savings. But what is the “real” cost and how do you explain that to clients?
Laying Out The “Real” Cost Of Choice
Comparing the “real cost” of financing education when selecting a school is similar to the concepts used in retirement planning. At MainLine, one pressing point communicated to clients is that regardless of a client’s asset base, there are no special loans or scholarships for retirement. When it comes to saving for retirement, advisors need to do everything they can to help clients grow wealth for a time when they will not be working. Because of the impact of accumulated wealth, a comfortable retirement should be the primary goal for clients. It’s easy to say to a client that the goal is to save as much as you can as consistently as possible, but an emphasis on saving early introduces one of the most important concepts in retirement planning—the miracle of compounding. By providing a visual representation of current saving in projected future dollars, this enables clients to understand how much of their retirement might be financed by compounding interest. This same concept can be used to help clients understand the real cost of choosing a college.
Using the example above, the typical client will look at the “gross cost” difference of $229,254 and may or may not be troubled by that variance. However, as advisors, we live in the world of compound growth. The actual cost to the family isn’t ascertained by simple subtraction, but is actually determined by the loss of future wealth. What would happen if we evaluated the cost differential in terms of potential retirement savings? If we took the $229,254 and retained that money in the family’s balance sheet and grew it at an investment rate of 6 percent per year for the next 30 years, the future value would be $1,318,443. At MainLine, we think that number is significant enough that even high-net-worth clients will care.