How Can You Save for College?

MARK RIEPE: Colleges and schools of higher education have been around for quite a while. Let me give you a few examples.

The oldest is the University of Al Quaraouinyine. I hoped I pronounced that right. It's spelled "Q-U-A-R-A-O-U-I-N-Y-I-N-E." If that's not right, give us a rating or review and leave the correct pronunciation in your review.

Anyway, this university's in Fez, Morocco. It was founded as a mosque in the year 859 and then became a leading spiritual and educational center of the Islamic Golden Age. 

The University of Bologna was founded in 1088 and Oxford in 1249.[1]

For our American listeners, Harvard was the first institution of higher learning in the English Colonies. It was founded in 1636.

So higher education isn't new, but what is relatively new is the fact that it's so expensive, and navigating the financial aspects of it is challenging, and that's the topic we're going to tackle today. 

I'm Mark Riepe, and I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgement.

Whenever I hear that something is expensive or cheap, I immediately think "relative to what?"

In 1816, the average college tuition was $57.50 a year.[2] When I plug that amount into a historical inflation calculator, it tells me that's around $1,257.73 in 2024 dollars.[3]

That's an amazing number. If you bought all your college textbooks new, the average cost for a year's worth is about $1,200 as of 2022.[4]

The good news is that kids share books, they can rent them, or they can go to the vibrant used book market, so most students don't pay that much. Nevertheless, that example illustrates the rate of inflation that concerns so many students and parents.

Now I get it that a comparison to 1816 may not be the most relevant, but even just 30 years ago, the average in-state college tuition cost around $13,000. Today, it's more like $24,000. That's an 83% increase. And private college tuition is even more. And we haven't even talked about room and board. 

Of course there is help available to ease the enormous financial burden of getting that college degree. I'm talking about things like 529 savings plans, scholarships, financial aid, loans, and more. But many look at that as a bewildering range of options, programs, and plans.

And my guest today, Chris Kawashima, is here to try and help make it easier. 

Chris is a Senior Research Analyst in the Financial Planning and Wealth Management group at the Schwab Center for Financial Research. Chris joined Schwab in 2008. Before joining the research group, he worked as a financial planner and equity compensation specialist serving clients at Schwab. He holds a B.A. in philosophy from the University of California at Los Angeles, aka UCLA. And he's also a Certified Financial Planner (CFP).

MARK: Chris, thanks for being here today.

CHRIS KAWASHIMA: My pleasure. Thanks for having me. I love the podcast.

MARK: You know, Chris, we're going to be talking about college today. So maybe we could just start out before we kind of really dive into the details. You've got a philosophy degree from UCLA. How do you get from there to being one of our high-quality investment analysts here at the Schwab Center for Financial Research?

CHRIS: So thank you, Mark. Good question. I think it was a bit of curiosity, luck, and uncovering a passion for personal finance that ultimately led me to Schwab. Out of college, my first job was with a market research firm. There was a job post, and it said, "We want someone who could combine creativity with analytical thinking." And I thought that would be a great fit for my degree, so I applied. But long story short, I ended up being there for seven years, managed a variety of different research projects, and also worked with a lot of really good people and had fantastic clients.

But sometimes things happen that change your plans, and that's what happened to me. And so towards the end of my career there, I married my then-girlfriend at the time, Lane. And one of our goals was to buy a home and of course start a family, but there was just no way we can do that in California. So we made the decision to move to Arizona.

But before that move, I really started to get into investing. I remember picking up books, going to seminars, and applying what I then knew about investing with my own personal accounts. And so that kind of started my journey. After seeing and having to go through that move, I applied to and interviewed with a few of the financial firms out here in Phoenix, but Schwab was really the only one that contacted me and made me an offer. 

I wasn't really your typical finance, business, or economics major. I was a philosophy major. And I have mainly a lot of research background, but really something like personal finance and investing, that's not something that really shows in my resume. So maybe quite surprised that I did get the call back and landed the job, but that's what got me here to Schwab. And I've been here for 15 years and have grown since. So really, thank you to Schwab, my gosh.

MARK: Well, no, thank you to you. I've certainly learned tons of stuff reading your material over the years, so we made a fantastic decision there. And I think your story is a good kind of illustration, and maybe we'll get into this a little bit later, of college is an investment. But it isn't always clear how it's going to pay off. Sometimes it's pretty direct. Sometimes it's more indirect. But maybe let's kind of dive in. 

Chris, we hear a lot of parents—I'm sure you hear it, I hear it—hey talk about just how expensive college has been. And so maybe we'll just start there. Does it still pay to go to college? Is it worth it for the average person?

CHRIS: Yeah, so really good question there. And I think before getting to that question, there was a really good point that you made.

I mean, I think a lot of folks don't have a direct path from college to career. There's a really interesting study that the New York Fed did about a decade ago that basically articulated exactly what I was … that I went through, the path that I took, but I think many others are taking as well.

And basically what ends up happening is that maybe a little over a quarter of college graduates go into a career that actually matches their degree. And maybe perhaps in the STEM majors, the science, technology, engineering, and math majors, there's a little bit more of a direct, linear line. But even then, there's only slightly above 50% of the folks that go from the degree over to a field that matches that degree.

So linear path, maybe not so much, but there's a pretty good chance that those that are in college right now might end up in a career that is quite different. In fact, there's another study that I saw recently too that said essentially people change their majors at least once, about 80% of the time.

So I think that's just a testament in terms of, you know, the ability to flex what you learn in college and the skill sets that you develop there and to be able to translate into other things.

But back to your original question though, I think the general answer is yes. Does it, is a college degree still the best route when it comes for most people to find like that upward mobility? And I think the answer is yes.

We see it in the data. Those that have college degrees have roughly 50 to 75% more on average in terms of income than those that don't have their degree. And when it comes to the unemployment rate, those that have a college degree are less prone to be unemployed than those that don't have a degree.

So one thing I don't want to be is dismissive about what avenues and careers people choose that don't need a college degree. 'It's just that college isn't for everybody. I understand that. But I would guess, for a lot of people, a college degree is still by far the best route to go.

MARK: Yeah, I think I agree with both of those points. Certainly, it's unreasonable to expect every 18, 19-year-old to have their whole life plan figured out. So there's going to definitely be some twists and turns along the way. And then, yeah, on average, I think college has turned out to be a good investment for a lot of people.

But the cost of that investment varies quite a bit. You've got public schools. You've got private schools. You've got in-state tuition. You've got out-of-state tuition. Maybe put some numbers on that. What is that variability from all those different situations?

CHRIS: Right, that's a great point, Mark. There is variability when it comes to the cost of college. But when it comes to, again, looking for that path and is it, back to that question, is it a good value? The answer is yes. When you see the amount of premium that you can get from getting a college degree versus not, against that 50 to 75% number that we were just describing, that payback period ends up being somewhere around five to 10 years for paying back the amount of time that you take and the amount that you can receive more in terms of income by going through college than not. 

To the point of how much does it cost—yes, let's put some numbers to it.

So in 2023—and some context too, because I think if we look at this over the decade, this is what parents are kind of seeing through in terms of their lens of what the cost is. If you're thinking about public in-state—2023, the cost was roughly around $24,000. If you look back 20 years ago—this was around 2003, 2004—that price was roughly around $17,500. You look back 30 years ago—this is for folks that were probably in college between 1993 and 1994—that cost was roughly about $13,000. So there's quite a bit of a gap that you see from 20 to 30 years ago to what that cost is now.

You see similar numbers too when it comes to private colleges and universities. On average, that cost today is roughly around $56,000. Look back 20 years, $43,000. In 30 years, that was about $33,000. So there has been a significant increase during that time. And that's in real-dollars terms.

So all these numbers that I'm saying here are saying, "Look, what is that impact today in 2023 numbers?"

MARK: Chris, right now—actually, as we're recording this—we've got various headlines about the student loan crisis and how are people going to continue to pay for college going forward, as well as pay off the debt that they incurred to go whenever they went. So are there any good rules of thumb for how much debt students or parents should take on?

CHRIS: So yeah, there's a really nice rule of thumb that folks in the college-planning circle use, and it's called the rule of thirds. And I'll get to the point about loans here in just a bit. But the rule of thirds basically says, "Look, we have three levers here. We have income, we have debt, and then we have savings. So let's start with a base of splitting those three areas into thirds. A third through income, a third through loans, a third through savings. And then take it in bite-sized chunks so that we can tackle that big idea or the big expense of college costs." Let's look at this number, break it down in terms of the thirds, and say, "What are we the most comfortable with when it comes to savings, right, income, and loans?" And think of it that way. 

Debt is tricky. I think you and I probably share the same thoughts when it comes to it. Most people probably don't want to go into debt if they have a choice. But when it comes to large expenses, perhaps it's expected to think about that.

Think of like buying a home. We do need the help and maybe push forward the amounts that we might not have right now in order to accomplish some of the goals that we need or want to accomplish in the time that we have here.

 So, you know, loans can be expected. And is it a good investment when it comes to college? Yes, and loans, well, we're taking some of that income, that future income that we might potentially get after college and, you know, moving that upfront to help pay for that expense, the college expenses, so we can be in a better footing here into the future.

Is there a prescription for it? Not quite. I mean, it's personal. We talked about the rule of thirds when it comes to that, but not everyone needs to subscribe to that particular idea. T'hink through your own personal finances. Think through your own preferences when it comes to loans. You know, some folks might want to have their kids have some skin in the game. You know, take advantage or maybe have the opportunity to understand what money really means. And for some folks, what that means is maybe the student take on some of those loans. Maybe it's necessary. Maybe it's an option. But I think, again, that's a personal choice when it comes to it.

MARK: So let's talk a little bit about the financial aid part of this. Certainly, I think something most listeners, most parents are aware of this. But it's not as far-fetched as it may seem, because I think this is true. But correct me if I'm wrong. Most students end up receiving some form of financial aid. Is that right?

CHRIS: The quick and dirty answer is yes. Many students do receive financial aid, but financial aid comes in different forms. It can be in the form of grants, which is free money. It can be in the form of work-study programs. This is for those that are financially needy. And then there's also education loans, what I just mentioned. So even if you don't qualify for financial need, it's something that where you're filing for financial aid can get you access to loans.

The Free Application for Federal Student Aid, which is the FAFSA, you know, when it comes to loans, has really low interest rates. When you compare that to what's available through the commercial line there—you know, private banks—they're more lenient when it comes to repayment options. You also have access to forbearance, deferments, as well as potential loan forgiveness. So we saw that here back in 2000, where essentially federal student loans had a forbearance period where you didn't have to pay anything for a few years at all. Private student loans, unfortunately, had to continue through that route. And so that is something to definitely consider when it comes to student aid.

Now, when it comes to the FAFSA—it's free. It takes less than an average of an hour to complete. And with the new FAFSA form, a lot of that income data's automatically brought in through the IRS. So it's more or less about figuring out your assets.

MARK: I'm glad you brought up FAFSA, Chris, because I got a bunch of questions about that. The first one really kind of puts a pin on the point you just made. You mentioned that it's free and there's some benefits. Would you go as far as to say that everyone should fill out FAFSA, even if they think that, you know, maybe their income is too high—you know, they're probably not going to qualify, and they don't want to take the 45 minutes or so to fill it out?

CHRIS: Great point there. Should everyone fill out the FAFSA? For the most part, yes. And there's three points to that.

I mentioned this before, but depending upon the family's preference, filing the FAFSA can also open up that ability to receive federal student loans. And it's low interest versus when it comes to private student loans. And it might be a route that families will either prefer to do that or are forced to do that when it comes to having to pay for college costs. So definitely that's a route to go.

Also, many private colleges and universities offer institutional aid. So this is aid that goes beyond the FAFSA. So if a family's looking for that, one of the requirements when it comes to institutional aid may be to fill out the FAFSA—as well as what's called the CSS profile. These are essentially a more detailed financial form that mostly private universities and colleges ask students to fill out. 

The third point on this too—now, some admissions offices may even view the ability to fully finance college as a factor for their students. Just to be able to fill out the class to get diversity when it comes to who gets in, and so that could be a factor as well. So those that don't even need or don't consider themselves needing financial aid may think otherwise. And so this is a point to that.

MARK: My impression is that FAFSA is 'not a static document. It's received some criticism over the years for being overly complicated. And I think there've been some changes made to address that, as well as some methodological changes in particular around, you know, how do you account for multiple kids going to college at the same time? So what can you tell me about that?

CHRIS: You're right on both of those counts there, Mark. So there was something called the FAFSA Simplification Act that was part of the Consolidated Appropriations Act of 2020 that mandated a change to the number of questions that go into that FAFSA questionnaire. That main change happened with this school year, 2024 to 2025. The FAFSA went from roughly about 100 questions to a little over 30 questions.

Another change that you mentioned was with this calculation when it comes to having multiple kids go through college. Previously, the old calculations would reduce the parents' contribution by the number of children that went into college. So the more kids you had, the more potentially you can receive in financial aid. So for example, some college advisors might recommend that the oldest take a gap year or maybe go to a community college so that they can maximize this discount of having multiple children attend more expensive schools. 

So the new FAFSA itself does away with it. So essentially this multiple children's discount is no longer there. Some colleges and universities are trying to take that account for this year. Anecdotally, I've heard some news in regards to that—that they might be offering some kind of a discount, but not moving forward. I think this is a transition year when it comes to this FAFSA Simplification Act and how things are handled from that perspective, but I think parents are expected to handle that moving forward.

I think a lot of this change too hit students where families make more than a hundred to a hundred fifty thousand. Those that make underneath or under that hundred or hundred fifty thousand threshold probably might not see too much of a difference when it comes to aid.

MARK: Yeah, Chris, I'm glad you brought up that issue of that income limit or an income at which some of these provisions kick in or are taken away because when you think about people's ability to pay, which at some level is really important when it comes to financial aid—on the one hand, you've got income. You can be a high earner. You've got a high income, but frankly, you don't have that many assets. On the other hand, you've got people who have a lot of assets, but they don't have much in the way of income. So how does FAFSA go about balancing those two aspects of somebody's wealth?

CHRIS: When it comes to income and assets, the FAFSA really puts the emphasis on income—not so much on the assets, but the income. And you can see this within the calculations and methodology of the FAFSA. 

So for example, 20% of the parents' income will count towards paying for college, while up to 5.64% of the parent's' assets will count towards paying for college. So you can see there's almost a three times difference here between what's counted for college costs using assets versus income—20% again for income, 5.64% for assets. 

Even the student side—students can also potentially contribute via assets as well as income. They're dinged a little bit more when it comes to how much they could potentially contribute or expected to contribute to that college cost. And so up to 50% of the students' income will be counted towards college costs, and 20% of assets will be counted towards that.

But no matter which way you look at it, income is always going to weigh more in terms of the calculations than assets.

MARK: Chris, we've talked about financial aid. We've talked about borrowing, taking on debt in some form or fashion. And then the other one of your components was savings.

And there are a lot of different … for better or worse, there's a lot of different types of accounts that kind of get roped in into a college-savings discussion. We've got 529s. We've got Coverdell accounts. We've got custodial accounts. We've got kind of Roth IRA accounts. Help us make sense of all those different types of accounts, those different types of strategies. What are the strengths and weaknesses of each one?

CHRIS: Yes, I think you listed all of the top targets here when it comes to the different accounts related to college.

Let's start off with Roth IRAs because I think there's a lot of eyes on it. You know, when it comes to Roth IRAs, let's face it. I mean, the contributions that you put into a Roth IRA can be withdrawn tax free anytime. I think that's what gets mentioned for the most part when it comes to educational costs. It can be used for that and without any tax hit. While it's true, I also believe that a Roth IRA should be the last resort when deciding to tap your assets for education. 

And I just want to remind folks that the main purpose when it comes to a Roth IRA is retirement. Those funds that sit in a Roth IRA have a double tax benefit, can grow tax free. Qualified withdrawals can come out tax free if you're over 59 and a half and you held that account for at least five years. But that's what makes Roth IRAs so valuable. They can control taxable income in retirement. But these accounts take time to grow. And if you start to distribute these accounts earlier than you expected before retirement, you can reduce what could be a potentially wonderful asset in retirement. So that's something I just wanted to make sure and emphasize.

I think the first account people should be thinking about funding, like you mentioned, Mark, is a 529 account. You know, parents, grandparents, other family members can open up a 529 for the child. A person 'can be the beneficiary of more than one 529 at the same time. States set really generous limits when it comes to funding towards it. So we roughly see about $300,000 to $500,000 per beneficiary. And you can contribute up to $18,000 a year, you know, without incurring a gift tax for 2024.

You can also superfund a 529. Superfunding essentially just means you can pre-fund five years of annual gifts into one year without having to dip into what's called like the lifetime federal estate and gift tax exemption. That's a really great way of putting money towards education with a purpose.

Any money that sits within the 529 can be distributed for qualified expenses, tax free. Also, whatever money that sits within a 529 account can be tax deferred. For some states, most states in fact, you might get a triple tax benefit in which contributions that go into a 529 might have the ability for a tax deduction or credit. Really tax-advantaged way—529s I think is a really good route.

Another one that you mentioned was the ESA—so the Coverdell Education Savings Account, ESA for short. It's similar to the 529. It's designed to help you pay for the child's education. Money that goes into the ESA is tax deferred, and any qualified distribution is tax free. I like ESAs as a topper because you can save in both the 529 and the ESA. If you have extra amounts to save, an ESA is a great way to do that.

However, there are some more limitations when it comes to the ESA versus the 529. The contribution is going to be limited to about 2,000 a year. So really not so much more they can put into an ESA than a 529. Contributions are also going to be phased out for higher income levels. So if you make over certain amounts, you're not going to be able to contribute to it.

Once the beneficiary of that Coverdell account—turns 30, that entire amount has to be distributed. So that's not like the 529 at all, which you can pass that down to different beneficiaries. You can change the owner of that 529. You could change beneficiaries of that 529. So an ESA is a little bit more stringent in that regard.

You mentioned custodial accounts. I think custodial accounts are a little bit more for affluent folks who want to think about maybe doing more estate planning or just tax sheltering when it comes to saving. They can also be used certainly for any level of wealth. So for example, if you want to make sure that there are expenses that perhaps might not be covered by like a 529—certainly they will be when it comes to the college experience. A custodial account could be a good place to do that while having a little bit of control before, we call the termination age. That's the age in which the custodial account becomes fully the account of the minor—or at that point in time an adult, a young adult.

So a custodial account can certainly help. It's a little bit more … again, if you're thinking about it, in terms of just a shifting of assets and taxes down to the younger generation, because of what I mentioned a little while ago, in which custodial accounts or assets owned by the student are counted a little bit more heavily than parents' assets.

And then finally, there's parents' brokerage accounts. I think this is a really catch-all and a great way to say, "Look, maybe you're not going to get a tax advantage. You might not get any savings from distributions because you'll have to pay taxes on anything that comes out or sold within a brokerage account or a savings account perhaps, but it's very flexible." Again, 'it's only accounted for up to 5.64% of whatever's in it. So there's a lot of flexibility with it. You can save. It could be yours. It doesn't have to be the child's. And it can go towards future retirement expenses, etc.

So those, I think, are the main culprits when it comes to the accounts for saving for college.

MARK: That was a long answer, but it was a good answer, Chris. I'm going to kind of simplify things a little bit and kind of put together sort of a real-world scenario here.

So let's say you've just got one type of account—you've been using the 529. But you know, it's not enough. You've also been borrowing money on the side. What should the flow look like from the loans in the account? Should you just use the account until it's empty and then borrow? Should you borrow upfront and also take a little out of the account each year and then supplement that with the student loan? What's the best way to approach that?

CHRIS: Yeah, I really like the last route that you mentioned, which is kind of take proportional amounts out from savings, income, and loans. One of the main reasons is that when it comes to federal loans, you're going to be capped in terms of how much you can take out in any one particular year. So to kind of compare this versus the scenario you mentioned before where you say, "Look, let's just take out as much as we can from savings really early on." Well, if you do that and you don't take out any loans, you're not going to get that loan amount back. You can't combine these loans into future years because you're capped. Proportionately taking out loans if you need them, as well as income and savings, makes the most sense to me.

It might happen too where if, for example, you don't go down that road where you're kind of proportionally taking out—another downfall is that you're going to be relying on other sources of assets if you can't pay off or if you can't use income to pay the college costs. So what this means is that you might be relying more on commercial loans, private loans, or you might have to put more into what we call PLUS loans. And PLUS loans are essentially—it's Parent Loans for Undergraduate Students, that's what it stands for. But there's no maximum in terms of how much you can receive.

And it can become really dangerous when the parent starts taking on that responsibility of paying off student loans when that parent might be 50 or 60 years old or taking on a loan that might be carrying on into retirement. I think when it comes to retirement planning, one of the things that we like to see is for folks to start reducing the amount of debt they have into retirement. On average, ''it's about $40,000 of loans that parents are taking in during that timeframe. I don't know about you, but $40,000 of debt going into retirement could potentially push retirement a little bit here.

So all in all, when it comes to, again, answering your question, "Should I do it over time, or should I take it upfront when it comes to the savings?" Over time I think is a better answer for all those reasons I just stated.

MARK: Well, I think another consideration is the fact that more and more people are entering their retirement years with mortgage debt, much more so than used to be the case. And now add in student loan debt. That just makes the problem worse.

I want to talk a little bit more about the 529, because we've been talking about it as kind of a college-savings vehicle. Can it be used for more than that? I mean, graduate school, high school—can it be used for tuition or both tuition as well as room and board? How many different ways can this type of account be used?

CHRIS: I love this question. Yes, for all of the things that you mentioned. So it can be used for more than just college tuition—board, fees, you name it, for the most part. As long as it's qualified, you can read it through the IRS, what's qualified when it comes to expenses. But yes, I mean, there's so many ways in which you can utilize a 529 beyond tuition itself.

Other ways that we're seeing is you can spend $10,000 a year on qualified tuition for eligible K through 12 private or public schools. So you mentioned that. So you can start earlier if you wanted to. If that's a desire to use it for K through 12, you can do that.

You can also pay for vocational or technical schools. So this isn't just, you know, your college or university experience.

You can also pay up to $10,000 in student loans. So say you've graduated—you still have leftover 529 money left—you can use up to $10,000 towards student loans.

And—this is a new provision within the Secure 2.0 Act—but you can potentially now rollover excess contributions up to $35,000 from a 529 to a Roth. So talk about, you know, what you can do in stretching the ability of the 529. These are really great ways to do that.

MARK: Just got a couple more questions for you. And one of those is—I don't have any data on this, but I suspect most of the people who are going to be listening to this episode, they probably feel to a certain extent stuck. They've got maybe a high enough income that they don't really qualify for some of the need-based aid that you were talking about. But they're also … they don't have the savings to kind of deal with the high sticker prices that you were talking about earlier for some of the schools.

So how do they approach this? What's the strategy to kind of get to an answer that's going to work out—allow them to get the kids the education that they need, but at the same time, kind of respecting the financial realities?

CHRIS: I 'think what we all want is balance when it comes to getting that quality education, the experience for the lowest cost and for the largest possible return. I mean, you want that. You want that Venn diagram of all those different aspects when it comes to education. And you want that little middle section there where it's the right fit. So I think of it as right-sizing the college plan.

But it takes work. And there's a variety of ways in which you can get to that mix in that right way. I think this kind of starts from high school. You know, you see this a lot, especially with the parents if they are in college, have gone through their own similar experiences of having to apply for, etc., getting into college universities. 

You start with high school by taking AP or dual-eligible courses. You can knock out college credits with that. You can reduce the amount of time that you're in college, you know, by going that route. Instead of going four years, you might be able to do it within two to three years, for example. 

Another route is going to community college for the first couple of years to kind of reduce that initial cost of college. So you might say, "Look, let's just go to community college to get your GEs done, your general education courses done." You can do it far cheaper than you could potentially within a more expensive school. And you can also, let's face it, figure out what your major is going to be. Having to figure out what it is that you want to do and what your passions are. What you want to study within college could change very well. 

So another route could just go simply to an in-state public college or university. We know that this tends to be cheaper than having to go into a private college or going to an out-of-state public university or college. And this will be especially important if we're considering perhaps careers in areas where you might not always need the connections, networking, of much more expensive schools. Or you might want to consider what that return on investment will be from that education. 

When it comes to private colleges and universities, you know, some of these private colleges can potentially receive a lot more in terms of institutional aid for the right student without having to rely so much on financial needs. So if you have a higher income, not so much in terms of assets, then you might want to really research and see what kind of institutional aid is given to a child regardless of financial need.

And also, I think one of the things that we've seen, especially when it comes time with COVID, etc., is this ability for parents, and we heard this a lot, is just negotiating at the late stage of this college planning process. If you have multiple offers, and the school is offering one—don't be bashful, maybe just compare that one college to the other and say, "I'm getting this X amount of dollars from this one college. Can you potentially match what they are giving or give me a little bit more for that consideration of going into your school?" 

Colleges are in the business of making money, and they can't do that if they don't fill up the seats. So that negotiation, the ability to negotiate for that college price or that college cost can also be another arrow in that quiver as well.

MARK: I think those are a lot of great tips, Chris. And I think you also put together a piece that we posted to Schwab.com where you listed a lot of the common mistakes that people are making. Is that right?

CHRIS: Yes, there is a piece, and I listed eight mistakes there that are fairly common. It's a short read, but it's packed with a lot of those common mistakes there. If there's an opportunity, take a look at it. It covers the lifecycle of someone going through the thinking and process of college planning from early stages all the way to late stages and some of those mishaps that might happen along the way. So thank you for mentioning that.

MARK: Sure. Chris Kawashima is a senior research analyst here at the Schwab Center for Financial Research. Chris, thanks for being here today.

CHRIS: Mark, it's been a fun conversation. Thank you for having me on your show.

MARK: Chris had a lot of great advice if you're trying to figure out how to pay for college. As he mentioned, there's an article at Schwab.com called "8 Mistakes to Avoid When Planning for College Costs." It's a summary of practical steps to take and avoid. We'll list it in the show notes. 

Chris also said that higher education is within reach of almost everyone. That's true, but it's a big commitment of dollars as well as time. And for any important financial decision, it makes sense to create a plan—preferably with some input from a financial professional or wealth planner. 

The purpose of this show is to showcase cognitive and emotional biases that get in the way of making good financial decisions. Not making quick, knee jerk decisions is a good way to improve decision-making. Creating a plan that accounts for different scenarios is an obvious technique whether you're thinking about college or any other big decision with financial implications.

But the act of planning isn't foolproof. For one thing, the act of planning itself is subject to various biases. One of those is not thinking broadly enough about different scenarios that might occur or putting blinders on and only thinking about positive scenarios and not negative ones.

With that in mind, here are a few extra things to think about when it comes to creating a financial plan for college.

First, college isn't right for everyone. I'm aware that we just did an episode where Chris supplied many compelling statistics about the long-term financial advantages of having a degree, and I absolutely agree with those statistics.

But those are averages, not guarantees. I'm looking at a study from the Center on Education and the Workforce at Georgetown University. It finds that 16% of workers with high school diplomas earn more than half of the workers with bachelor's degrees.[5]

So it's more accurate to say that having a college degree has, historically, increased your odds of having higher earning power, but it doesn't guarantee anything, and it's not a "have-to."

Second, if you're going to go to college, getting the degree really matters. There are some aspects of our financial lives where we can set a goal, and if we don't meet that goal, but we're close, it's far from being the end of the world.

If your retirement goal is to have $1 million, and you enter retirement with $900,000—that's close, and it isn't too bad. But you can make spending adjustments and everything will probably work out fine. On the other hand, there are goals where the benefits are more binary. You either complete the task, or you don't. If you do, you get the benefits, and if you don't, there can be big repercussions.

Having a will is one. Making a plan to create a will and meeting with an attorney is all well and good, but all the i's need to be dotted, the t's need to be crossed, and signatures need to be put in place for the will to be real.

It's either done or not done, and you don't get any benefits if it's not done. As Yoda said in one of the Star Wars movies, "Do or do not. There is no try."

College is more like the latter than the former. I'm looking at the same Georgetown study, and it shows the median lifetime earnings for someone with a high school diploma or GED as $1.6 million.

It also has a category for "some college." That refers to people who went to college but didn't graduate. The median lifetime earnings only goes up to $1.9 million. Compare that to people who got a bachelor's degree. That number is $2.8 million.

In other words, there is an earnings premium for attending some college, but the payoff is much larger for graduating with a degree. Of course, like I said earlier, these are averages, not guarantees, but the data are persuasive.

My final point is that when planning for college you need to think about how long it's going to take to get that degree because the longer it takes, the more money it's going to cost. Four years is the standard, but that's not the typical experience.

According to the National Center for Education Statistics—that's a division of the U.S. Department of Education—only 44% of students who got degrees did so in 48 months or less. Twenty percent did so in five years, and 10% took six years.

There are many reasons for why this might happen (for example, switching majors or transferring to a different school), but the point is that it happens frequently enough that its worth planning for the possibility.

That's our show, and thank you for listening. There's also a lot of other education-related content at schwab.com/learn.

To hear more from me, you can follow me on my LinkedIn page or X @MarkRiepe: M-A-R-K-R-I-E-P-E. And if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app.

Please consider leaving us a rating or review on Apple Podcasts. It really helps us out. 

For important disclosures, see the show notes and schwab.com/FinancialDecoder.
 

[1] "What Are the 15 Oldest Universities in the World?" Oxford Scholastica Academy, blog article, July 27, 2023, https://www.oxfordscholastica.com/blog/what-are-the-15-oldest-universities-in-the-world/

[2] Daugherty, Greg, "Here's What College Cost 200 Years Ago," Money, Feb. 9, 2016,  https://money.com/what-college-cost-200-years-ago/

[3] CPI Inflation Calculator, https://www.officialdata.org/us/inflation/1816?amount=57.50

[4] National Center for Education Statistics, Table 330.40, November 2022, 

[5] Carnevale, Anthony P. et al, "The College Payoff: More Education Doesn't Always Mean More Earnings," Georgetown University, Center on Education and the Workforce, 2021, cew.georgetown.edu/collegepayoff2021.