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Bogleheads Speaker Series with Ron Lieber

Post on: June 12, 2021 by Rick Ferri

New York Times financial columnist and author Ron Lieber’s new book, The Price You Pay for College, provides a roadmap to help families navigate the often difficult and confusing journey of preparing for college. In this discussion with Rick Ferri, Ron will touch on the most important college-planning topics, from choosing the right school to figuring out the right ways to save, borrow, and bargain for a better deal.


Bogleheads® Speaker Series – Ferri with Lieber

Rick Ferri: So with no further ado, let's welcome Ron Lieber. Welcome to the Bogleheads Speaker Series Ron.

Ron Lieber: Thank you, Rick. It is an honor here to be among my fellow personal finance nerds. I know there are few people living and walking and breathing in the United States or in the world who care more about  beating the system, winning the details and getting it right than this crew and it's a special honor to be here with Mr. Asset Allocation himself  doing the grilling for the next 60 minutes. So I look forward to it. Lay it on me.

Rick Ferri: Well, Ron, we'll start out with you. Over the past decade your writing has shifted to focus on family finances, but particularly raising children, teaching children about money, and now sending those children to college. So I think I can guess this, but what sparked your interest in doing a book on the price you pay for college?

Ron Lieber: Sure. Well some of this is born of my own personal experience. I grew up in Chicago. My family was well off enough to afford three private school tuitions back in the day, in the ‘70s and ‘80s when that didn't cost quite as much as it does  today. And I had a couple things happen there that changed everything for me. So my parents split up. If any of you were divorced, or the children of divorce ,you know that that is a calamitous financial event. 

Among others, right .You take one household, you turn it into two. There's  just going to be more expenses. And then right about the same time my father, my late father, lost his job and he did not earn much income to speak of for the next couple of years, except through some occasional consulting jobs. And it was about a decade, really, until my family was back to where it had been financially.

So right away we were thrust into the private school financial aid system for K to 12, such as it exists. Basically it consisted of a board of directors at our school in Chicago deciding whether the Lieber kids were going to be evicted for lack of ability to pay. And thank God we weren't. It's still the most generous thing that anyone's ever done for me. And those kids who I grew up with became my family and are still  my closest friends to this day.

So I got to stay there at the Francis Parker school but when it came time to apply to college we did not have enough money for the places that I wanted to attend. Luckily our college counselor there knew the name of a guy to see. The guy in the Chicagoland area who you would go to for help for financial aid.

And we called him up. He gave us an address. He said we were to show up at 5pm the following Tuesday at this place in Evanston and we were supposed to bring him $50 in cash and he said to go through the side door. So we thought okay, and we show up at this address and it turns out it's the office of financial aid at Northwestern University. And it turns out that we were there to see the assistant director who had this incredible side hustle going on where every day during the fall at 5pm he would usher in these needy families and you would pay him a little money, which he presumably would not report to the IRS, or certainly to his employer.  And then he would proceed to explain to you all of the secrets of the financial aid system and it turned out this guy knew exactly what he was talking about and I got into Amherst College.

Early decision. I got a great financial aid package, and I learned a couple of important things from that. Namely that the grown-up world was filled just chock full of complex systems involving money and they were totally made to be hacked, right. He wasn't encouraging us to break the law, but there was this guy out there who knew the answers and for very little money we could get a hold of him and he could tell us what to do.

That lesson stayed with me. So it's not  really any big surprise that I grew up to be the person whose beat is beating the system in the newspaper. That's always the way that I thought of my personal finance work at the Wall Street Journal and now at the New York Times.

And as a part of that basically anything and everything that hits you in the wallet, particularly items that have large costs or large potential costs and that involve a lot of emotions and feelings are the things that I care the most about.

So of course when I became a dad in 2005 for the first time--I now have two kids, a 15-year-old and a five-year-old--I became a little bit obsessed with 529 plans. Back then I was at the Wall Street Journal and there was still a fair bit to say about the lousy investment choices and the high fees and the various limitations and the complexity. As most of the people on this call probably know, we have largely, although not completely, solved for the generalized mediocrity of these 529 plans.

So at a certain point I moved on in my writing to write about how to pay for college instead of how to save for college. Because we were starting to hear about all these people coming out of undergraduate with just piles of student loans. Particularly 15 years ago when you could still get these so-called private loans, not the federal loans that are capped, but private loans without any adult cosign.

So I started to get into that area, and I'm still writing sort of sporadically about those very complex systems involving money that we have not yet solved for in the New York Times. But what started to happen as time went on is that I would hear from readers and from colleagues and friends who were super confused. Not so much about how to save, and not so much about how to pay.

They were asking value questions. They would come to me and they'd say Ron, you know my kid got into the University of Illinois at Champaign-Urbana and that's going to be maybe $125,000 because we don't qualify for any need based aid. My kid also got into Kenyan College because they're interested in English, being a writer, and that's a really great small liberal arts college in Ohio, and they gave us a bunch of discounts even though we don't qualify for any need-based financial aid. That's going to be $200,000. And then, my kid shot the lights out and got into Northwestern. So that's going to be $300,000.  Where in your library of big data sets that you keep track of over there, is the data set that tells me why Northwestern is two hundred thousand dollars better than University Evansville.

And so I thought, Wow! I need to start thinking about value. I need to start thinking about what to pay for college too. And so that was sort of my journey to becoming obsessed with the college question. It was from personal experience as a student, as a middle-income student. It was from personal experience as an investor with one and then two kids living in New York city, a high cost area. And then it was from professional experience with this avalanche of incredibly confused people asking questions about value that I did not know how to answer.

Rick Ferri: Well your book starts with a discussion that contrasts the advertised cost of college by those institutions with the price of college. So I'm going to show a chart. And this chart is the price of the cost of college from 1980 through 2020. Now 1980 is a really important period for me because it's when I graduated college. And I went back and I looked. I actually paid room and board, tuition, everything else: $10,000 for a four year degree at the University of Rhode Island. That's what it cost.

Now this chart is showing the cost of college over the next 40 years going up by 1200% and during that same period of time the cost of inflation going up by 236%. So here's what I did. I went back to my old alma mater, the University of Rhode Island and I said, “If I paid $10,000 back in 1980, and the cost of inflation was  236% i would pay $36,600 for the same education today.” It turns out though--I actually looked at the data that I got off the administration of the website from the University of Rhode Island--and it came out exactly to $128,000. This chart is very accurate. Now my question to you, Ron, is why does this chart exist? What happened here?

Ron Lieber: Yeah. So I guess  let's start by making sure we label this chart correctly because what we were looking at there was list prices. And I assume at some point, sooner rather than later in the hour, we'll get to net prices and discounts. But there are plenty of people who pay the list prices particularly at public institutions like URI, that don't have a lot of  institutional aid. And there are--and if you're a good Boglehead and you have saved effectively, you may have so many assets and perhaps enough income to support those going to qualify for much-need-based, and so you may well pay the list price.

So let's talk about those list prices. First of all let's consider a public institution like the one that you attended or any flagship state university. What's gone on there, more than anything that's caused that line to be so steep, is a decrease in the amount of subsidy that the state legislatures give to the schools. I mean to the extent that the price of those institutions are quote-unquote, artificially low, that they don't cover the cost of actually maintaining the buildings and paying all the professors and providing programming for the students is because the state uses tax or other revenue and just hands it over to the university to keep tuition costs down.

So back in the day this was thought to be a useful enterprise, a good investment. A well-trained workforce grows up to be more productive, pays higher taxes because it's earning more, and that money comes back to the state and it gets a return on investment. But back in the last big recession, in particular 2007, 2008, 2009, 2010, these states were so hammered by a loss of tax revenue in that enormous recession back then, that they had to make some difficult choices. And one really easy thing to do, politically, is just to stick it to the state university system and the chancellor and the board to make difficult decisions about whether they're going to raise prices or whether they're going to cut services or cut programs.

And those schools felt like well we can raise prices because what it really means is that these students and these families will probably just have to borrow a little bit more, maybe a thousand dollars extra per year. You know they can afford it because this was already a subsidized education. In particular, but if that thinking continues to feed on itself, over time, that's how you get a chart like this with public institutions.

Now if you're looking at the chart for private institutions ,it's a little bit more like this for a variety of  reasons  in the market, that we can talk about--still pretty steep, far outpacing inflation, maybe not quite you know-- but starting from a higher price, which is why the angle, the slope is is not as high as it would be for publics. The privates have a  different problem going on there, shared somewhat with the publics, but that the private institutions need to justify their higher prices with more faculty, better services, shinier buildings.

They're in competition with the state university systems but the other thing they have going on is that, as time has gone on, both market demand and regulatory requirements have meant that these institutions have either needed to, or felt like they really had no choice but to add a whole bunch of administrators. We've got all sorts of new laws that require equality on the playing field for our daughters, Title IX.  All sorts of actions that speak to diversity and equal access in areas outside of gender. We have ever higher technology budgets at these institutions. There are parents who demand bigger and better career centers. Kids have become  accustomed to living in a certain manner and if your dorms don't have air conditioning, well people may not choose your school.

And so there are all these market pressures, regulatory pressures, which has led to there being a much higher number of administrators at these schools. Administrators don't come cheap. They're reasonably well trained, they're experienced, and I think if you get right down to it, as a parent, if you've got a child who's going to college and they've got a medium grade mental health challenge, you don't want a 23 year old grad student working in the counseling center using your child as their guinea pig. You want a 43 year old Phd psychologist working in the mental health center to take care of your precious child who you've pushed off into the world for the first time. 

And you multiply that times all sorts of different parents with all sorts of different needs and pretty soon you have a lot more administrators than you used to. And that's got to be paid for in some way. And for the private institutions, if they don't have a big endowment, that comes from tuition. So that's how the list price goes up.

Rick Ferri: There I have another screen. And this one shows the difference for 2000 - 2021. Up on top is a two-year public college, basically a community college. And then you have your four-year college public $26,800. And then you have your four year out of state  $43 000. This is all inclusive, it's tuition, room and board, books and supplies, transportation and so forth. And then the bottom is your non-profit, It's going to be a private non-profit four-year college.

Now a couple of things that strike me, is number one, why does it cost more money to live in a dorm in a private college than a public college. I don't know. The second thing is the books. I noticed the books have increased with the rate of that original inflation. The cost of books have gone up about 1200% over the last 40 years too. So they have far outpaced the cost of just buying a regular book. In fact, if you bought a regular book, the cost has actually come down. It's basically been lower than the inflation rate. So tell me, if you will, if you know this, what's going on with textbooks, college textbooks. Why are they so expensive?

Ron Lieber: Yeah. So I know a little bit about this only because I helped some friends of mine run a campus-based used bookstore back in the late ‘80s and early ‘90s. And look, some industries have higher profit margins than others and textbook publishers really rake it in. Why didn't they do that well? First of all I can tell you how if you put out a slightly changed, really just like re-paginated, where you change the font size of the edition of your textbook every 18 months, then you can just sync the used textbook market all together.

And if you want to do well in the class and don't want to be checking the book out from the library, you've got no choice but to buy this thing. And the books back in the day would only be available at the campus bookstore and you paid the list price. And that was that.  And there's a reasonably high barrier to entry for these things because the professors themselves have high standards. They want the textbook to be excellent. And it turns out it takes a couple of years to write a really great thoughtful textbook for organic chemistry or for psych 101 or for econ. And so they do this because they can. I mean it's not an incredibly large piece of the budgetary pie but it's just high enough that it really bugs people.

And there have been various attempts at innovation, most recently with the electronic textbook publishing. And that's helped some. But this is just a slow industry to change and people, the professors, in particular, have ingrained habits and it's a tough one, it's tough to crack.

Ron Lieber: Well, so let's start with the baseline economic data. The baseline academic data economic unit tells us that there's roughly a million dollar lifetime gap in earnings between  people who go to college and finish, which is important because roughly there's a very high percentage of people who go to college or start college and never actually finish. So that million dollar difference is between people who finish and people who don', or who never go in the first place. So that's a lot of money over time. But that's just an average. So of course all of our kids are above average and the ones who are above average who don't go to college are ones who enter highly paid trades for which there is a relatively consistent demand, often in a situation where they're self-employed and not at the whim of whether the local manufacturer moves out of town or whether the Chrysler plant closes and moves to Mexico. And so much is going to depend on the choices you make.

I ask people to consider a different question because not everybody goes to college for the same reason in the first place. So trying to figure out what's worth it, and how much it's worth gets to the very definition of what college is in the first place. And when I started doing the reporting for the price you pay for college, people sort of looked at me funny when I asked them well what is college. They would sort of look back at me blankly. And I'm like surely you've thought about the point of the exercise if you're about to maybe spend $300,000 on this thing right. And then their faces scrunch up and they're like, yeah I guess we should do that.

And so I get them talking. And it really just comes down to three things. College first and foremost--not foremost, but foremost for some people--college first is about the education. It's about the learning. It's about having your mind grown and your mind blown. Essentially having your brain taken apart and put back together again by an expert practitioner. So that's the first part.

The second part of college for  many people is the kinship.  You go to college to find the people that you never could have imagined existing in the world. The people who will be by your side for the rest of your life and who will mold and shape you themselves through four years of banter, and decades afterwards of friendship. These are also the people who will form the beginnings of your career network, and it's not just peers by the way, it's also grown-ups. It is the professors, it is the deans, or other people you encounter along the way who will become your mentors, and who will sort of drag you into a bigger and better version of yourself. So that's number two. College about the people.

And the number three. Colleges also, of course, at least for most people, are about the credential. And maybe that's a credential that allows you to take a quantum leap up the social class ladder and into a middle middle-class career, where there is a reasonable amount of job security because you've gotten a bachelor's in nursing, or a bachelor's in accounting or something like that. Or you're going to go to med school, or perhaps you're getting that credential because you know that the degree from Princeton when you're coming from rural Wisconsin, will open doors for you into industries and companies that never would have been open to you otherwise. You know with the sort of social capital and the snobbery and elitism and all that that comes with a fancy name plated degree. So those are the three things that our college are about.

And there's no right answer to the question. Some people think all three are of equal importance. Then there's some people who are only going  for the kinship, and I make no judgments about that. I only make judgments about the people who never stop to ask themselves the question in the first place. Because if you don't do that, how do you know what you're shopping for.

Rick Ferri: So we have we're going to go to college. The children,  the grandchildren are going to go to college. Now we have to figure out, well, which college, and then how to get into that college, and then how to pay for that college. So let's start out with selecting the right school. You list three unhelpful feelings, you call them the three unhelpful feelings of fear, guilt, and snobbery and elitism. Can you explain why these are unhealthy?

Ron Lieber: Sure. Well I guess where you start is you always want to be checking yourself, and this is not going to be any news to Bogleheads. You know the Boglehead community has become used to, over decades, resisting flashiness, resisting so-called expertise, resisting the smart man and the smart woman who were supposedly the end-all be-all of investing prowess.

And so what are the things that can cause you to spend more than you need to? And I think those emotions and those answers apply equally well to colleges that they do to mutual funds or ETFs. First of all, it's fear. Fear that if you don't spend money, fear that if you don't believe that you'll get what you pay for, and the more you pay, the more you'll get that. If the fear that if you do it wrong, if you cheap out, then in this instance your kids will go tumbling down the social class ladder from wherever it is that you've managed to clamber up to.

Because you were seeking, because you were too cheap essentially. And that there's something wrong with you as a parent or as a grandparent if you're not ponying up for the most expensive version of whatever it is that you know that your kid actually needs. College is not a want for many families, it's a given. So this is actually a need. It's just a question of how much you're going to pay for it. So there's that fear.

Then there's guilt. Guilt that we have not saved enough to provide whatever it is our kid wants in this category of need. That guilt that we do not earn enough. Guilt that we chose the wrong profession, that does not allow us to write a $300,000 check after taxes out of current income. Guilt that we cannot do what our parents did for us. Even though Rick's parents in 1980, if they did pay for any of it, and it looks like they didn't, but you know had they wanted to, or been able to, the final price tag for you, as you just explained at the top of the hour, doesn't look anything like the $128,000 price tag you know the parents in Kingston or Cranston or Providence would be looking at right now.

And so we get ourselves all hung up on what our parents did for us without really understanding that the world has changed entirely. Or maybe we get all hung up on what our parents did not do for us, and we either deeply resent that they had the ability, but not the willingness, to pay for us. Or we know how much we struggled because they did not have enough money through no fault of their own, and we wanted to be exactly the opposite for our kids.

We want them never to have to worry about money during college for a second, no matter how much it costs. And if we haven't accomplished that, if we haven't satisfied that goal, then we're doing it wrong. So just like guilt, guilt, guilt. We can send ourselves on so many guilt trips about this stuff. And I'm trying to get people off those guilt trips.

And then the fear in the snobbery--is you know, about the subconscious or maybe the conscious sense--that where our kid goes to school, where we can afford to send our kid, where they are able to get in, is all some kind of final exam on parenting. The results of which, played in public to the public, through Facebook and Instagram, sweatshirt reveals, and the bumper sticker in the window. And you want that college to be as prestigious or fancy as possible.

Otherwise you did it wrong. Otherwise  you've got to see minus as a parent. Or even if we manage to get over that and step outside of ourselves, we're worried about other people's snobbery. Because if we got a 16 year old budding investment banker on our hands and that kid has already figured out that, oh okay if I'm going to do this, I want to be an investment banking analyst, you know Goldman Sachs or Wall Street--Goldman Sachs or Morgan Stanley or a couple of other Wall Street firms--those places are just shock full of snobs and elitists and they are not going to hire you out of Wisconsin Whitewater, but they are going to  hire you out of Princeton. They are going to  take a close look there.

And so you know if you've got 10,000 acres and 5,000 head of dairy cattle up in northern Wisconsin  and you're tempted to just send your kid to Wisconsin Whitewater that's great. But if that kid really wants to be a banker and you want that kid to have a shot at their dream, and you're not going to earn any need based financial aid because you're making all that money  selling the milk to Ben and Jerry's, you're going to think really hard about spending that $300,000 for Princeton if your kid manages to get it. Not because you think it's worth it, but because somebody else on Wall Street is a big freaking snob.

And so these are relatively limited circumstances. But as a parent I can see how if you have the means or the ability to borrow,  you want to do everything you possibly can, or you're tempted to not to close off any avenues to your kid whatsoever. And that is how people end up spending $300,000 ,or borrowing to do so. And sometimes it's for a reasonably good reason, and sometimes it's because people are confused.

Rick Ferri: So you talk a lot in the book about value. Are you getting the value out of your education or so forth. So how do you separate--for each individual, of course it's different--so how do you separate value, and how do you find value in the college system?

Ron Lieber: Sure. So it begins with trying to figure out what it is that you're going to school for. t So let's forget about the 16 year old investment banker for a minute. Let's think about the 16 year old who wants nothing more than to be a marine biologist. And this isn't the eight-year-old who loves the dolphins. This is the 16 year old who's shooting the lights out in AP bio and has done an internship, and  you know is reasonably sure that they want to go not just to college but to graduate school.

So you're thinking about a lot of things there, but probably the first thing you're thinking about hopefully, is you're thinking about the quality of the education. But what you're also thinking about is the quality of the mentorship, because you know that  you can't get into one of these teeny, tiny, very competitive marine biology Phd programs. Or you figure this out with a little bit of research, you can't do that without just a glowing lights out recommendation from your undergraduate faculty advisor.

So how are you going to  find somebody in an institution who's going to actually get to know your kid well enough to be able to write that kind of recommendation? And what sort of environment or circumstances are going to need to exist. Is there a better chance of that happening if they're in biology 101 with 800 other people, including 300 people who want to go to medical school. Or is there a better chance of that happening if they go to a small liberal arts college that happens to have a really great biology program.

So you start thinking about size. You start thinking about faculty contact again. If you're up there in northern Wisconsin and you've got that budding marine biologist  on your hands who wants to do it someplace other than Lake Superior, you know maybe you're going to send them to  Madison or to Wisconsin Whitewater. But there may be a lot of adjunct professors there, or part-timers who aren't even going to be around two or three years later. Whereas if they go to Lawrence University, a smaller school, if they go to Knox college, if they go to one of the smaller colleges in Minnesota, they're going to have a better shot at making that kind of contact.

And then you can go looking for data, which actually does exist, that will tell you which undergraduate institutions the phd students--at the biggest biology programs for Phd students-- where the undergraduates actually come from. This data is out there, so you start looking for whatever data or evidence you can that exists that might give you some sense of whether an institution that costs more than your state university might actually be worth it if it stands the chance of raising the odds of helping your kid do whatever it is that they want to do.

So there are a number of problems with this. First of all, to the extent that the colleges have good data on outcomes they're not always so great about sharing. Because if everybody shared standardized data then there would be even more ways to compare and rank the schools and this is not in their interest. And so there's not always great data, It isn't easy to find. I spent years hoovering up resources and trying to spit them out in the book. But I was not ultimately satisfied with what I was able to put together and it's the school's fault.

And then there's the not so small matter of the fact that we are dealing with children, for reasons lost to history, but that makes absolutely no sense whatsoever. We spend all this money on teenagers. We don't send them off to serve in the US armed forces on a mandatory basis. We don't send them off to do non-military national service. We don't encourage them, for the most part, to take a year or two off before going to college. So we've got these 18 year-olds who've never done a darn thing in the world except you know scoop ice cream and work at a day camp, and sitting in high school--going to college.

And we're making these six figure decisions investments based on what we think their interests are. But some of them have no earthly idea what they want to do. And then many of the rest, who are absolutely certain about Wall Street or marine biology change their minds once they get into a really good college classroom and get exposed to bigger and better ideas. 

So the whole thing is fundamentally flawed--and deeply dissatisfied, I'm just trying to help people walk through a reasonably dysfunctional system with their head screwed on reasonably straight.

Rick Ferri: That's great. Okay, so at the end of this journey you're going to pick out a few schools and you're going to have to apply to get into those schools. So I have a slide on that. [Laughter]

Well I learned this by watching  television. But anyway, so now we need to get in, and with that in mind  the big thing these days seems to be diversity. I was listening to some entrance experts if you will, former admissions experts and they were talking about diversity, diversity, diversity. Not just race and religion, but athletics. Anything that sets you apart from others. So how do you use diversity to get into the school you want to get into.

Ron Lieber: Sure, So let's just talk briefly and bluntly about a how this works at the rejected schools in the country--the schools that reject the highest  percentage of applicants--and there you are at the biggest advantage, you are rich. And if you are white you're at an advantage if you're rich because you can donate a building, right. And it tends to be way more affluent and way  whiter people who benefit from what's known as a legacy preference, where your grades can be lower and your scores can be lower. As long as your mom or your dad or both--or like four generations of Cabots or eight generations you know went to Harvard or Amherst or Stanford. Those people tend to be disproportionately affluent and white.

When it comes to athletic preference, which gives you even a bigger edge than legacy preference does. You know many of those sports ,although not all, but the majority of them are sports that require a great deal of investment and nurturing to get you to a place, through the private tutoring, through the kind of elite level club sports, that will get you ready to swim or play golf or play tennis or play lacrosse or play hockey at an institution that will give you a preference. So there too being wealthy gives you a bigger advantage. and more often than not, the people who are wealthy are white.  Same things through testing, tutoring on academics. And then there is preference based on race, which are the ones that get the most attention, but may have a little bit less to do with who gets in--the total number of people who get via legacy preference or via athletic preference, particularly in the rich white sports.

So all of that is like a big kind of toxic stew that generates a lot of attention. But what, I think, people miss a lot of the time is that a step below, there are still really excellent high quality schools that reject way more applicants than they can take. There is actually a huge advantage to being able to pay full price  because they get 50 or 75 percent of the way through the number of admissions they have to hand out, and then they start running out of financial aid money. And then the packages get weaker, or they just start rejecting people who need aid.

So if you are a Boglehead and you have those compound interest charts imprinted in your brain, which I do thanks to my dad and the USAA magazine, he sending me one when I was 23 years old. I knew good and well that I didn't want money to be a factor and so I just started saving for college for my kids, like well, they were still in utero. So money does provide a really sizable and sometimes measurable admissions advantage there too.

So in many of these institutions that the parents would be proud to send their kids to it's good to be rich. It's complicated and it becomes politicized, but the fact of the matter is that there are all sorts of people, of all sorts of skin tones and backgrounds, benefiting from a certain amount of admissions preference. And that makes it harder in many instances, in most instances, for people who do not have any sort of a hook.

But we shouldn't forget that there are hundreds and hundreds of essentially open access undergraduate institutions out there where more or less anybody can go if you can fog a mirror. And there's a lot of dedicated instructors at those places too. And you  I don't want to discount the worth of those institutions.

Rick Ferri: So I was reading in the book, that we were talking about the advertised price of college and the two reasons why colleges put these very high prices on their website. Number one, because some people will pay it. And number two is because if they don't put the high price on there, people don't think they're getting good value for their money. So with that in mind let's get into how do we pay for college. First of all, let's talk about discounting--and it was enlightening to me, in reading your book, that internally admissions people call it discounting, but externally they call it scholarships. Go into discounting. I mean what should you pay, not what the price is, but what you should pay.

Ron Lieber: Right. Well gosh, where do we start here. I mean there's a couple of different ways that these discounts happen and we'll use the terms interchangeably, but what you want to be thinking about as a parent, as a shopper, is what is my actual cost of attendance going to be. And if I get an offer of financial aid am I 100% sure I understand which of these discounts or scholarships--that we're not going to have to pay back-- and that we understand how much the school is asking us to actually pay out of pocket or what it's telling us to borrow.

So there's two basic kinds of financial aid. You know back in our day-- even back in my day, I'm a couple years younger than you, Rick--most of the financial aid that was offered was based on need. So my family had to lay ourselves bare in terms of our income and our assets. And then Amherst College decided what they thought we could afford to pay. And they basically were good for the rest of it, with a couple of campus jobs and undergraduate loans thrown in.

What's changed now is that the need-based aid system still exists, and at the 100 or so most well-resourced private institutions in America--state systems are a little different-- but the private ones still kind of looks like that. But starting around in the ‘90s this whole separate system hived off that's become known as merit aid. And merit aid was originally designed to help fourth tier institutions improve to the third or second tier by swiping kids who are qualified for second or even first-year institutions, by throwing money at them, and making them feel good.

So if you got this unsolicited offer in the mail after you took your PSAT test and you've done well, from a school that you've never heard of. The letter would say, hey we have our eye on you and we're not going to charge you any application fee if you come here. And you get in, we'll give you $5,000 off the list price.

And that worked so well, so many of the good smart kids were getting bought off from higher tier institutions that market forces intervened. Competition took hold, and over the course of 10 or 15 or 20 years it just kind of moved farther and farther up the food chain. Where now it's really only 30 or 40 schools that aren't forced to offer some kind of discount. And let's be clear too, this merit aid discounting has nothing to do with your ability to pay, and everything to do with your willingness. So there are all sorts of super rich families who are being offered 10, 20, $30,000 off a year, or even a full ride if the school has decided that their kids are attractive, whether because of their actual academic or extracurricular merit, or just because they're throwing money around to try and get people to come.

So think about it this way. If you're Kenyan College in Ohio, or Connecticut College in New London Connecticut. If you are Macalester College in Saint Paul Minnesota, excellent schools but they have slipped enough in terms of marketplace perception that even a certain number of people with the ability to pay $75,000 a year are lacking the willingness to do so. But if you are Macalester and your cost to educate a student is $42,000 a year, you're charging a list price of $70,000. If you throw an $18,000 merit aid package at an affluent family, that family's going to feel really good about what it has accomplished. Because they're going to get 18, 36, 54, $72,000 off over the course of four years. Their cost of attendance in any given year is $52,000, but if Macalester only needs forty thousand dollars to educate that kid, that's still a twelve thousand dollar profit. And they can take that profit and they can toss it at a lower income family and help them too.

So in theory everybody wins. But it's a real weird look to be throwing scholarships at millionaires, which is essentially what's going on. And so as a parent, as a shopper, it is not at all clear that this is going on, the extent to which it's going on. Nor is it predictable, in many instances how much you will get. And so for somebody with a Boglehead mindset, the temptation and the desire once you understand what's going on behind the curtain, is to crack the code, to try and beat the system. And so I did my level best in the book to show people exactly where the data is, that can give them some level of predictability about what kind of merit aid might be offered.

But the fact of the matter is that the schools change their goals each year, in part depending on their own institutional priorities and also based on what's going on in the market around them. And especially in the last couple years with the pandemic, whatever algorithms they're using to try and decide what prices to offer which students. Which is another revelation for people. A lot of these merit offers are delivered by robots, by software, not by humans. These algorithms can't predict how people are going to behave during a pandemic and so you're getting all sorts of wacky results, where people are getting no discounts, or they're deciding to apply to 22 schools just because it's also unpredictable.

And they're only getting into four. And you know, it's all a real hash. I do hope that things will have leveled out-- a level out--and they'll be making more sense by next year. But it's not always predictable So the best we can do sometimes is just attempt to explain how the system works even if we can't predict precisely what kind of offer it's going to make in any given year.

Rick Ferri: Let's get on to a couple of other ways of saving. And that is, the most popular one is a 529 plan. And a lot of people use 529 plans. Parents use them, grandparents use them. Some states give tax breaks, some don't. A lot of people ask--the most common question I get about 529s is how much is enough? How much should I put in? What should I put in every year and what do I need to get to by age 18 when my son or daughter goes to college. So could you talk about 529s? And then the next question I'm going to ask would be the final question, because we don't have any more time, will be student loans. So 529's first, and then student loans second.

Ron Lieber: Sure. So let's start with 529's. As I think most of the people in this crowd probably know, the nice thing about 529s is that they come with some sizable tax benefits. In 30 some states you get some kind of a tax break for putting money in the first place. And then for everybody, you get a huge tax break on the way out as long as you take the money and you use it for some higher educational purpose. Or there are private K-12 schools in many states. You don't pay any capital gains taxes on the earnings, and so if you start at age zero and you get the kind of market that we've had the last 15 or 20 years, you're going to have a lot of capital gains that you're not paying taxes on. Yay for being in the system, right.

So the downside is there's a bit of complexity.  Every state has their own plan. The rules tend to be different, different investment lineups. Sometimes, although with increasing less frequency, your plan may not have an index fund for every asset class that you want to be in. Although that's mostly gone now. It was definitely the case 10 or 15 years ago. Thankfully Vanguard is in, and others who index are running or providing investments for most of these plans.

So how much should you save? Well I don't you know. Save as much as you reasonably can. Everybody's different, but here's something to anchor to, that might make you not freak out-- because I talk to a lot of parents of young kids-- and if they can do any kind of inflation math in their head they're thinking, Wow! If I want my kid to go to the institutions that we went to it's going to be $500,000  by the time they're 18, and that's insane. Like I'm still paying off my student loan debt. We haven't bought our forever home yet. We want to have seven figures in retirement saved. How am I going to do this?

So many years ago I had a conversation with a financial planner in Wisconsin named Kevin Mckinley who came up with what I now refer to as the Mckinley Rule. Which is just  think about it in fractions. You could think about it this way. You want to save a third of the money that they'll need for college. And maybe your goal is public, or maybe your goal is private, or maybe it's somewhere in between those two list prices as we've discussed.

So you want to save a third. You want to pay for a third out of current income. So while they're in college you stop taking vacations, you eat rice and beans, you do whatever you can, and you pay for third while they're there. And then you borrow a third. Maybe the parents borrow half of that third, and the kid borrows the other half.  Although if your kid goes to a state university the federal loan borrowing limit of $31,000 or so will almost cover that third, all the loan.

So then this starts to feel reasonable. If your goal is to end up with $50,000 of savings in today's dollars you can do that with $250 a month or whatever it is depending on your return assumptions. And that starts to feel a little more doable for families. Then you're not driving yourself crazy. Now that number is going to need to be higher if you want to have a third of a private college available to you 18 years from now. And if you have more than one kid, well there you go. So what can you do? Well you can talk to grandparents about this. even $50 a month of a contribution from a relative can make an appreciable difference going forward. Okay to ask much, better than all the plastic trinkets that they tend to show up with that end up under foot and then in the garbage.

And so those are the basics. You know there's an hour-long debate we could have about whether you might be better off just saving in a standard brokerage account for a whole variety of reasons. And that's fine if that's the way you want to go. I just urge, beg people to start early, save as much as you reasonably can. It is so rare that anybody regrets saving too much for college. That would be a high class problem.

Rick Ferri: So let's talk about student loans for a couple of minutes. I mean there are three types. The direct loans from the government as you mentioned. Then there's private loans and then there's parent loans, called direct plus loans. Could you just briefly describe the three different types?

Ron Lieber: Sure. So it has worked different ways over the years, but the way it works today is that if you are borrowing from the federal government there's no bank involved, and in most instances if your kid is a dependent they can borrow roughly  $31,000 and  change over the course of four years. And then what's known as a servicer will step in to start sort of collecting those payments. So those are how the undergraduate loans work.

Then there are private loans from institutions like Sallie Mae, Discover, maybe your credit union does some of this, you know a few other companies you may have heard of, and again, back in the day undergraduates used to be able to get private loans on top of the federal loans or in lieu of the federal loans without any kind of parental grown-up co-signer. And that is not the case anymore.

So if your kid has maxed out their federal loans and you want to borrow even more-- which I would encourage you to think hard about--whether that's smart or not. You will need to be a co-signer, and then there's going to be a sort of complex dance afterwards where all of you will have to decide who's making the payments and whose credit rating is getting messed up if the 22 year old is making the payments and forgets. And how much debt is too much and for what sort of degree.

Then there are those parent loans that you mentioned. There are what's known as the plus loans that you can get from the federal government. Pretty high origination rate, pretty high interest rate. People who do feel the need to borrow sometimes will borrow against their home instead, to avoid these federal loans. But parents are increasingly using them and we actually know more  about where this plus zone borrowing tends to be most persistent.

And it is not as you would expect at private institutions that are not all that well resourced in terms of their financial aid offerings.  And also historically black schools have a fair amount of parent borrowing there as well. So those are the basic types.

Rick Ferri: Well last minute here. You offer a message of hope for people. Can you just give us your message of hope?

Ron Lieber: Sure. So let me tell you about the opposite of hope. I mean the opposite of hope is all these calls that I used to get in March and April from incredibly smart people who help run institutions in New York city that you have actually heard of, and they have gotten to the end of the process and realized that they had no idea that they weren't going to get any discounts and that their kid had applied to all of the wrong schools, and they're just saying to me, Ron, is there something you can do to help.

And after too many of these calls I thought, Wow! It is deeply problematic here that this system is so complicated. And while I can't solve for that, I can certainly help pull the curtain back so that people know, first of all, how the system works. The best ways to get discounts most effectively, and how to shop for these. The sort of institutions that will give their kid everything that the kid needs, at least some of what they want. And for people to know that they don't have to spend $300,000 or anything close to that to accomplish those needs.  And once you're going into the process with a head of steam, and frankly like a Boglehead style, system beating,  question authority, question everything mindset, it actually starts to be fun again, and less about dread, and more about this incredible experience that you are going to be able to provide for your kid, one way or the other, that will change their life.

And as much as you may dread letting them go, you should also be excited and hopeful about the fact that you're able to provide it for them. So I don't want this to be a downer. I don't want to be angry. By the end of the book I want them to feel ready. And I want them to feel excited and jealous, frankly, that their kid gets to do this amazing thing.

Rick Ferri: Well the name of the book is The Price You Pay For College: An Entirely New Roadmap For The Biggest Financial Decision Your Family Will Ever Make, by Ron Lieber. Ron, thank you so much for being a guest today. It's been a wonderful presentation and we've all learned a lot.

Ron Lieber: It's a pleasure and an honor. And I'm easy to find at ronlieber.com. If you have questions or observations or ideas for additional avenues of exploration, you know those ideas are gold to me, so thank you.

Rick Ferri: Thank you, Ron.

About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant


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