Please enjoy this post from staff writer, Mitchell Pauly. If you’re interested in hearing more from Mitchell, he blogs over at SnarkFinance.com.
Annually, 20 million hungover young adults graduate college and move on to a miserable like the rest of us. Of these 20 million, roughly 12 million (60%) will carry some form of student loan debt. And they’re not alone. There are currently 37 million people in the United States with outstanding student loan debt, which is roughly the same amount of people as the entire population of California. With the rising costs of higher education ballooning upward like McDonald’s calorie counts, it’s become a safe bet that student loan balances will only continue to rise. In fact, I would bet on it: Your child will need student loans.
Why Your Child Will Need Student Loans
The 1980s were a time of excess, murderous dolls, and actor-Presidents. They were also a time where college was fairly affordable. In 1986, if tuition cost $10,000 and grew at the rate of inflation it would now cost about $21,500. Instead, it costs $59,800, or 2.5 times the inflation based forecast. The average tuition inflation rate is around 8% and the average cost around $23,000 for in-state public schools ($45,000 for private). Thus, it is important to compare these two stats against two others:
- Average rise in wages
- Average family income
Currently, average take-home pay increases about 3% nationally. That is far below the average rise in tuition by a factor of 266%. This means that, even if tuition currently is an affordable percentage of your annual income (to be defined by you, not an overly general rule of thumb), it certainly will not be soon.
By the way, the average American family income in 2011 was $50,054. Annual college tuition was therefore 46% as a percentage of income for public in-state universities and 90% for private. Of course, this is shocking. Also keep in mind that the average family income stated is pre-tax and household expenses. It isn’t disposable income. I won’t depress you with the math. A lot of people making $50,000 per year would have no choice but to get pretty creative to cover the costs of college for their children- including strategies like borrowing against their 401K or taking out short-term loans.
Wait! What about my 529 Plan?
While your diligent saving and selflessness might render higher education more affordable for your child, you have about the same chance of paying for all of it as a politician does of passing a polygraph. Let’s say your child is born today, with the average cost of college being the numbers I used above along with the annual average tuition increase. In 18 years, a public in state schools will cost $91,908. A private one will run you $179,820. Let’s generously assume your 529 Plan increases at 8% annually—a miracle, really. You would need to invest $1,000 today and $100 every month for 18 years in order to pay for the public in-state route, and $1,000 today and $420 per month for the private option. Good luck to you if you can’t yield that 8%.
All this adds up to one fairly obvious conclusion: your child will need student loans in order to go to college.
 Unless they aggressively avoid them, which is possible if not probable.
 All this is compounded annually for simplicity in calculations.
Well, that was depressing. What about you? Do you think that your child will need student loans? What are you doing to save for your kid’s college?