There IS a segment of the population that is truly fortunate: Those that have FULLY saved for college and do NOT need to go down the debt path. Bravo! Some are even wealthy enough to fund 4 years at the country's best private schools, which may cost $75k/year or over $300,000 for the degree. Lets use this as the baseline, the fortunate family that has $300k burning a hole in their pocket and eager to put junior through the most expensive private schools in the country.
Remember on page one where I said a goal of ours is to challenge conventional thinking?
Let's go there, and consider this question:
What is truly the best use of $300,000?
"Invest it" in that expensive private school? Or, put it in a simple S&P 500 index fund and let it run for 40 years at a historical rate of return of 7%, while Junior figures life out on their own?
Results?
Well the index fund is easy......although you DO have to assume that rate of return, but 7% I think most would say is realistic over the long term (40 years just as an example).
Result? A tidy little $4.5mm.
How would that compare to Junior going to that high ticket private school at $300k, graduating, assuming the best, that they DO graduate (40% will not), and that they graduate in 4 years (the exception), start at $70k, utilize basic increase assumptions in the college ROI studies, but then assume Junior is more disciplined than the average, lives within their means AND saves a healthy 15% of their annual pay, and get the same 7% annual return?
What's that net worth number?
A smidge over $2mm. Well done, but a far cry from $4.5mm.
Surprising?
I bet it is to some. You could interpret this a few ways, but here's mine.
The Lump sum of $300k in the S&P 500 starts at $300k and immediately starts to grow. Go to college and you deplete that down to zero, get a job, have this pesky thing called living expenses and hope to save and invest your way to wealth.
The College path not only brings $300k to zero, it also delays the savings and investing for 4 years, and time in the market is massive for creating wealth.
But if this is truly an either or....
Maybe Junior would piece together "alternative be a VERY low cost education, maybe online certificates, community college, university of the people?
Feels a bit like a Brick by Brick type candidate. And Mom/Dad put that cool $300k in the market (or hand it to Junior and let them invest it). Where does THIS option end up? About $5.3mm. So the intital lump sum grew, and then low cost degree, earnings and investing (at a lesser rate) created an even larger outcome.
So when ROI is discussed, and the headline numbers are "college pays out over $1mm over the course of the career" shouldn't the question be, COMPARED TO WHAT?
This is OVER-simplified and I can the outcries near and far....
"You just can't hand it over like a gift"
"What about the college experience!""
"What about the network!"
I get all that, but we are talking about $300k right? Get creative and put $250k in that fund, and break up $50k in all sorts of fun experiential back packs through Europe, networking seminars, living in an Air BNB for a couple weeks for a few years, you figure it out.
I don't care how rich you are, $300k is a ton of money! People are free to choose how to spend their money however they please, but when the "system" keeps preaching return as loud as they do, I'm sorry, these really are lazy arguments, ESPECIALLY when people are this liquid.
AGAIN, very simplified example that ONLY looks at those truly fortunate people that can self fund college without debt, and the most expensive to boot. BUT, if measured by pure $'s and cents, and "best use of capital"......I see no mathematical reality where taking that $300k and going to the expensive college will generate more net wealth then practically anything BUT that. Does that mean you skip it? Not necessarilybut the foregone conclusion that there's actually ROI compared to alternatives and across the board is simply not true.
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