As most Americans celebrated independence this week, a class of citizens — families with college-bound kids — suffered monetary dependence, as bills are due very soon.
For the incoming freshman class, tuition and room and board at most private colleges will total from $175,000 to $250,000 for four years.
And the median sales price of a home in America is $213,400.
So forget your college guidance counselor — go hire an investment manager.
You’re gonna need one just to help forecast the future earnings for your future pupil, because today, college needs to be looked at more as a cold-hearted, non-emotional investment than an education.
College is no longer about picking a large school because your child wants a big NCAA team to root for on weekends or a small school because he or she is more comfortable with that.
It’s about how much future earnings per pupil (EPP) your $200K can generate.
Looking at the next four years the way astute investment managers would view their investments is the best way to analyze college choices and costs.
The focus should be on return of capital and then return on capital.
Ask yourself what the school in question enables and prepares your student to earn that you couldn’t earn some other way without spending the $200K. Period.
And then, once you have computed that, figure the difference compared with the earnings potential of a hard-working, non-higher-educated career.
There had better be a very big difference. There has to be in order to justify the $200K investment and to generate dividends after the principal is paid back.
Your EPP must be sufficient to return all of the $200K plus interest of 6 percent — the borrowing costs after six or seven years.
If the school cannot achieve those realistic returns, then an evaluation of the potential career path, major or school must be changed.
Because what starts out as a $200K weight tied to your feet upon graduation grows to $250,000 with interest, and that’s for new grads to recover in a tough economy.
If you spend $213,400 on a home, you hire a broker and an engineer to assess your investment.
Why not do the same for college?