The new fall semester is underway, which means more college articles! Morgan Housel of Fool.com recently talked about how the increasing cost of college is exaggerated (emphasis mine):

According to the College Board, the annual sticker price of attending a private four-year college increased from $17,040 in 1992 to $29,060 in 2012, adjusted for overall inflation. But grants and scholarships more than doubled during that period. On net, the median annual cost of attending private college went from $10,010 in 1992 to $13,380 in 2012, meaning the amount students actually paid grew half as fast as the sticker price suggests.

Ditto for public four-year schools. The sticker price of tuition was $3,810 in 1992, and $8,660 by 2012, adjusted for overall inflation. That’s a gain of 4.2% per year. But the actual amount students paid went from $1,920 to $2,910, or an annualized gain of 2%. Adjusted for grants, the inflation-adjusted cost of two-year college has actually declined over the last 20 years.

Why would schools balloon the sticker price but make it up with scholarships? A lot of it is marketing. If I say, “Billy, tuition is $20,000 a year,” it sounds high. If I say, “Billy, tuition is $40,000 a year, but we’ll give you a scholarship to bring it down to $20,000,” it’s an offer he can’t refuse. There’s also a rich student, Jimmy, whose parents will pay $40,000 without batting an eye. Jimmy is actually making Billy’s scholarship possible.

By those numbers, the cost of 4-year public college grew at 2% annually above inflation over that 20 year period, while the cost of 4-year private college grew at 1.5% annually above inflation.

The average student debt is roughly $30,000, about the price of the average new car. As Jim of the FreeBy50 blog points out, only a tiny 0.3% of graduates end up with over $100,000 of student loan debt. Any media piece about a struggling student with a six-figure student loan is an outlier.

Now, I’m not saying there aren’t problems. For one, the wages of new graduates are stagnant. But the sky is not falling.

Increasingly, parents should look at listed tuition prices like the sticker price of a car. It’s just a starting point for negotiations. Colleges, especially private colleges, can easily adjust what they actually charge per student based on two variables:

• Their financial situation, using need-based aid.
• Their desirability as an applicant, using merit-based aid.

Universities have all sorts of financial aid tricks to adjust actual out-of-pocket costs… various grants and scholarship funds that they can draw from, work-study guarantees, comped room & board, and so on. You can even negotiate your aid package with them further after getting your acceptance letter.

In fact, the industry term is tuition discount rate, which measures the upfront tuition discount given directly from private universities, thus excluding outside scholarships, tax breaks, or subsidies. The NACUBO tuition discount rate for 2013 was 45% and had risen every year for the previous 7 years.

If Billy is a somewhat borderline applicant and his parents have a high income, he’ll may get accepted but must pay full sticker price. If Billy is a very strong applicant, he may get accepted with a partial or full scholarship regardless of income.

This is why parent shouldn’t automatically just tell their kid to go to a state public school. If your child finds the right fit, they could go to private school for close to or less than the cost of public. Many households with modest income and financial assets will be offered substantial grants. Of course, you have to be ready to say “no” if your kid gets in without any aid, meaning the total cost is more than a house (my personal fear!).

There is a lot of policy talk about increasing financial literacy in order to improve people’s decision-making. The Conversable Economist blog discusses a paper that digs into this subject, called “The Economic Importance of Financial Literacy” (found via Counterparties). In order to measure current levels of financial knowledge, a very short survey was conducted on a nationally representative group of Americans age 50+ to. Only 34% of respondents answered all three questions below correctly:

Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow:

• More than $102
• Exactly $102
• Less than $102
• Do not know
• Refuse to answer

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Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy:

• More than,
• Exactly the same as, or
• Less than today with the money in this account?
• Don't know
• Refuse to answer

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Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

• True
• False
• Don't know
• Refuse to answer

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The first question measures numeracy or the capacity to do a simple calculation related to compounding of interest rates. The second question measures understanding of inflation, again in the context of a simple financial decision. The third question is a joint test of knowledge about ‘stocks’ and ‘stock mutual funds’ and of risk diversification, since the answer to this question depends on knowing what a stock is and that a mutual fund is composed of many stocks.

If you’ve been following this subject, sadly this isn’t be a surprise. Many similar tests confirm that the level of financial literacy in the U.S. is low. There is a lot of debate about the best way to solve this problem, from high school classes to adult education programs. Nothing has been found to be all that great (so far).

My take is that we should continue working on financial education as there is a lot of room for improvement, but also consider that many poor financial decisions can’t be solved by learning some definitions. The root cause is often a lack of non-academic skills like self-control, ability to delay gratification, and persistence. Most people know that they should spend less and save for the future. They just don’t necessarily do it.

Inside this Morningstar article discussing the choice between a prepaid 529 plan or a 529 college-savings account, there was an updated chart comparing the 10-year growth rates of tuition at 4-year public and private universities, the S&P 500 index, and the Barclays US Aggregate Bond index. A blended 60% stock and 40% bond portfolio would have returned 6.34% annualized.

There used to be some great prepaid 529 options out there, but they have been gradually going away. Only a few states even offer a prepaid plan anymore (Alaska, Florida, Illinois, Maryland, Michigan, Massachusetts, Mississippi, Nevada, Pennsylvania, Texas, Virginia, and Washington). I’m not familiar enough to recommend any one in particular, but I do know people who still invest in both the Washington and Texas plans. You should look for one that provides at least some investment return if the student ends up going to an out-of-state school.

For many of us the traditional stock/bond route will have to do, which we see would only have just about kept up with tuition inflation over the least 10 years. I still can’t see tuition compounding away at 8% annually for the next 20 years, but I will probably make my 529 contributions under the assumption that a 60/40 stock/bond portfolio will only keep up with tuition over the long-term (as opposed to contributing less and hoping stock performance will cover the gap).

Stanford University is offering a free open online course “Finance of Retirement & Pensions” taught by Joshua Rauh, Professor of Finance, running 10/14-12/13. Here’s the course description and a video:

In this eight-week course, you will learn the financial concepts behind sound retirement plan investment and pension fund management. Course participants will become more informed decision makers about their own portfolios, and be equipped to evaluate economic policy discussions that surround public pensions. The course begins with the principles of financial economics, such as the distribution of outcomes when investing in stocks, bonds, or annuities. These serve as the building blocks for an understanding of different retirement strategies that can help you improve your asset allocation. Finally, the course applies these principles to government programs and policies.

This MOOC looks a bit more focused, a bit more advanced, and also more interactive than the previous Coursera personal finance course I signed up for.

There is no actual course credit earned, but there is a competition at the end of the class where the top 5 teams with the best ideas for pension reform will get to present them at the Stanford Graduate School of Business, all expenses paid! Via NY Times.

Right now, freshmen are moving into dorms all around the country and parents are scrambling to pay the bills. I’ve written about how many students don’t pay sticker price on college tuition, but I recently ran across another statistic that tracks the phenomenon. It’s called the tuition discount rate. The version compiled by the National Association of College & University Business Officers (NACUBO) uses this definition:

Tuition Discount Rate: Institutional grant dollars as a share of gross tuition and fee revenue for first-time, full-time freshmen […] gathered from 400 private, nonprofit four-year colleges and universities

Basically, this measures the upfront tuition discount given directly from private universities, thus excluding outside scholarships, tax breaks, or subsidies. The NACUBO tuition discount rate for 2012 was 45% and has risen every year for the last six years. From digging around their website, from 1990 to 2002 the average tuition discount rate increased from 26.7 percent to 39.4 percent. Then things stabilized somewhat until it started rising again in 2007. In rough numbers, over the last 15 years the discount rate doubled from 25% to 50%.

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The Georgia Institute of Technology and Udacity.com are partnering together to offer an accredited master of science degree in computer science (press release). What makes it special is that this MSCS will be from a top-tier university, 100% online, and the full tuition cost for all coursework will be under $7,000. Georgia Tech believes that it can pull this off due to advances in technology and the resulting ability to maintain an instructor:student ratio of 1:100 rather than 1:10.

Anyone can take the courses online, but if you want the accredited degree and grades you’ll still need to gain admission into the program. As AT&T is funding the 2014 pilot program, it appears that most initial students will be from AT&T and other corporations affiliated with Georgia Tech, with enrollment hopefully ramping up in future years. Still, this is a big step in the evolution of online education, and especially good news for those looking to get further education but can’t afford to be a full-time on-campus student.

More news coverage: Forbes, WSJ

If this is successful, it’d be natural to wonder about a cheap, 100% online bachelor’s degree from a major public university (not some regionally accredited/for-profit diploma mill). I can’t help but keep recall this excerpt from Is College a Lousy Investment? by Megan McArdle:

In Academically Adrift, their recent study of undergraduate learning, Richard Arum and Josipa Roksa find that at least a third of students gain no measurable skills during their four years in college. For the remainder who do, the gains are usually minimal. For many students, college is less about providing an education than a credential—a certificate testifying that they are smart enough to get into college, conformist enough to go, and compliant enough to stay there for four years.

Will such online degrees maintain the same prestige just with a lower price tag, or will it just devalue the entire concept of having a degree even further? Or will an on-campus degree always be seen as better?

People tend to assume that getting a college education is a good financial investment. But a new Brookings report Should Everyone go to College? [pdf] finds that the actual value of a 4-year bachelor’s degree can vary dramatically depending on factors such as field of study, type of college, graduation rate, and future occupation. As usual, I’m just plucking out the charts that I like from the study. As you read all this, remember that correlation does not mean causation.

The more selective the school, the higher the return on investment (ROI) as calculated by Payscale. Here the annualized ROI seems to average around 10%, while other studies have found it closer to 16%. Public schools tend have a higher ROI than private schools (remember that ROI isn’t in absolute dollars). The bad schools are pretty bad, as Payscale found that 1 in 5 have a negative ROI over 30 years.

The lifetime earnings of a graduate also varies widely with the type of major and subsequent occupation:

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