Bogleheads® on Investing Podcast 035 - Ron Lieber, host Rick Ferri (audio only)

00:00:00.000 | [MUSIC PLAYING]

00:00:10.760 | Welcome to Bogleheads on Investing, podcast number 35.

00:00:14.880 | Today, our special guest is Ron Lieber.

00:00:17.920 | Ron is a New York Times award-winning columnist

00:00:20.880 | and the author of a new book, The Price You Pay for College.

00:00:25.040 | And today, that's what our discussion is all about.

00:00:27.800 | [MUSIC PLAYING]

00:00:38.600 | Hi, everyone.

00:00:39.280 | My name is Rick Ferry, and I'm the host

00:00:40.940 | of Bogleheads on Investing.

00:00:42.800 | This episode, as with all episodes,

00:00:44.880 | is brought to you by the John C. Bogle Center

00:00:47.360 | for Financial Literacy, a 501(c)(3) nonprofit organization

00:00:52.600 | that you could find at boglecenter.net.

00:00:56.040 | Your tax-deductible contribution to help

00:00:58.600 | expand financial literacy are greatly appreciated.

00:01:01.920 | Today, our special guest is Ron Lieber, New York Times

00:01:05.960 | award-winning columnist and the author

00:01:08.400 | of a new book, The Price You Pay for College,

00:01:11.840 | an entirely new roadmap for the biggest financial decision

00:01:15.040 | your family will ever make.

00:01:17.240 | I recently interviewed Ron for the Bogleheads speaker series

00:01:21.360 | in a live interview that is available on the boglecenter.net

00:01:26.040 | website.

00:01:27.100 | This is the audio from that video.

00:01:31.240 | What I learned after reading Ron's book

00:01:33.400 | and interviewing him was that picking the right college,

00:01:37.680 | getting into that college, and paying for that college

00:01:41.200 | is not nearly as clear-cut as we would like it to be.

00:01:45.240 | There's an awful lot that goes on behind the scenes.

00:01:48.280 | This is a wonderful interview.

00:01:49.640 | If you have children who will be going to college

00:01:51.960 | or grandchildren who will be going to college,

00:01:54.640 | or perhaps you will be going to college,

00:01:57.640 | there's something to learn for everyone.

00:02:00.000 | So here we go.

00:02:01.560 | With no further ado, let's welcome Ron Lieber.

00:02:06.560 | Thank you, Rick.

00:02:07.640 | It is an honor here to be among my fellow personal finance

00:02:11.800 | nerds.

00:02:12.280 | I know there are few people living and walking

00:02:16.000 | and breathing in the United States

00:02:17.680 | or in the world who care more about beating the system,

00:02:21.960 | winning the details, and getting it right than this crew.

00:02:25.920 | And it's a special honor to be here

00:02:27.840 | with Mr. Asset Allocation himself,

00:02:30.360 | doing the grilling for the next 60 minutes.

00:02:33.240 | So I look forward to it.

00:02:34.840 | Lay it on me.

00:02:36.720 | Well, Ron, we'll start out with you.

00:02:39.960 | Over the past decade, your writing

00:02:42.000 | has shifted to focus on family finances,

00:02:45.640 | but particularly raising children,

00:02:48.040 | teaching children about money, and now sending

00:02:50.280 | those children to college.

00:02:51.760 | So I think I can guess this, but what

00:02:54.560 | sparked your interest in doing a book on the price

00:02:57.000 | you paid for college?

00:02:59.200 | Sure, well, some of this is born of my own personal experience.

00:03:03.480 | I grew up in Chicago.

00:03:05.720 | My family was well off enough to afford three private school

00:03:10.760 | tuitions back in the day in the '70s and '80s

00:03:14.400 | when that didn't cost quite as much as it does today.

00:03:17.560 | And I had a couple of things happen in there that kind

00:03:21.000 | of changed everything for me.

00:03:22.360 | So my parents split up.

00:03:24.320 | If any of you are divorced or the children of divorce,

00:03:27.080 | you know that that is a calamitous financial event

00:03:29.800 | among others, right?

00:03:30.840 | You take one household, you turn it into two,

00:03:33.320 | they're just going to be more expenses.

00:03:35.480 | And then right about the same time, my father,

00:03:39.440 | my late father, lost his job.

00:03:41.680 | And he did not earn much income to speak

00:03:45.320 | of for the next couple of years, except through some occasional

00:03:48.240 | consulting jobs.

00:03:49.640 | And it was about a decade, really,

00:03:51.680 | until my family was back to where it had been financially.

00:03:54.680 | So right away, we were sort of thrust

00:03:56.400 | into the private school financial aid system for K

00:04:00.280 | to 12, such as it exists.

00:04:02.160 | It basically consisted of a board of directors

00:04:04.920 | at our school in Chicago deciding

00:04:06.720 | whether the leaver kids were going to be evicted

00:04:08.720 | for lack of ability to pay.

00:04:10.400 | And thank God, we weren't.

00:04:12.040 | It's still the most generous thing

00:04:13.720 | that anybody's ever done for me.

00:04:15.480 | And those kids who I grew up with became my family

00:04:18.200 | and are still my closest friends to this day.

00:04:21.480 | So I got to stay there at the Francis Parker School.

00:04:24.200 | But when it came time to apply to college,

00:04:27.240 | we did not have enough money for the places

00:04:30.320 | that I wanted to attend.

00:04:31.920 | Luckily, our college counselor there

00:04:35.000 | knew the name of a guy to see, the guy in the Chicagoland

00:04:39.480 | area, who you would go to for help

00:04:41.720 | with applying for financial aid.

00:04:44.080 | And we called him up.

00:04:45.560 | He gave us an address.

00:04:46.640 | He said we were to show up at 5 PM the following Tuesday

00:04:50.160 | at this place in Evanston.

00:04:51.720 | And we were supposed to bring him $50 in cash.

00:04:55.120 | And he said to go through the side door.

00:04:59.680 | So we thought, OK.

00:05:00.560 | And we show up at this address.

00:05:02.000 | And it turns out it's the Office of Financial Aid

00:05:04.840 | at Northwestern University.

00:05:07.160 | And it turns out that we were there

00:05:08.760 | to see the assistant director, who

00:05:10.560 | had this incredible side hustle going on, where

00:05:13.720 | every day during the fall at 5 PM,

00:05:15.840 | he would usher in these needy families.

00:05:17.840 | And you would pay him a little money, which he presumably

00:05:20.200 | would not report to the IRS or certainly to his employer.

00:05:23.880 | And then he would proceed to explain to you

00:05:25.760 | all of the secrets of the financial aid system.

00:05:28.360 | And it turned out that this guy knew exactly what

00:05:30.360 | he was talking about.

00:05:31.320 | And I got into Amherst College, early decision.

00:05:33.520 | I got a great financial aid package.

00:05:35.840 | And I learned a couple of important things from that,

00:05:38.560 | namely that the grown-up world was filled,

00:05:42.600 | just chock full of complex systems involving money.

00:05:46.280 | And they were totally made to be hacked.

00:05:48.960 | He wasn't encouraging us to break the law.

00:05:51.840 | But there was this guy out there who knew the answers.

00:05:54.880 | And for very little money, we could get a hold of him.

00:05:57.680 | And he could tell us what to do.

00:05:59.840 | That lesson stayed with me.

00:06:02.280 | So it's not any big surprise, really,

00:06:05.320 | that I grew up to be the person whose beat is beating

00:06:08.520 | the system in the newspaper.

00:06:10.080 | That's always the way that I've thought

00:06:11.560 | of my personal finance work at "The Wall Street Journal"

00:06:13.920 | and now at "The New York Times."

00:06:15.200 | But basically, anything and everything

00:06:16.560 | that hits you in the wallet, particularly items

00:06:19.680 | that have large costs or large potential costs

00:06:22.440 | and that involve a lot of emotions and feelings

00:06:25.120 | are the things that I care the most about.

00:06:28.360 | So of course, when I became a dad in 2005 for the first time,

00:06:32.080 | I now have two kids, a 15-year-old and a 5-year-old,

00:06:35.280 | I became a little bit obsessed with 529 plans.

00:06:37.960 | Back then, I was at "The Wall Street Journal."

00:06:39.880 | And there was still a fair bit to say

00:06:41.840 | about the lousy investment choices and the high fees

00:06:45.560 | and the various limitations and the complexity.

00:06:50.400 | As most of the people on this call probably know,

00:06:52.440 | we have largely, although not completely,

00:06:54.480 | solved for the generalized mediocrity of these 529 plans.

00:07:00.040 | So at a certain point, I moved on in my writing

00:07:02.440 | to write about how to pay for college

00:07:04.640 | instead of how to save for college,

00:07:06.120 | because we were starting to hear about all these people

00:07:08.280 | coming out of undergraduate

00:07:10.280 | with just piles of student loans,

00:07:12.960 | particularly 15 years ago,

00:07:15.120 | when you could still get these so-called private loans,

00:07:18.000 | not the federal loans that are capped,

00:07:19.720 | but private loans without any adult cosign.

00:07:22.840 | So I started digging into that area,

00:07:24.840 | and I'm still writing sort of sporadically

00:07:27.360 | about those very complex systems involving money

00:07:30.200 | that we have not yet solved for in "The New York Times."

00:07:33.440 | But what started to happen as time went on

00:07:35.240 | is that I would hear from readers

00:07:37.560 | and from colleagues and friends who were super confused,

00:07:42.840 | not so much about how to save

00:07:44.680 | and not so much about how to pay.

00:07:47.760 | They were asking value questions.

00:07:49.520 | They would come to me, and they'd say,

00:07:50.560 | "Ron, you know, my kid got into the University of Illinois

00:07:55.320 | at Champaign-Urbana, and that's going to be maybe $125,000

00:07:59.240 | because we don't qualify for any need-based aid.

00:08:01.680 | My kid also got into Kenyon College

00:08:03.720 | because they're interested in English, being a writer,

00:08:05.960 | and that's a really great small liberal arts college in Ohio.

00:08:08.960 | And they gave us a bunch of discounts.

00:08:12.120 | Even though we don't qualify for any need-based financial aid,

00:08:15.040 | that's going to be $200,000."

00:08:16.680 | And then my kid shot the lights out

00:08:18.040 | and got into Northwestern, right?

00:08:19.840 | So that's going to be $300,000.

00:08:22.280 | Where in your library of big data sets

00:08:26.120 | that you keep track of over there

00:08:28.000 | is the data set that tells me why Northwestern

00:08:31.160 | is $200,000 better than the University of Illinois?

00:08:34.280 | -And we're going to get into that.

00:08:36.240 | We're going to get into that. -Yeah, and I didn't have that, right?

00:08:39.120 | So I thought, "Wow, I need to start thinking about value.

00:08:44.360 | I need to start thinking about what to pay for college, too."

00:08:48.680 | And so that was sort of my journey

00:08:50.680 | to becoming obsessed with the college question.

00:08:53.600 | It was from personal experience as a student,

00:08:57.320 | as a middle-income student.

00:08:58.520 | It was from personal experience as an investor

00:09:01.240 | with one and then two kids

00:09:02.640 | living in New York City, a high-cost area.

00:09:05.120 | And then it was from professional experience

00:09:06.960 | with this, like, avalanche of incredibly confused people

00:09:10.600 | asking questions about value that I did not know how to answer.

00:09:14.840 | -Well, your book starts with a discussion

00:09:17.400 | that contrasts the advertised cost of college

00:09:22.840 | by those institutions with the price of college.

00:09:27.040 | So I'm going to show a chart,

00:09:29.680 | and this chart is the cost of college from 1980 through 2000.

00:09:40.200 | Now, 1980 is a really important date for me

00:09:43.640 | because it's when I graduated college.

00:09:45.680 | And I went back and I looked.

00:09:47.040 | I actually paid room and board, tuition, everything else,

00:09:51.240 | $10,000 for a four-year degree at the University of Rhode Island.

00:09:56.480 | That's what it cost.

00:09:57.440 | Now, this chart is showing the cost of college

00:10:02.600 | over the next 40 years going up by 1,200%.

00:10:09.640 | And during that same period of time,

00:10:11.160 | the cost of inflation going up by 236.

00:10:16.960 | So here's what I did.

00:10:18.080 | I went back to my old alma mater,

00:10:20.720 | the University of Rhode Island,

00:10:22.360 | and I said, "If I paid $10,000 back in 1980

00:10:27.920 | and the cost of inflation was 236%,

00:10:34.480 | I would pay $36,600 for the same education today."

00:10:40.280 | Turns out, yeah, turns out, though,

00:10:42.960 | I actually looked at the data that I got off the website

00:10:48.360 | from the University of Rhode Island,

00:10:50.200 | and it came out exactly to $128,000.

00:10:55.360 | This chart is very accurate.

00:10:59.080 | Now, my question to you, Ron, is why does this chart exist?

00:11:03.520 | What happened here?

00:11:05.840 | -Yeah, so I guess let's start by making sure

00:11:11.200 | we label this chart correctly, right?

00:11:13.200 | Because what we were looking at there was list prices,

00:11:16.480 | and I assume at some point sooner rather than later

00:11:18.520 | in the hour, we'll get to net prices and discounts, right?

00:11:22.320 | But there are plenty of people who pay the list prices,

00:11:25.520 | particularly at public institutions like URI

00:11:28.880 | that don't have a lot of institutional aid.

00:11:32.320 | And if you're a good Bogle head and you saved effectively,

00:11:36.320 | you may have so many assets,

00:11:37.880 | and so you may well pay the list price.

00:11:39.800 | So let's talk about those list prices.

00:11:41.760 | First of all, let's consider a public institution

00:11:43.880 | like the one that you attended

00:11:45.120 | or any flagship state university.

00:11:47.640 | What's gone on there more than anything

00:11:50.240 | that's caused that line to be so steep

00:11:53.880 | is a decrease in the amount of subsidy

00:11:57.120 | that the state legislatures give to the schools, right?

00:12:01.440 | I mean, to the extent that the price of those institutions

00:12:04.520 | are, quote-unquote, "artificially low,"

00:12:06.360 | that they don't cover the cost of actually

00:12:08.640 | maintaining the buildings and paying all the professors

00:12:11.080 | and providing programming for the students,

00:12:14.280 | is because the state uses tax or other revenue

00:12:17.640 | and just hands it over to the university

00:12:19.840 | to keep tuition costs down, right?

00:12:22.240 | So back in the day, this was thought to be a useful

00:12:24.680 | enterprise, a good investment.

00:12:26.880 | A well-trained workforce grows up to be more productive,

00:12:30.360 | pays higher taxes 'cause it's earning more,

00:12:32.880 | and that money just sort of comes back to the state

00:12:35.480 | and it gets a return on investment.

00:12:37.920 | But back in the last big recession in particular,

00:12:41.440 | 2007, 2008, 2009, 2010, these states were so hammered

00:12:46.440 | by a loss of tax revenue in that enormous recession

00:12:52.080 | back then that they had to make some difficult choices.

00:12:55.680 | And one really easy thing to do politically, right,

00:13:00.120 | is just to sort of stick it

00:13:01.400 | to the state university system, right,

00:13:03.600 | and force the chancellor and the board

00:13:06.720 | to make difficult decisions about whether they're gonna

00:13:08.800 | raise prices or whether they're gonna cut services

00:13:11.960 | or cut programs, right?

00:13:13.560 | And those schools felt like, well, we can raise prices

00:13:16.400 | because what it really means is that these students

00:13:19.120 | and these families will probably just have to borrow

00:13:21.440 | a little bit more, maybe $1,000 extra per year.

00:13:25.240 | They can afford it, right, 'cause this was already

00:13:27.280 | a subsidized education in particular.

00:13:29.120 | But if that thinking continues to feed on itself over time,

00:13:32.680 | that's how you get a chart like this

00:13:34.960 | with public institutions.

00:13:36.560 | Now, if you're looking at the chart

00:13:37.640 | for private institutions, still pretty steep,

00:13:40.360 | far outpacing inflation, maybe not,

00:13:43.480 | but starting from a higher price,

00:13:45.160 | which is why the angle, the slope is not as high

00:13:47.600 | as it would be for publics.

00:13:49.400 | With the privates, the private institutions need

00:13:52.560 | to justify their higher prices with more faculty,

00:13:56.440 | better services, shinier buildings.

00:13:59.000 | They're in competition

00:13:59.960 | with the state university systems, right?

00:14:02.360 | But the other thing they have going on

00:14:04.160 | is that as time has gone on,

00:14:06.920 | both market demand and regulatory requirements

00:14:11.000 | have meant that these institutions have either needed to

00:14:14.440 | or felt like they really had no choice,

00:14:16.840 | but to add a whole bunch of administrators, right?

00:14:19.560 | We've got all sorts of new laws that require equality

00:14:23.960 | on the playing field for our daughters, right?

00:14:26.720 | Title IX, diversity and equal access

00:14:29.560 | in areas outside of gender.

00:14:31.720 | We have ever higher technology budgets

00:14:35.200 | at these institutions.

00:14:36.440 | There are parents who demand bigger

00:14:38.480 | and better career centers, right?

00:14:40.960 | Kids have become accustomed to living in a certain manner.

00:14:44.720 | And if your dorms don't have air conditioning,

00:14:46.920 | well, people may not choose your school, right?

00:14:49.960 | And so there are all these market pressures,

00:14:52.360 | regulatory pressures, which has led

00:14:54.120 | to there being a much higher number

00:14:56.680 | of administrators at these schools.

00:14:58.880 | Administrators don't come cheap.

00:15:00.520 | They're reasonably well-trained.

00:15:02.120 | They're experienced.

00:15:03.040 | And I think if you get right down to it, right?

00:15:04.720 | As a parent, if you've got a child who's going to college

00:15:08.400 | and they've got a medium grade mental health challenge,

00:15:11.440 | right, you don't want a 23-year-old grad student

00:15:15.280 | working in the counseling center

00:15:16.600 | using your child as their guinea pig, right?

00:15:19.520 | You want a 43-year-old PhD psychologist

00:15:22.960 | working in the mental health center

00:15:24.920 | to take care of your precious child

00:15:26.560 | who you've pushed off into the world

00:15:28.040 | for the first time, right?

00:15:29.480 | And you multiply that times all sorts of different parents

00:15:32.880 | with all sorts of different needs.

00:15:34.400 | And pretty soon, you have a lot more administrators

00:15:36.360 | than you used to.

00:15:37.480 | And that's got to be paid for some way.

00:15:39.600 | And for the private institutions,

00:15:41.040 | if they don't have a big endowment,

00:15:42.400 | that comes from tuition.

00:15:44.320 | So that's how the list price goes up there.

00:15:46.640 | - Well, the second thing is, you know, the books,

00:15:50.200 | I noticed the books have increased

00:15:53.840 | with the rate of that original inflation, the cost.

00:15:57.600 | Books have gone up about 1200% over the last 40 years, too.

00:16:01.000 | So they have far outpaced the cost

00:16:04.240 | of just buying a regular book.

00:16:05.440 | In fact, if you bought a regular book,

00:16:06.840 | the cost has actually come down.

00:16:08.160 | It's basically been lower than the inflation rate.

00:16:10.560 | So tell me, if you will, if you know this,

00:16:12.160 | what's going on with textbooks, college textbooks?

00:16:16.200 | Why are they so expensive?

00:16:18.840 | - Yeah, so I know a little bit about this

00:16:23.840 | only because I helped some friends of mine

00:16:26.560 | run a campus-based used bookstore

00:16:28.840 | back in the late '80s and early '90s.

00:16:31.480 | And look, you know, some industries

00:16:35.120 | have higher profit margins than others.

00:16:38.760 | And textbook publishers really rake it in.

00:16:42.800 | Why do they do that?

00:16:43.880 | Well, first of all, I can tell you the how, right?

00:16:47.720 | If you put out a slightly changed,

00:16:51.840 | really just like repaginated,

00:16:54.480 | where you change the font size

00:16:55.800 | of the edition of your textbook every 18 months,

00:16:59.560 | then you can just sync the used textbook market altogether.

00:17:02.920 | And if you wanna do well in the class

00:17:04.480 | and don't wanna be checking the book out from the library,

00:17:07.440 | you've got no choice but to buy this thing.

00:17:09.640 | And the books back in the day

00:17:11.720 | would only be available at the campus bookstore.

00:17:13.840 | And you paid the list price, and that was that.

00:17:17.200 | And there's a reasonably high barrier to entry

00:17:20.280 | for these things because the professors themselves

00:17:23.240 | have high standards.

00:17:24.800 | They want the textbook to be excellent.

00:17:26.840 | And it turns out it takes a couple of years

00:17:29.560 | to write a really great, thoughtful textbook

00:17:33.520 | for organic chemistry or for Psych 101 or for Econ.

00:17:37.760 | And so they do this because they can.

00:17:40.360 | I mean, it's not an incredibly large

00:17:44.960 | piece of the budgetary pie,

00:17:46.440 | but it's just high enough that it really bugs people.

00:17:50.520 | And there have been various attempts at innovation,

00:17:54.880 | most recently with the electronic textbook publishing.

00:17:58.240 | And that's helped some,

00:17:59.400 | but this is just a slow industry to change.

00:18:03.240 | And people, the professors in particular,

00:18:06.360 | have sort of ingrained habits,

00:18:08.680 | and it's a tough one to crack.

00:18:10.200 | - So let me ask a question

00:18:12.240 | since college is getting to be so expensive,

00:18:14.920 | as we've seen.

00:18:15.760 | And we'll get into what people actually pay

00:18:18.240 | as opposed to what the advertised cost is

00:18:20.320 | here in a little bit.

00:18:21.360 | But tell me whether it's still worth it

00:18:25.240 | to pay all of this money to go to a four-year college.

00:18:29.040 | Did you go to college anymore or a four-year college?

00:18:31.880 | Are you gonna get a better job?

00:18:33.440 | And what's the data show?

00:18:34.680 | - Well, so, I mean,

00:18:37.400 | let's start with the baseline economic data.

00:18:40.360 | The baseline economic data tells us

00:18:43.880 | that there's roughly a million dollar lifetime gap

00:18:48.880 | in earnings between people who go to college and finish,

00:18:52.760 | which is important because roughly,

00:18:55.480 | there's a very high percentage of people

00:18:58.400 | who go to college or start college

00:19:00.120 | and never actually finish.

00:19:02.000 | So that million dollar difference

00:19:03.120 | is between people who finish

00:19:04.840 | and people who don't or who never go in the first place.

00:19:08.280 | So that's a lot of money over time,

00:19:10.120 | but that's just an average.

00:19:11.640 | So of course, all of our kids are above average.

00:19:14.200 | And the ones who are above average,

00:19:16.240 | who don't go to college,

00:19:17.520 | are ones who enter highly paid trades

00:19:21.360 | for which there is a relatively consistent demand,

00:19:24.640 | often in a situation where they're self-employed

00:19:27.560 | and not at the whim of,

00:19:29.840 | whether the local manufacturer moves out of town

00:19:32.120 | or whether the Chrysler plant closes and moves to Mexico.

00:19:36.600 | I ask people to consider a different question, right?

00:19:40.920 | Because not everybody goes to college

00:19:43.080 | for the same reason in the first place.

00:19:44.640 | So trying to figure out what's worth it

00:19:47.040 | and how much it's worth,

00:19:48.720 | gets to the very definition

00:19:50.840 | of what college is in the first place.

00:19:54.160 | And when I started doing the reporting

00:19:56.920 | for the price you pay for college,

00:19:58.880 | people sort of looked at me funny when I asked them,

00:20:01.200 | well, like, what is college, right?

00:20:03.240 | They would just sort of look back at me blankly.

00:20:04.960 | And I'm like,

00:20:05.880 | surely you've thought about the point of the exercise

00:20:08.760 | if you're about to maybe spend $300,000 on this thing, right?

00:20:12.160 | And then their faces scrunch up and they're like,

00:20:14.920 | yeah, I guess we should do that, right?

00:20:16.680 | And so I get them talking, right?

00:20:18.840 | And it really just comes down to three things.

00:20:21.800 | College first and foremost,

00:20:23.880 | not foremost, foremost for some people.

00:20:26.080 | First, college first is about the education, right?

00:20:29.680 | It's about the learning.

00:20:30.840 | It's about having your mind grown and your mind blown, right?

00:20:36.760 | Essentially having your brain taken apart

00:20:39.200 | and put back together again by an expert practitioner.

00:20:42.000 | So that's the first part.

00:20:44.080 | The second part of college for many people

00:20:46.360 | is the kinship, right?

00:20:48.520 | You go to college to find the people

00:20:51.200 | that you never could have imagined existing in the world,

00:20:54.840 | right?

00:20:55.680 | The people who will be by your side

00:21:00.000 | for the rest of your life

00:21:01.120 | and who will mold and shape you themselves

00:21:04.920 | through four years of banter

00:21:06.920 | and decades afterwards of friendship.

00:21:09.760 | These are also the people who will form

00:21:11.880 | the beginnings of your career network.

00:21:14.120 | And it's not just peers, by the way,

00:21:15.560 | it's also grownups, right?

00:21:17.360 | It is the professors,

00:21:20.000 | it is the deans or other people you encounter along the way

00:21:24.080 | who will become your mentor soon

00:21:26.040 | and who will sort of drag you

00:21:27.480 | into a bigger and better version of yourself.

00:21:29.960 | So that's number two, college is about the people.

00:21:32.560 | And then number three, college is also, of course,

00:21:34.640 | at least for most people, about the credential, right?

00:21:37.800 | And maybe that's a credential that allows you

00:21:42.800 | to take a kind of quantum leap up the social class ladder

00:21:46.240 | and into a middle-class career

00:21:49.920 | where there is a reasonable amount of job security,

00:21:53.640 | because you've gotten a bachelor's in nursing

00:21:56.520 | or a bachelor's in accounting or something like that,

00:21:58.760 | or you're gonna go to med school.

00:22:00.480 | Or perhaps you're getting that credential

00:22:03.400 | because you know that the degree from Princeton,

00:22:08.400 | when you're coming from rural Wisconsin,

00:22:11.320 | will open doors for you into industries and companies

00:22:15.600 | that never would have been open to you otherwise,

00:22:18.400 | with the sort of social capital and the snobbery

00:22:22.520 | and elitism and all of it that comes

00:22:25.280 | with a fancy name-plated degree.

00:22:27.640 | So those are the three things that college are about.

00:22:29.760 | And there's no right answer to the question.

00:22:33.080 | Some people think all three are of equal importance.

00:22:35.800 | Then there's some people who are only going for the kinship.

00:22:38.920 | And I make no judgments about that.

00:22:41.360 | I only make judgments about the people who never stop

00:22:44.360 | to ask themselves the question in the first place.

00:22:47.920 | Because if you don't do that,

00:22:49.320 | how do you know what you're shopping for?

00:22:50.920 | - We're going to go to college.

00:22:51.960 | The children or the grandchildren are gonna go to college.

00:22:54.240 | Now we have to figure out, well, which college,

00:22:57.520 | and then how to get into that college,

00:23:01.120 | and then how to pay for that college.

00:23:03.680 | So let's start out with selecting the right school.

00:23:07.680 | You list three unhelpful feelings.

00:23:11.400 | You call them the three unhelpful feelings

00:23:13.760 | of fear, guilt, and snobbery and elitism.

00:23:17.040 | Can you explain why these are unhealthy?

00:23:20.200 | - Sure.

00:23:22.320 | Well, I guess where you start, right,

00:23:25.920 | is you always want to be checking yourself, right?

00:23:30.160 | And this is not gonna be any news to bogelheads, right?

00:23:34.160 | You know, the bogelhead community has become used to,

00:23:38.680 | over decades, resisting flashiness,

00:23:43.680 | resisting so-called expertise,

00:23:46.920 | resisting the smart man and the smart woman

00:23:51.160 | who are supposedly the end-all, be-all

00:23:54.240 | of, you know, investing prowess, right?

00:23:57.760 | And so, you know, what are the things that can cause you,

00:24:02.600 | you know, to spend more than you need to?

00:24:05.000 | And I think, you know, those emotions

00:24:06.960 | and those answers apply equally well

00:24:08.520 | to colleges than they do to mutual funds or ETFs, right?

00:24:12.840 | First of all is fear, right?

00:24:14.920 | Fear that if you don't spend money,

00:24:18.000 | fear that if you don't believe

00:24:19.560 | that you'll get what you pay for

00:24:21.040 | and the more you pay, the more you'll get,

00:24:23.000 | that the fear that if you do it wrong,

00:24:25.160 | if you cheap out, that in this instance,

00:24:28.080 | your kids will go tumbling down the social class ladder

00:24:32.160 | from wherever it is that you've managed to clamber up to

00:24:36.320 | because you were too cheap, essentially.

00:24:38.760 | And that there's something wrong with you

00:24:40.400 | as a parent or as a grandparent

00:24:42.400 | if you're not ponying up for the most expensive version

00:24:46.360 | of whatever it is that you know

00:24:48.440 | that your kid actually needs, right?

00:24:51.080 | College is not a want for many families.

00:24:53.160 | It's a given, right?

00:24:55.520 | So this is actually a need.

00:24:56.880 | It's just a question of, you know,

00:24:58.920 | how much you're going to pay for it.

00:25:00.680 | So there's that fear, right?

00:25:02.600 | Then there's guilt.

00:25:04.640 | Guilt that we have not saved enough

00:25:07.760 | to provide whatever it is our kid wants

00:25:11.160 | in this category of need.

00:25:13.040 | Guilt that we do not earn enough.

00:25:15.160 | Guilt that we chose the wrong profession

00:25:17.520 | that does not allow us to write a $300,000 check

00:25:20.360 | after taxes out of current income.

00:25:22.760 | Guilt that we cannot do what our parents did for us,

00:25:26.560 | even though Rick's parents in 1980,

00:25:29.040 | if they did pay for any of it,

00:25:30.880 | and it looks like they didn't,

00:25:33.600 | but you know, had they wanted to or been able to,

00:25:37.560 | you know, the final price tag for you,

00:25:42.040 | as you just explained at the top of the hour,

00:25:44.400 | doesn't look anything like the $128,000 price tag,

00:25:48.400 | you know, that somebody in Kingston or Cranston

00:25:50.960 | or Providence would be looking at right now, right?

00:25:53.960 | And so, you know, we get ourselves all hung up

00:25:56.320 | on what our parents did for us

00:25:57.680 | without really understanding

00:25:59.360 | that the world has changed entirely.

00:26:01.120 | Or maybe we get all hung up

00:26:03.920 | on what our parents did not do for us, right?

00:26:06.920 | And we either deeply resent that they had the ability,

00:26:09.800 | but not the willingness to pay for us,

00:26:11.920 | or we know how much we struggled

00:26:15.560 | because they did not have enough money

00:26:17.960 | through no fault of their own.

00:26:19.520 | And we want it to be exactly the opposite for our kids.

00:26:22.160 | We want them never to have to worry

00:26:23.520 | about money during college for a second,

00:26:25.160 | no matter how much it costs, right?

00:26:27.040 | And if we haven't accomplished that,

00:26:28.640 | if we haven't satisfied that goal,

00:26:30.120 | then we're doing it wrong, right?

00:26:31.520 | So it's just like guilt, guilt, guilt.

00:26:33.680 | We can send ourselves on so many guilt trips

00:26:35.720 | about this stuff, and I'm trying people,

00:26:37.200 | trying to, you know, get people off those guilt trips.

00:26:40.400 | And then the fear and the snobbery

00:26:42.160 | is about the subconscious or maybe the conscious sense

00:26:47.080 | that where our kid goes to school,

00:26:49.880 | where we can afford to send our kid,

00:26:51.840 | where they are able to get in,

00:26:54.040 | is all some kind of final exam on parenting

00:26:59.040 | that the results of which played in public, to the public,

00:27:05.160 | through like, you know, the Facebook

00:27:07.320 | and Instagram sweatshirt reveals

00:27:09.160 | and the bumper sticker in the window, right?

00:27:11.880 | And you want that college to be as prestigious

00:27:14.240 | or fancy as possible.

00:27:15.480 | Otherwise you did it wrong.

00:27:16.800 | Otherwise, you know, you've gotten a C- as a parent, right?

00:27:20.960 | Or even if we managed to kind of get over that

00:27:23.840 | and step outside of ourselves,

00:27:25.640 | we're worried about other people's snobbery, right?

00:27:30.000 | Because if we got a 16-year-old budding investment banker

00:27:34.040 | on our hands, and that kid has already figured out

00:27:37.480 | that like, oh, okay, if I'm gonna do this,

00:27:39.960 | I wanna be an investment banking analyst at Goldman Sachs

00:27:43.240 | or Morgan Stanley, or, you know,

00:27:44.600 | a couple of other Wall Street firms,

00:27:47.120 | those places are just shock full of snobs and elitists.

00:27:51.200 | And they are not gonna hire you

00:27:53.200 | out of Wisconsin whitewater, right?

00:27:55.920 | But they are gonna hire you out of Princeton.

00:27:57.840 | They are gonna take a close look there.

00:28:00.160 | And so if you've got 10,000 acres and, you know,

00:28:04.960 | 5,000 head of dairy cattle, you know,

00:28:07.320 | up in Northern Wisconsin, and you're tempted to, you know,

00:28:10.600 | just send your kid to Wisconsin whitewater, that's great.

00:28:13.400 | But if that kid really wants to be a banker,

00:28:15.520 | and you want that kid to have a shot at their dream,

00:28:18.160 | and you're not gonna earn any need-based financial aid

00:28:20.680 | because you're making all that money, you know,

00:28:22.120 | selling the milk to Ben and Jerry's,

00:28:24.560 | you're gonna think really hard

00:28:25.720 | about spending that $300,000 for Princeton

00:28:28.080 | if your kid manages to get it.

00:28:29.840 | Not because you think it's worth it,

00:28:31.960 | but because somebody else on Wall Street

00:28:34.000 | is a big freaking snob, right?

00:28:36.720 | And so, you know, these are relatively

00:28:39.040 | limited circumstances, but, you know, as a parent, right,

00:28:42.480 | I can see how, if you have the means

00:28:45.560 | or the ability to borrow, right,

00:28:48.080 | you wanna do everything you possibly can,

00:28:50.280 | or you're tempted to, not to close off any avenues

00:28:55.280 | to your kid whatsoever.

00:28:57.200 | And that is how people end up spending $300,000

00:29:00.760 | or borrowing to do so.

00:29:02.120 | And sometimes it's for, you know, a reasonably good reason,

00:29:04.960 | and sometimes it's because people are confused.

00:29:08.440 | - You talk a lot in the book about value.

00:29:11.440 | And, you know, are you getting the value

00:29:14.200 | out of your education or so forth?

00:29:17.440 | So how do you separate, for each individual,

00:29:20.160 | of course, it's different.

00:29:21.360 | So how do you separate value and how do you find value

00:29:25.600 | in the college system?

00:29:26.840 | - Sure, so, I mean, it begins with trying to figure out

00:29:30.440 | what it is that you're going to school for, right?

00:29:33.320 | So let's forget about the 16-year-old investment banker

00:29:36.520 | for a minute.

00:29:37.360 | Let's think about 16-year-old who wants nothing more

00:29:41.360 | than to be a marine biologist, right?

00:29:44.840 | And this isn't, you know, the eight-year-old

00:29:46.520 | who like loves the dolphins.

00:29:47.800 | This is the 16-year-old who's like shooting the lights out

00:29:50.280 | at AP Bio and has done an internship

00:29:53.000 | and is reasonably sure that they want to go

00:29:55.760 | not just to college, but to graduate school, right?

00:29:58.520 | So you're thinking about a lot of things there, right?

00:30:01.040 | But probably the first thing you're thinking about,

00:30:02.800 | hopefully, is you're thinking about the quality

00:30:05.520 | of the education, but what you're also thinking about

00:30:08.600 | is the quality of the mentorship.

00:30:10.360 | Because you know that you can't get into one of these,

00:30:15.000 | you know, teeny tiny, very competitive

00:30:17.800 | marine biology PhD programs,

00:30:20.080 | or you figure this out with a little bit of research.

00:30:21.760 | You can't do that without just a glowing,

00:30:24.480 | lights-out recommendation from your undergraduate,

00:30:27.920 | you know, faculty advisor, right?

00:30:29.960 | So how are you gonna find somebody at an institution

00:30:34.800 | who's gonna actually get to know your kid well enough

00:30:37.400 | to be able to write that kind of recommendation?

00:30:39.960 | And what sort of environment or circumstances

00:30:42.200 | are going to need to exist?

00:30:43.600 | Is there a better chance of that happening

00:30:45.760 | if they're in, you know, Biology 101

00:30:48.840 | with 800 other people, including 300 people

00:30:51.640 | who want to go to medical school?

00:30:53.240 | Or is there a better chance of that happening

00:30:54.680 | if they go to a small liberal arts college

00:30:57.280 | that happens to have a really great biology program, right?

00:31:01.320 | So, you know, you start thinking about size.

00:31:03.400 | You start thinking about faculty contact.

00:31:05.680 | Again, if you're, you know, up there in Northern Wisconsin

00:31:08.880 | and you've got that budding marine biologist on your hands

00:31:13.760 | who wants to do it someplace other than Lake Superior,

00:31:17.320 | you know, maybe you're gonna send them to Madison

00:31:19.480 | or to Wisconsin Whitewater,

00:31:21.080 | but there may be a lot of adjunct professors there

00:31:23.320 | or part-timers who aren't even gonna be around

00:31:25.280 | two or three years later.

00:31:26.880 | Whereas if they go to Lawrence University,

00:31:29.160 | you know, a smaller school, you know,

00:31:31.240 | if they go to Knox College,

00:31:32.600 | if they go to one of the smaller colleges in Minnesota,

00:31:37.040 | they're gonna have a better shot

00:31:38.320 | at making that kind of contact, right?

00:31:40.600 | And then you can go looking for data,

00:31:42.360 | which actually does exist,

00:31:43.920 | that will tell you which undergraduate institutions

00:31:47.000 | the PhD students at the biggest biology programs

00:31:51.000 | for PhD students, you know,

00:31:52.360 | where the undergraduates actually come from, right?

00:31:55.000 | This data is out there.

00:31:56.080 | So, you know, you start looking for whatever data

00:31:58.000 | or evidence you can that exists

00:32:01.680 | that might give you some sense

00:32:02.960 | of whether an institution that costs more

00:32:06.280 | than your state university might actually be worth it

00:32:09.640 | if it stands the chance of raising the odds

00:32:12.880 | of helping your kid do whatever it is that they wanna do.

00:32:16.080 | So there are a number of problems with this, right?

00:32:18.760 | First of all, to the extent that the colleges

00:32:21.360 | have good data on outcomes,

00:32:23.240 | they're not always so great about sharing, right?

00:32:26.160 | Because if everybody shared standardized data,

00:32:28.920 | then there would be even more ways to compare

00:32:30.840 | and rank the schools.

00:32:32.000 | And this is not in their interest.

00:32:34.720 | And so, you know, there's not always great data.

00:32:37.720 | It isn't easy to find.

00:32:39.040 | I spent years, you know, sort of hoovering up resources

00:32:41.800 | and trying to spit them out in the book,

00:32:43.200 | but I was not ultimately satisfied

00:32:44.880 | with what I was able to put together.

00:32:46.360 | And it's the school's fault, right?

00:32:49.680 | And then there's the not so small matter

00:32:51.800 | of the fact that we are dealing with children, right?

00:32:56.000 | For reasons lost to history,

00:32:58.000 | but that make absolutely no sense whatsoever.

00:33:00.560 | We spend all this money on teenagers, right?

00:33:03.280 | We don't send them off to serve in the US armed forces

00:33:06.600 | on a mandatory basis.

00:33:08.040 | We don't send them off to do non-military national service.

00:33:11.760 | We don't encourage them for the most part

00:33:13.920 | to take a year or two off before going to college.

00:33:16.720 | So we've got these 18-year-olds

00:33:18.040 | who've never done a darn thing in the world,

00:33:19.680 | except, you know, scoop ice cream and work at a day camp

00:33:22.560 | and, you know, sit in high school going to college.

00:33:25.920 | And we're making these six-figure decisions,

00:33:27.880 | investments based on what we think their interests are,

00:33:31.000 | but some of them have no earthly idea what they want to do.

00:33:33.480 | And then many of the rest who are absolutely certain

00:33:36.000 | about Wall Street or marine biology change their minds

00:33:40.520 | once they get into a really good college classroom

00:33:43.200 | and get exposed to, you know, bigger and better ideas.

00:33:46.120 | So the whole thing is fundamentally flawed

00:33:48.280 | and deeply dissatisfied.

00:33:50.240 | And I'm just trying to help people, you know,

00:33:52.880 | walk through a reasonably dysfunctional system

00:33:57.600 | with their head screwed on reasonably straight.

00:34:01.640 | - Okay, so at the end of this journey,

00:34:06.000 | you're gonna pick out a few schools

00:34:08.480 | and you're gonna have to apply to get into those schools.

00:34:13.480 | So now we need to get in.

00:34:17.840 | And with that in mind,

00:34:20.160 | the big thing these days seems to be diversity.

00:34:23.680 | I was listening to some entrance experts, if you will,

00:34:28.360 | former admissions experts,

00:34:30.800 | and they were talking about diversity, diversity, diversity,

00:34:34.520 | not just race and religion, but athletics,

00:34:37.440 | anything that sets you apart from others.

00:34:39.520 | So how do you use diversity

00:34:41.880 | to get into the school you want to get into?

00:34:44.080 | - Sure, so, I mean, let's just, you know,

00:34:47.720 | talk briefly and bluntly about how this works at,

00:34:51.960 | you know, the rejective schools, right?

00:34:55.000 | The schools that reject the highest percentage of applicants

00:34:58.440 | and there you are at the biggest, you know,

00:35:00.360 | advantage if you are rich and if you are white.

00:35:03.040 | You're at an advantage if you're rich

00:35:06.280 | because you can donate a building, right?

00:35:09.600 | And it tends to be way more affluent and way whiter people

00:35:14.480 | who benefit from what's known as,

00:35:16.960 | what's known as a legacy preference, right?

00:35:19.240 | Where your grades can be lower

00:35:20.800 | and your scores can be lower

00:35:22.160 | as long as your mom or your dad or both,

00:35:24.320 | or like four generations of Cabot's, you know,

00:35:26.880 | or eight generations, you know,

00:35:28.520 | went to Harvard or Amherst or Stanford.

00:35:31.000 | Those people tend to be disproportionately affluent

00:35:33.000 | and white.

00:35:34.360 | When it comes to athletic preference,

00:35:35.960 | which gives you even a bigger edge

00:35:37.560 | than legacy preference does, you know,

00:35:40.680 | many of those sports, although not all,

00:35:42.400 | but, you know, the majority of them

00:35:43.760 | are sports that require a great deal of investment

00:35:47.120 | and nurturing to, you know, get you to a place

00:35:49.720 | through the private tutoring,

00:35:51.320 | through the kind of elite level club sports, right?

00:35:54.760 | That will get you ready to swim or play golf

00:35:57.040 | or play tennis or play lacrosse or play hockey

00:36:00.280 | at an institution that will give you a preference, right?

00:36:02.800 | So there too, being wealthy gives you the bigger advantage

00:36:06.560 | and more often than not, the people who are wealthy are white.

00:36:09.720 | Same thing through with testing and tutoring on academics.

00:36:13.560 | And then there are preferences based on race,

00:36:15.640 | which are the ones that get the most attention,

00:36:17.640 | but may have a little bit less to do

00:36:21.840 | with who gets in than, you know,

00:36:24.280 | the total number of people who get in via legacy preference

00:36:27.640 | or via athletic preference,

00:36:29.000 | particularly in the rich white sports.

00:36:31.320 | So all of that is like a, you know,

00:36:33.080 | big kind of toxic stew that generates a lot of attention.

00:36:36.840 | But what I think people miss a lot of the time

00:36:40.000 | is that like a step below there

00:36:42.600 | at some still like really excellent high quality schools

00:36:46.560 | that, you know, reject way more applicants

00:36:48.560 | than they can take.

00:36:50.560 | There is actually, you know,

00:36:52.160 | a huge advantage to being able to pay full price

00:36:54.920 | because they get 50 or 75% of the way

00:36:57.480 | through the number of admissions they have to hand out.

00:37:00.600 | And then they start running out of financial aid money,

00:37:02.840 | right?

00:37:03.680 | And then the packages get weaker

00:37:05.120 | or they just start rejecting people who need aid, right?

00:37:08.120 | So if you are a Bogle head and you, you know,

00:37:11.360 | have those compound interest charts imprinted in your brain,

00:37:16.000 | which I do, thanks to my dad and the USAA Magazine,

00:37:19.560 | you know, sending me one when I was 23 years old,

00:37:23.120 | I knew good and well, right?

00:37:24.440 | That I didn't want money to be a factor.

00:37:26.560 | And so I just started saving for college for my kids.

00:37:31.000 | Like, well, they were still in utero, right?

00:37:33.040 | So money does provide a really sizable

00:37:38.040 | and sometimes measurable admissions advantage there too.

00:37:41.640 | So, you know, in many of these institutions,

00:37:43.480 | the parents would be proud to send their kids to,

00:37:46.160 | it's good to be rich.

00:37:48.480 | You know, it's complicated and it becomes politicized.

00:37:51.800 | But the fact of the matter is that

00:37:53.440 | there are all sorts of people

00:37:55.560 | of all sorts of skin tones and backgrounds

00:37:58.640 | benefiting from a certain amount of admissions preference.

00:38:02.880 | And that makes it harder, you know,

00:38:04.640 | in many instances and most instances

00:38:06.400 | for people who do not have any sort of a hook.

00:38:09.480 | But we shouldn't forget that there are hundreds

00:38:11.560 | and hundreds of, you know, essentially open access

00:38:16.040 | undergraduate institutions out there

00:38:18.120 | where more or less anybody can go, you know,

00:38:19.920 | if you can fog a mirror and, you know,

00:38:21.760 | there's a lot of dedicated instructors at those places too.

00:38:25.920 | And, you know, I don't want to discount

00:38:27.880 | the worth of those institutions.

00:38:29.960 | - So I was reading in the book that

00:38:32.080 | we were talking about the advertised price of college

00:38:37.320 | and the two reasons why colleges

00:38:41.040 | put these very high prices on their website.

00:38:45.440 | Number one, because some people will pay it.

00:38:48.680 | They'll pay it.

00:38:49.920 | And number two is because

00:38:51.760 | if they don't put the high price on there,

00:38:53.320 | people don't think they're getting good value

00:38:55.680 | for their money.

00:38:56.520 | So with that in mind, how do we pay for college?

00:39:02.400 | First of all, let's talk about discounting.

00:39:05.400 | It was enlightening to me in reading your book

00:39:07.120 | that internally admissions people call it discounting,

00:39:11.640 | but externally they call it scholarships.

00:39:15.200 | Anyway, go into discounting.

00:39:19.400 | I mean, what should you pay?

00:39:21.240 | Not what the price is, but what should you pay?

00:39:23.840 | - Right, well, gosh, where do we start here?

00:39:27.600 | I mean, there's a couple of different ways

00:39:29.680 | that these discounts happen.

00:39:32.040 | And, you know, we'll use the terms interchangeably,

00:39:34.800 | but what you want to be thinking about as a parent,

00:39:36.840 | as a shopper, right?

00:39:38.400 | Like what is my actual cost of attendance going to be?

00:39:43.400 | And if I get an offer of financial aid,

00:39:47.520 | am I a hundred percent sure I understand

00:39:49.840 | which of these discounts or scholarships

00:39:52.640 | that we're not going to have to pay back?

00:39:54.560 | And that, you know, we understand how much the school

00:39:56.480 | is asking us to actually pay out of pocket

00:39:59.360 | or what it's telling us to borrow, right?

00:40:01.880 | So there's two basic kinds of financial aid.

00:40:04.200 | You know, back in our day, even back in my day,

00:40:07.400 | I'm a couple of years younger than you, Rick,

00:40:09.200 | most of the financial aid that was offered

00:40:11.080 | was offered based on need, right?

00:40:13.600 | So my family had to kind of lay ourselves bare

00:40:16.080 | in terms of our income and our assets.

00:40:18.000 | And then Amherst College decided

00:40:19.760 | what they thought we could afford to pay.

00:40:21.800 | And they basically were good for the rest of it

00:40:24.480 | with, you know, with a couple of, you know,

00:40:27.240 | campus jobs and undergraduate loans thrown in.

00:40:31.040 | What's changed now is that that need-based aid system

00:40:34.720 | still exists, you know, at the hundred or so,

00:40:39.240 | you know, most well-resourced private institutions

00:40:41.600 | in America, state systems are a little different,

00:40:44.560 | but, you know, at the private ones,

00:40:45.800 | it still kind of looks like that.

00:40:47.760 | But, you know, starting around in the '90s,

00:40:49.880 | this like whole separate system hived off

00:40:51.960 | that's become known as Merit Aid.

00:40:54.400 | And Merit Aid was originally designed

00:40:56.840 | to help like fourth-tier institutions

00:41:01.480 | improve to the third or second tier

00:41:04.120 | by swiping kids who were qualified

00:41:06.760 | for second or even first-tier institutions

00:41:09.200 | by throwing money at them and making them feel good, right?

00:41:12.120 | So if you got this unsolicited, you know,

00:41:14.120 | offer in the mail after you took your PSAT test

00:41:17.000 | and you've done well from a school

00:41:19.120 | that you've never heard of, you know,

00:41:20.520 | the letter would say, "Hey, we have our eye on you,

00:41:23.320 | and we're not gonna charge you any application fee.

00:41:26.400 | If you come here and you get in,

00:41:28.000 | you know, we'll give you $5,000 off the list price."

00:41:30.960 | And that worked so well,

00:41:32.640 | so many of the, you know, of the good, smart kids,

00:41:35.680 | like were getting bought off, you know,

00:41:38.040 | from higher-tier institutions,

00:41:40.080 | that market forces intervened, you know,

00:41:42.520 | competition took hold,

00:41:43.840 | and over the course of 10 or 15 or 20 years,

00:41:46.800 | it just kind of moved, you know,

00:41:48.040 | farther and farther up the food chain,

00:41:50.120 | where now, you know, it's really only 30 or 40 schools

00:41:54.720 | that aren't forced to offer some kind of discount.

00:41:58.240 | And let's be clear, too, this merited discounting,

00:42:01.440 | it has nothing to do with your ability to pay

00:42:04.760 | and kind of everything to do with your willingness, right?

00:42:07.800 | So there are all sorts of super-rich families

00:42:10.120 | who are being offered $10,000, $20,000, $30,000 off a year,

00:42:13.440 | or even a full ride,

00:42:15.520 | if the school has decided that their kids are attractive,

00:42:18.920 | whether because of their actual academic

00:42:21.480 | or extracurricular merit,

00:42:23.200 | or just because they're throwing money around

00:42:25.120 | to, you know, try and get people to come.

00:42:27.240 | So, you know, think about it this way, right?

00:42:28.920 | If you're Kenyon College, right, in Ohio,

00:42:32.000 | or Connecticut College in London, Connecticut,

00:42:36.320 | if you are Macalester College in St. Paul, Minnesota,

00:42:40.120 | you know, excellent schools,

00:42:41.920 | but they have slipped enough

00:42:43.600 | in terms of marketplace perception

00:42:46.000 | that even a certain number of people

00:42:48.360 | with the ability to pay $75,000 a year

00:42:51.840 | are lacking the willingness to do so, right?

00:42:54.800 | But if you are Macalester

00:42:56.000 | and your cost to educate a student is $42,000 a year,

00:42:59.800 | all right, you're charging a list price of 70, right?

00:43:03.040 | If you throw an $18,000 merit aid package

00:43:06.000 | at an affluent family,

00:43:07.800 | that family's gonna feel really good

00:43:09.440 | about what it has accomplished, right?

00:43:11.960 | Because they're gonna get 18, 36, 54, $72,000 off

00:43:16.800 | over the course of four years.

00:43:18.400 | Their cost of attendance in any given year is $52,000, right?

00:43:22.760 | But if Macalester only needs $40,000 to educate that kid,

00:43:26.720 | that's still a $12,000 profit, right?

00:43:29.960 | And they can take that profit

00:43:31.400 | and they can toss it at a lower income family

00:43:33.680 | and help them too, right?

00:43:35.520 | So in theory, everybody wins,

00:43:38.080 | but it's a real weird look

00:43:39.480 | to be throwing scholarships at millionaires,

00:43:42.560 | which is essentially what's going on.

00:43:44.680 | And so as a parent, as a shopper,

00:43:48.080 | it is not at all clear that this is going on,

00:43:52.080 | the extent to which it's going on,

00:43:54.360 | nor is it predictable in many instances

00:43:57.960 | how much you will get, right?

00:44:00.240 | And so for somebody with like a bogal head mindset,

00:44:04.880 | the temptation and the desire,

00:44:07.080 | once you understand what's going on behind the curtain,

00:44:09.600 | is to crack the code, right?

00:44:11.320 | To try and beat the system.

00:44:13.160 | And so I did my level best in the book

00:44:16.840 | to show people exactly where the data is

00:44:19.640 | that can give them some level of predictability

00:44:22.520 | about what kind of merit it might be offered.

00:44:25.040 | But the fact of the matter is,

00:44:26.080 | is that the schools kind of change their goals each year,

00:44:29.240 | in part, depending on their own institutional priorities,

00:44:32.840 | and also based on what's going on in the market around them.

00:44:36.280 | And especially in the last couple of years with the pandemic,

00:44:39.640 | whatever algorithms they're using

00:44:41.240 | to try and decide what prices to offer which students,

00:44:45.400 | which is another revelation for people,

00:44:47.240 | a lot of these merit aid offers are delivered by robots,

00:44:50.200 | by software, not by humans, right?

00:44:53.600 | These algorithms can't predict

00:44:54.920 | how people are gonna behave during a pandemic.

00:44:57.000 | And so you're getting all sorts of wacky results

00:44:59.320 | where people are getting no discounts

00:45:01.960 | or they're deciding to apply to 22 schools

00:45:05.440 | just because it's all so unpredictable

00:45:08.120 | and they're only getting into four.

00:45:09.760 | And it's all a real hash.

00:45:12.800 | I do hope that things will have kind of leveled out

00:45:16.120 | and they'll be making more sense by next year.

00:45:18.560 | It's not always predictable.

00:45:21.640 | So the best we can do sometimes

00:45:24.280 | is just attempt to explain how the system works,

00:45:27.360 | even if we can't predict precisely what kind of offer

00:45:31.040 | it's going to make in any given year.

00:45:33.640 | - Let's get on to a couple of other ways of saving.

00:45:36.320 | And that is the most popular one is a 529 plan.

00:45:39.880 | And a lot of people use 529 plans.

00:45:42.120 | Parents use them, grandparents use them.

00:45:43.960 | Some states give tax breaks, some don't.

00:45:46.760 | A lot of people ask,

00:45:48.400 | the most common question I get about 529s

00:45:50.520 | is how much is enough?

00:45:51.720 | How much should I put in?

00:45:53.280 | What should I put in every year?

00:45:56.960 | And what do I need to get to by age 18

00:45:59.520 | when my son or daughter goes to college?

00:46:03.040 | - Sure.

00:46:03.880 | As I think most of the people in this crowd probably know,

00:46:07.000 | the nice thing about 529s

00:46:08.440 | is that they come with some sizable tax benefits, right?

00:46:11.680 | In 30 some states,

00:46:13.160 | you get some kind of a tax break

00:46:15.120 | for putting money in in the first place.

00:46:17.040 | And then for everybody,

00:46:18.240 | you get a huge tax break on the way out.

00:46:20.480 | As long as you take the money

00:46:21.720 | and you use it for some higher educational purpose,

00:46:24.840 | you don't pay any capital gains taxes on the earnings.

00:46:28.720 | And so if you start at age zero

00:46:31.120 | and you get the kind of market

00:46:32.600 | that we've had the last 15 or 20 years,

00:46:34.920 | you're going to have a lot of capital gains

00:46:36.440 | that you're not paying taxes on.

00:46:37.800 | So yay for being in the system, right?

00:46:40.760 | So the downside is there's a bit of complexity.

00:46:44.200 | Every state has their own plan.

00:46:46.480 | The rules tend to be different,

00:46:47.960 | different investment lineups.

00:46:49.440 | Sometimes, although with increasingly less frequency,

00:46:54.480 | your plan may not have an index fund

00:46:56.880 | for every asset class that you want to be in,

00:47:00.240 | although that's mostly gone now.

00:47:02.600 | It was definitely the case 10 or 15 years ago.

00:47:05.440 | Thankfully, Vanguard and others who index

00:47:09.640 | are running or providing investments

00:47:11.320 | for most of these plans.

00:47:12.680 | So how much should you save?

00:47:14.680 | Well, save as much as you reasonably can, right?

00:47:19.040 | Everybody's different.

00:47:20.000 | But here's something to anchor to

00:47:22.040 | that might make you not freak out.

00:47:23.960 | Because I talked to a lot of parents of young kids

00:47:26.680 | and if they can do any kind of inflation math in their head,

00:47:30.040 | they're thinking, wow,

00:47:31.000 | if I want my kid to go to the institutions that we went to,

00:47:34.880 | it's going to be $500,000 by the time they're 18.

00:47:39.280 | And that's insane, right?

00:47:40.920 | Like I'm still paying off my student loan debt.

00:47:42.960 | We haven't bought our forever home yet.

00:47:44.640 | We want to have seven figures in retirement savings.

00:47:46.880 | How am I going to do this, right?

00:47:49.400 | So many years ago,

00:47:52.200 | I had a conversation with a financial planner in Wisconsin

00:47:55.640 | named Kevin McKinley,

00:47:57.200 | who came up with what I now refer to as the McKinley Rule,

00:48:00.040 | which is just to think about it in fraction.

00:48:02.360 | You want to save a third of the money

00:48:04.600 | that they'll need for college.

00:48:06.000 | And maybe your goal is public,

00:48:07.440 | or maybe your goal is private,

00:48:08.800 | or maybe it's somewhere in between those two list prices,

00:48:12.040 | as we've discussed, right?

00:48:13.240 | So you want to save a third,

00:48:15.000 | you want to pay for a third out of current income, right?

00:48:18.120 | So while they're in college, you stop taking vacations,

00:48:21.360 | you eat rice and beans, you do whatever you can,

00:48:24.680 | and you pay for a third of that while they're there,

00:48:26.720 | and then you borrow a third.

00:48:28.080 | Maybe the parents borrow half of that third,

00:48:30.760 | and the kid borrows the other half, right?

00:48:33.440 | Although if your kid goes to a state university,

00:48:35.880 | the federal loan borrowing limit of $31,000 or so

00:48:39.200 | will almost cover that third all alone, right?

00:48:41.640 | So then this starts to feel reasonable, right?

00:48:44.240 | You know, if your goal is to end up

00:48:45.480 | with $50,000 of savings in today's dollars,

00:48:48.560 | you know, you can do that with 250 bucks a month,

00:48:51.560 | or whatever it is, depending on your return assumptions.

00:48:54.120 | And that starts to feel a little more doable for families,

00:48:57.440 | right?

00:48:58.280 | Then you're not driving yourself crazy.

00:48:59.840 | Now that number is going to need to be higher

00:49:01.640 | if you want to have a third of a private college

00:49:04.560 | available to you 18 years from now,

00:49:06.280 | and if you have more than one kid, well, right,

00:49:08.680 | there you go, right?

00:49:09.640 | So what can you do?

00:49:10.480 | Well, you can talk to grandparents about this, right?

00:49:13.360 | Even $50 a month, you know, a contribution from a relative

00:49:16.920 | can make an appreciable difference going forward.

00:49:19.560 | Okay to ask, right?

00:49:21.400 | Much better than all the plastic trinkets

00:49:23.440 | that they tend to show up with that, you know,

00:49:25.400 | end up underfoot and then in the garbage.

00:49:27.440 | And so those are the basics, right?

00:49:31.520 | You know, there's an hour-long debate we could have

00:49:33.880 | about whether you might be better off

00:49:36.000 | just saving in a standard brokerage account

00:49:37.720 | for a whole variety of reasons,

00:49:39.120 | and that's fine if that's the way you want to go.

00:49:41.600 | I just urge, beg people to, you know, start early,

00:49:44.840 | save as much as you reasonably can.

00:49:46.760 | It is so rare that anybody regrets saving too much

00:49:50.000 | for college.

00:49:50.840 | That would be a high-class problem.

00:49:52.160 | - So let's talk about student loans for a couple of minutes.

00:49:54.520 | I mean, there are three types.

00:49:56.040 | The direct loans from the government, as you mentioned,

00:49:58.600 | then there's private loans,

00:50:00.240 | and then there's parent loans called direct PLU loans.

00:50:03.360 | Could you just briefly describe the three different types?

00:50:06.040 | - Sure.

00:50:06.960 | It has worked different ways over the years,

00:50:08.720 | but the way it works today is that if you are borrowing

00:50:11.320 | from the federal government,

00:50:12.960 | there is no bank involved, right?

00:50:14.800 | And in most instances, if your kid is a dependent,

00:50:17.960 | they can borrow, you know, roughly $31,000 and change

00:50:21.440 | over the course of four years.

00:50:23.280 | And then what's known as a servicer will step in

00:50:25.920 | to start sort of collecting those payments.

00:50:28.440 | So those are how the undergraduate loans work.

00:50:31.040 | Then there are private loans from institutions

00:50:33.480 | like Sallie Mae, Discover,

00:50:35.600 | maybe your credit union does some of this,

00:50:37.680 | you know, a few other companies you may have heard of.

00:50:40.000 | And again, back in the day,

00:50:41.320 | undergraduates used to be able to get private loans

00:50:43.960 | on top of the federal loans or in lieu of the federal loans

00:50:46.960 | without any kind of, you know, parental grownup cosigner.

00:50:50.560 | And that is not the case anymore.

00:50:52.840 | If your kid has maxed out their federal loans

00:50:54.880 | and you want to borrow even more,

00:50:56.560 | which I would encourage you to think hard

00:50:58.280 | about whether that's smart or not,

00:51:00.160 | you will need to be a cosigner.

00:51:01.720 | And then there's going to be a, you know,

00:51:03.120 | sort of complex dance afterwards

00:51:06.120 | where all of you will have to decide, like,

00:51:08.120 | who's making the payments

00:51:09.440 | and whose credit rating is getting messed up

00:51:11.640 | if the 22-year-old is making the payments and forgets,

00:51:14.360 | right, you know, and how much debt is too much.

00:51:17.480 | And, you know, for what sort of degree.

00:51:19.480 | Then there are those parent loans that you mentioned.

00:51:21.320 | There are the, what's known as the plus loans

00:51:24.040 | that you can get from the federal government,

00:51:25.880 | pretty high origination rate,

00:51:27.960 | pretty high interest rate.

00:51:30.000 | You know, people who do feel the need to borrow

00:51:31.920 | sometimes will, you know, borrow against their home instead,

00:51:36.080 | you know, to avoid these federal loans.

00:51:38.080 | But parents are increasingly using them.

00:51:40.760 | And we actually know more

00:51:42.440 | about where this plus loan borrowing

00:51:44.720 | tends to be most persistent.

00:51:46.680 | And it is not, you know, as you would expect

00:51:50.400 | at private institutions that are not all that well-resourced

00:51:54.480 | in terms of their financial aid offerings.

00:51:56.520 | And also historically black schools

00:51:59.320 | have a fair amount of parent borrowing there as well.

00:52:02.960 | So, you know, those are the basic types.

00:52:05.080 | - Well, last minute here,

00:52:06.480 | you offer a message of hope for people.

00:52:10.280 | Can you just give us your message of hope?

00:52:12.920 | - Sure.

00:52:14.920 | So, I mean, let me tell you about the opposite of hope.

00:52:16.840 | I mean, the opposite of hope is, you know,

00:52:18.600 | all of these calls that I used to get in March and April

00:52:21.240 | from incredibly smart people

00:52:23.280 | who like help run institutions in New York City

00:52:26.480 | that you have actually heard of.

00:52:28.920 | And they have gotten to the end of the process

00:52:30.720 | and realized that, you know,

00:52:31.880 | they had no idea that they weren't gonna get any discounts

00:52:35.400 | and that their kid had applied to all of the wrong schools.

00:52:38.720 | And they're just, you know, saying to me,

00:52:40.880 | "Ron, is there something you can do to help?"

00:52:43.400 | And after too many of these calls,

00:52:45.360 | I thought, wow, it is deeply problematic here

00:52:49.000 | that this system is so complicated.

00:52:50.960 | And while I can't solve for that,

00:52:53.360 | I can certainly help pull the curtain back

00:52:56.360 | so that people know, first of all, how the system works,

00:52:59.760 | the best ways to get, you know, discounts most effectively,

00:53:02.800 | and how to shop for the sort of institutions

00:53:06.200 | that will give their kid everything that the kid needs

00:53:09.320 | and at least some of what they want.

00:53:11.440 | And for people to know that they don't have

00:53:13.440 | to spend $300,000 or anything close to that

00:53:16.760 | to accomplish those needs.

00:53:18.520 | And, you know, once you're going into the process

00:53:21.680 | with a head of steam and frankly,

00:53:23.640 | like a bobblehead style system beating question authority,

00:53:28.160 | question everything mindset,

00:53:30.840 | it actually starts to be fun again.

00:53:34.160 | And, you know, less about dread

00:53:36.520 | and more about this incredible experience

00:53:39.760 | that you are gonna be able to provide for your kid

00:53:42.640 | one way or the other that will change their life, right?

00:53:46.640 | And as much as you may dread letting them go,

00:53:49.480 | you should also be excited and hopeful about the fact

00:53:53.320 | that you're able to provide it for them.

00:53:55.360 | So I don't want this to be a downer.

00:53:57.520 | I don't want people to be angry by the end of the book.

00:54:01.000 | I want them to feel ready, right?

00:54:03.000 | And I want them to feel excited and jealous, frankly,

00:54:06.400 | that their kid gets to do this amazing thing.

00:54:08.640 | - Well, the name of the book is

00:54:10.680 | "The Price You Pay for College,"

00:54:12.160 | an entirely new roadmap for the biggest financial decision

00:54:15.800 | your family will ever make by Ron Lieber.

00:54:19.040 | Ron, thank you so much for being a guest today.

00:54:21.800 | It's been a wonderful presentation

00:54:23.680 | and we've all learned a lot.

00:54:26.720 | - It's a pleasure and an honor

00:54:28.520 | and I'm easy to find at ronlieber.com.

00:54:31.960 | You know, if you have questions or observations

00:54:34.640 | or ideas for additional avenues of exploration,

00:54:38.200 | you know, those ideas are gold to me.

00:54:39.640 | So thank you.

00:54:40.840 | - Thank you, Ron.

00:54:42.440 | This concludes "Bogleheads on Investing," episode number 35.

00:54:46.880 | - Join us each month as we have a new guest.

00:54:49.560 | In the meantime, visit bogleheads.org, boglecenter.net,

00:54:54.560 | the "Bogleheads" wiki,

00:54:56.200 | get involved in your local "Bogleheads" chapter

00:54:58.640 | or a virtual community and tell others about it.

00:55:02.160 | Thanks for listening.

00:55:03.320 | (upbeat music)

00:55:05.900 | (upbeat music)

00:55:08.480 | (upbeat music)

00:55:11.060 | (upbeat music)

Bogleheads® on Investing Podcast 035 - Ron Lieber, host Rick Ferri (audio only)

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