Wednesday, April 8, 2015

Education Dollars and Sense

Recently I had a discussion with a co-worker about education. His daughter is nine years old. He told me he doesn't want her to have to pay for her college. He and his wife will take on her debt so that she can get a good start out of school. So that got us to talking about the economics of education.

In Illinois the average cost per year of a 4 year university is $14,000. I'll save you some math that's $56,000 for four years.

If you have a child this year and you commit to saving enough money so that your child can go to college without debt that means you're putting away $2666 per year for 21 years (remember, you don't have to pay it all when he/she turns 18, it's due at graduation).

Hey, that's not too bad! Doesn't sound too difficult.

Sorry, you forgot about inflation. Did you think the cost of college wouldn't go up in 21 years?

Inflation averages around 3% per year. $100 in 2015 money will buy you $97 worth of stuff in 2016.

$56,000 in 2015
$57,680 in 2016
$59,410 in 2017
$98,196 in 2034
$101,142 in 2035
$104,176 in 2036 (the year that little pip squeak graduates)

So $104,176 is really your goal. Not $56,000.

Now you're putting away $4960 per year.

That works out to about:
$414 per month
$96 per week
$20 per every day worked (for 21 years, remember that)

The median household income in Illinois is $56,000.

Assume Uncle Sam and the Guv are going to take 20% of that (I really don't know what the tax rate is, but with Social Security and other deductions that sounds about right). You're left with $44,800 in your pocket.

$5000 of that is going to little Johnny/Janie's future schooling. You now have $39,800 to live on. over 10% of your take home income for 21 years is going straight into that college fund.

Oh, you've got three kids? Hand over your wallet now, please.

Thankfully that 3% inflation also means the median income goes up. That's why all of us get 3% raises every year. Am-i-rite? Joking aside; that $5000 per year is actually much less painful when your kid is approaching college age.

So with that said most college savings won't start with a savings amount that you stick to for 21 years. They will increase it over time to match the predicted cost of tuition: $2666 this year. $2746 next year, etc. So really it's more like $50 per week per child. And theoretically you're investing that fund into something that might produce some interest. Will it surpass the 3% average inflation? Probably not, but if it stays even with it, that's a victory.

But here's the real point I want to get to: It doesn't have to be this way.

Per the 2010 census there are roughly 17.5 million Americans who are between 18 and 21 years old. I derived this math from an average of the 18 - 24 bracket multiplied by 4.

Assume we want to send every single one of them to college, or some equivalent adult education program, that costs $14,000 per year on the tax payer's dime. It would cost us $245 billion!

There are approximately 177 million Americans between the ages of 22 and 64 (working, tax paying age).

Dividing that $245 billion between all of the tax payers equally that works out to around...

$1385 per tax payer per year.

That's $115 per month
That's $26 per week... to ensure every American gets a higher education. It doesn't matter if you have one kid, two, or five. The burden is shared by all of us... and then the reward is shared by all of us.

And this is assuming that providing free higher education wouldn't reduce the cost of schooling.

Let's pretend for a moment that providing free higher education reduces the overall cost by a mere 25%. That;s $10,500 per student per year (by the way, it costs only $7500 per student per year for education in Finland)

That per year cost drops to $1038, the per week drops to $19.50

And this is assuming all of those kids are going to a 4 year university. A lot of them are going to spend a year or two studying a trade. Right now only about 40% of Americans are getting a college degree. Let's work with a 50/50 split. 50% get a four year degree and 50% learn a trade for 2 years. And by the way "learning a trade" doesn't mean becoming a carpenter or plumber. The vast majority of jobs don't actually need a four year education. Most office jobs can be done competently by someone with two years of focused training.

That's down to 13.3 million kids in school at any given time at $10,500 per year.

That's now only $138 billion per year.
Or $780 per tax payer per year. $15 per week.

And this is also assuming that tax burden is distributed evenly, which it almost certainly wouldn't be. Under the current system 85% of all taxes revenue comes from the higher income brackets*. With that said the the realistic end result would probably be less than $2.25 per week per middle class tax-payer to ensure every American gets a higher education.

"Bah! Gubment need ta stay outta mah pocketbook. I kin do it bettah on mah own!"

Ok, sorcerer. Good luck turning that $2.25 per week you would pay for state funded education into the $50 per week, per child, you need if you're doing it on your own.

* Finding information on how much each "bracket" contributes in taxes is notoriously difficult. Land on a conservative website and they'll tell you 99% of all tax income comes from taxes on massive corporations and honest Americans who make a meager $10 million per year. Land on a liberal website and the top 75% of American earners are only paying 5% of the taxes. So I had to go with an average from several websites. 85% came up a few times.

One last bit of math. The US Federal government collects $3.7 trillion in taxes. If every working age American were taxed equally it would require each of us to pay around $21,000. Between my wife and I we averaged $7000 each in 2014. Someone is covering the rest of that money.

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