 Welcome to Bogle Heads on Investing, podcast number 35. Today our special guest is Ron Lieber. Ron is a New York Times award-winning columnist and the author of a new book, The Price You Pay for College. And today, that's what our discussion is all about. Hi everyone, my name is Rick Ferri and I'm the host of Bogle Heads on Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a 501C3 nonprofit organization that you can find at BogleCenter.net. Your tax-deductible contribution to help expand financial literacy are greatly appreciated. Today our special guest is Ron Lieber, New York Times award-winning columnist and the author of a new book, The Price You Pay for College, an entirely new roadmap for the biggest financial decision your family will ever make. I recently interviewed Ron for the Bogle Heads speaker series in a live interview that is available on the BogleCenter.net website. This is the audio from that video. What I learned after reading Ron's book and interviewing him was that picking the right college, getting into that college, and paying for that college is not nearly as clear-cut as we would like it to be. There's an awful lot that goes on behind the scenes. This is a wonderful interview if you have children who will be going to college or grandchildren who will be going to college, or perhaps you will be going to college. There's something to learn for everyone. So here we go. With no further ado, let's welcome Ron Lieber. Thank you, Rick. It is an honor here to be among, you know, sort of my fellow personal finance nerds. I know there are few people living and walking and breathing in the United States or in the world who care more about beating the system, winning the details, and getting it right than this crew. And it's a special honor to be here with Mr. Asset Allocation himself doing the grilling for the next 60 minutes. So I look forward to it. Lay it on me. Ron, we'll start out with you. Over the past decade, your writing has shifted to focus on family finances, but particularly raising children, teaching children about money, and now sending those children to college. So I think I can guess this, but what sparked your interest in doing a book on the price you paid for college? Sure. Well, some of this is born of my own personal experience. I grew up in Chicago. You know, my family was well off enough to, you know, afford three private school of tuition, you know, back in the day in the 70s and 80s and when that didn't cost quite as much as it does today. And I had a couple of things happen in there that kind of changed everything for me. So my parents split up. If any of you are divorced or the children of divorce, you know that that is a calamitous financial event among others, right? You know, one household you turn it into two, they're just going to be more expenses. And then right about the same time, my father, my late father lost his job and he did not earn, you know, much income to speak of for the next couple of years, except through some occasional consulting jobs. And it was about a decade really until my family was back to where it had been financially. Anyway, we were sort of thrust into the, you know, private school financial aid system for K to 12, such as it exists, you know, it basically consisted of a board of directors at our school in Chicago deciding whether the labor kids were going to be evicted for lack of ability to pay. And thank God we weren't it's still the most generous thing that anybody's ever done for me and those kids who I grew up with, you know, became my family and are still my closest friends to the state. So I got to stay there at the Francis Parker school, but when it came time to apply to college, we did not have enough money for the places that I wanted to attend. Luckily, our college counselor there knew the name of a guy to see the guy in the Chicago land area, you who you would go to for help with with applying for financial aid. And we called him up he gave us an address he said we were to you know show up at 5pm the following Tuesday at this place in Evanston. And we were going to, you know, we're supposed to bring him $50 in cash and he said to go through the side door. So we thought okay, and we show up at this address and turns out it's the Office of Financial Aid at Northwestern University. And it turns out that we were there to see the assistant director who had this incredible side hustle going on, where every day during the fall at 5pm. He would usher in these needy families and you would pay him a little money which he presumably would not report to the IRS or certainly to his employer. And then he would proceed to explain to you all of the secrets of the financial aid system. And it turned out to this guy knew exactly what he was talking about and I got into Amherst College early decision I got a great financial aid package. And I learned a couple of important things from that, namely that you know the grown up world was filled just chock full of complex systems involving money and they were totally made to be hacked. He wasn't encouraging us to break the law right, but there was this guy out there who knew the answers and for very little money, you know we could get a hold of him and he could tell us what to do. And the lesson stayed with me right so it's not any big surprise really that I grew up to be the person whose beat is beating the system in the newspaper that's always the way that I thought of my personal finance work at the Wall Street Journal and now at the New York time, but basically anything and everything that hits you in the wallet, you know particularly items that have large costs or large potential costs and then involve a lot of emotions and feelings are the things that I care the most about. So of course I became a dad in 2005 for the first time I now have two kids a 15 year old and a five year old. I became a little bit obsessed with 529 plans back then I was at the Wall Street Journal and there were still a fair bit to say about you know the investment choices and the high fees and, and you know the various limitations and the complexity. As most of the people on this call probably know we have largely although not completely solved for the, you know generalized mediocrity of these 529 plans. So you know to a certain point I moved on in my writing to write about how to pay for college instead of how to save for college because we were starting to hear about all these people coming out of undergraduate with just you know piles of student loans, particularly, you know 15 years ago when you could still get the so called private loans not the federal loans that are capped private loans without any adult cosine. So I started, you know, been into that area and I'm still writing, you know sort of sporadically about those very complex systems involving that we have not yet solved for in the New York Times. But what started to happen as time went on is that I would hear from readers and from, you know, colleagues and friends who were super confused, not so much about how to save and not so much about how to pay. They were asking value questions they would come to me and they'd say Ron you know my kid, you know, got got into the University of Illinois at Champaign Urbana and that's going to be maybe $125,000 because we don't qualify for any need based state. My kid also got into Kenyon College because they're interested in English being a writer and that's a really great small liberal arts college in Ohio, and they gave us a bunch of discounts, even though we don't qualify for any need based financially that's going to be $200,000. And then my kid shot the lights out and got into Northwest right so that's going to be $300,000. Where in your library of big data sets that you keep track of over there is the data set that tells me why you know Northwestern is $200,000 better than the University of Illinois and we're going to get into that. We're going to get into that. We're going to get into that. Right. So I thought, I thought, wow. I need to start thinking about value. I need to start thinking about what to pay for college to. And so that was sort of my journey to becoming obsessed with, you know, the college question it was from personal experience as a student. It was from personal experience as an investor with one and then two kids living in New York City, a high cost area. And then it was from professional experience with this like avalanche of incredibly confused people asking questions about value that I did not know how to answer. Well, your book starts with a discussion that contrasts the advertised cost of college by those institutions with the price of college. So I'm going to show a chart and this chart is the price of the cost of college from 1980 through 2000. Now 1980 is a really important period date for me because it's when I graduated college and I went back and I looked I actually paid room and board tuition and everything else. $10,000 for four year degree at the University of Rhode Island. That's what it costs. Now this shows this chart is showing the cost of college over the next 40 years going up by 1200% and during that same period of time the cost of inflation going up by 236. So here's what I did I went back to my old alma mater, the University of Rhode Island, and I said, if I paid $10,000 back in 1980 and it was the cost of inflation was 236%, I would pay $36,600 for the same education today. Turns out though, I actually looked at the data that I got off the administration of the website from the University of Rhode Island, and it came out exactly to $128,000. This chart is very accurate. Now, my question to you Ron is, why does this chart exist? What happened here? Yeah. So I guess let's start by making sure we label this chart correctly, right? Because what we were looking at there was list prices. And I assume at some point sooner rather than later in the hour we'll get to net prices and discounts, right? But there are plenty of people who pay the list prices, particularly at public institutions like URI that don't have a lot of institutional aid. And if you're a good bogelhead and you've subsaved effectively, you may have so many assets and so you may well pay the list price. So let's talk about those list prices. First of all, let's consider a public institution like the one that you attended or any flagship state university. And on there, more than anything that's caused that line to be so steep is a decrease in the amount of subsidy that the state legislatures give to the schools, right? I mean, to the extent that the price of those institutions are quote unquote artificially low, that they don't cover the cost of actually maintaining the buildings and paying all the professors and providing programming for the students is because the state uses tax or other revenue and just hands it over to the university to keep tuition costs down, right? So back in the day, this was thought to be a useful enterprise, a good investment. A well-trained workforce grows up to be more productive, pays higher taxes because it's earning more, and that money just sort of comes back to the state and it gets a return on investment. But back in the last big recession in particular 2007, 2008, 2009, 2010, these states were so hammered by a loss of tax revenue in that enormous recession back then that they had to make some difficult choices. And one really easy thing to do politically, right, is just to sort of stick it to the state university system, right? And force the, you know, the chancellor and the board to make difficult decisions about whether they're going to raise prices or whether they're going to cut services or cut programs, right? And those schools felt like, well, we can raise prices because what it really means is that, you know, these students and these families will probably just have to borrow a little bit more, you know, maybe $1,000 extra per year, you know, they can afford it, right? Because this was already a subsidized education in particular. But, you know, if that thinking continues to feed on itself over time, that's how you get a chart like this with public institutions. Now, if you're looking at the chart for private institutions, still pretty steep, far outpacing inflation, maybe not, you know, but starting from a higher price, which is why the angle of the slope is not as high as it would be for publics. With the privates, the private institutions need to justify their higher prices with, you know, more faculty, better services, shinier buildings, you know, they're in competition with the state university systems, right? But the other thing they have going on is that as time has gone on, both market demand and regulatory requirements have meant that these institutions have either needed to or felt like they really had no choice, but to add a whole bunch of administrators, right? We've got all sorts of new laws that require equality on the playing field for our daughters, right? Title IX, you know, diversity and equal access in areas outside of gender. We have, you know, ever higher technology budgets at these institutions. There are parents who demand bigger and better career centers, right? Kids have become accustomed to living in a certain manner, and if your dorms don't have air conditioning, well, you know, people may not choose your school, right? And so there are all these market pressures, regulatory pressures, which has led to there being a much higher number of administrators at these schools. Administrators don't come cheap. They're reasonably well trained, they're experienced, and I think if you get right down to it, right, as a parent, if you've got a child who's going to college and they've got a medium grade mental health challenge, right? You don't want a 23-year-old grad student working in the counseling center using your child as their guinea pig, right? You want a 43-year-old PhD psychologist working in the mental health center to take care of your precious child who you've pushed off into the world for the first time, right? And you multiply that times all sorts of different parents with all sorts of different needs, and pretty soon you have a lot more administrators than you used to, and that's got to be paid for some way. And for the private institutions, if they don't have a big endowment, that comes from tuition. So that's how the list price goes up there. Well, the second thing is, you know, the books, I noticed the books have increased with the rate of that original inflation, the cost. Books have gone up about 1200% over the last 40 years, too. So they have far outpaced the cost of just buying a regular book. In fact, if you bought a regular book, the cost has actually come down. It's basically been lower than the inflation rate. So tell me if you will, if you know this, what's going on with textbooks, college textbooks? Why are they so expensive? Yeah. So I know a little bit about this only because I helped some friends of mine run a campus-based used bookstore back in the late 80s and early 90s. And look, some industries have higher profit margins than others, and textbook publishers really rake it in. Why didn't they do that? Well, first of all, I can tell you the how. If you put out a slightly changed, really just like repaginated, or you change the font size of the edition of your textbook every 18 months, then you can just sync the used textbook market altogether. And if you want to do well in the class and don't want to be checking the book out from the library, you've got no choice but to buy this thing. And the books back in the day would only be available at the campus bookstore, and you paid the list price, and that was that. And there's a reasonably high barrier to entry for these things because the professors themselves have high standards. They want the textbook to be excellent. And it turns out it takes a couple of years to write a really great, thoughtful textbook for organic chemistry or for Psych 101 or for Econ. And so they do this because they can. I mean, it's not an incredibly large piece of the budgetary pie, but it's just high enough that it really bugs people. And, you know, there have been various attempts at, you know, innovation, you know, most recently with the electronic textbook publishing, and that's helped some but this is just a slow industry to change. And, you know, people, the professors in particular have sort of ingrained habits and it's tough on the crack. So let me ask a question since college is getting to be so expensive, as we've seen, and we'll get into what people actually pay as opposed to what the advertised cost is here in a little bit but tell me whether it's still worth it to pay all of this money to go to a four year college. Did you go to college anymore, or four year college? Are you going to get a better job? And what's the data show? Well, so, I mean, let's start with the baseline economic data. The baseline economic data tells us that, you know, there's roughly a, you know, million dollar lifetime gap in earnings between people who go to college and finish, which is important because, you know, roughly, you know, there's a very high percentage of people who go to college or start college and never actually finish. So that million dollar difference is between people who finish and people who don't or who never go in the first place. Right. So that's a lot of money over time. But that's just an average, right. So of course, all of our kids are above average. And the ones who are above average who don't go to college are ones who enter highly paid trades for which there is a relatively consistent demand, often in a situation where they're, you know, self employed and not at the whim of, you know, whether the local manufacturer moves out of town or whether the, you know, Chrysler plant closes and moves to Mexico. I ask people to consider a different question, right, because not everybody goes to college for the same reason in the first place. So trying to figure out, you know, what's worth it and how much it's worth gets to the very definition of what college is in the first place. And, you know, when I started doing the reporting for the price you pay for college, people sort of looked at me funny when I asked them, well, like, what, what is college, right, they would sort of look back at me blankly. And I'm like, surely you've thought about the point of the exercise if you're about to maybe spend $300,000 on this thing, right. And they, and then they, their faces crunch up and they're like, yeah, I guess we should do that, right. And so I get them talking, right. And it really just comes down to three things. You know, college first and foremost, not foremost, foremost for some people first college first is about the education, right. It's about the learning it's about having your mind, your mind grown in your mind blown. Right. Essentially having your brain taken apart and put back together again by an expert practitioner. So that's the first part. You know, the second part of college for for many people is the kinship. Right. You go to college to find the people that you never could have imagined existing in the world. Right. The people who will be by your side, you know, for the rest of your life and and who will mold and shape you into yourselves, you know, through four years of banter and, you know, decades afterwards of friendship. These are the also the people who will form, you know, the beginnings of your career network. And it's not just peers by the way it's also grown ups right is the professors, it is, you know, the deans or, you know, other people you encounter along the way who will become your mentor, so and who will sort of drag you into a bigger and better version of yourself. So that's number two college about people. And then number three college is also of course at least for most people about the credential, right, and maybe that's a credential that allows you to take a kind of quantum leap up the social class ladder and into a, you know, middle class career where there is a reasonable amount of job security, you know, because you've gotten a bachelor's in nursing or a bachelor's in accounting or something like that, or you're going to go to med school. Or perhaps you're getting that credential because you know that, you know, the degree from Princeton when you're coming from rural Wisconsin will open doors for you into industries and companies that never would have been open to you otherwise, you know, with the sort of social capital and the snobbery and elitism and all of it, you know, that comes with a fancy name plated degree. So those are the three things that are college are about and there's no right answer to the question. Some people think all three are of equal importance. Then there's some people who are only going for the kinship and I make no judgments about that. And I only make judgments about the people who never stop to ask themselves the question in the first place, because if you don't do that. How do you know what you're shopping for. We're going to go to college, the children of the grandchildren are going to go to college now we have to figure out well which college, and then how to get into that college, and then how to pay for that college. Let's start out with selecting the right school. You list three unhelpful feelings you call them the three unhelpful feelings of fear guilt and snobbery and elitism. Can you explain why these are unhealthy. Well, I guess where you start right is you always want to be checking yourself right and this is a, this is not going to be any news to Bogle heads right. You know the Bogle head community has become used to over decades, resisting flashiness, resisting so called expertise, resisting the smart man and the smart woman who are supposedly the end all be all of you know investing prowess right. So, you know what are what are the things that that can cause you, you know, to spend more than you need to and I think, you know, those those emotions and those answers supply equally well the colleges that they do to to mutual funds or ETFs right first of all calls fear, right, fear that if you don't spend money fear that if you don't believe that you'll get what you pay for and the more you pay you'll more you'll get that if the fear that if you do it wrong if you if you cheap out that in this way your kids will go tumbling down the social class ladder from wherever it is that you've managed to clamber up to because you were too cheap, essentially, and that there's something wrong with you as a parent or as a grandparent. If you're not ponying up for the most expensive version of whatever it is that you know that your kid actually needs right college is not a want for many families it's it's a given. So this is actually a need it's just a question of you know how much you're going to pay for it so there's that fear right then there's guilt. guilt that we have not saved enough to provide whatever it is our kid wants in this category of need. guilt that guilt that we do not earn enough guilt that we chose the wrong profession that does not allow us to write a $300,000 check after taxes out of current income. guilt that we cannot do what our parents did for us, even though ricks parents in 1980 if they did pay for any of it. It looks like they didn't but you know had had they wanted to or been able to you know the final price tag for you. As you just explained at the top of the hour doesn't look anything like the $128,000 price tag, you know the 17 Kingston or Cranston or Providence would be looking at right now. Right. And so you know we get ourselves all hung up on what our parents did for us without really understanding that the world has changed entirely, or maybe we get all hung up on what our parents did not do for us right and we either deeply resent that they had the ability but not the willingness to or we know how much we struggled because they did not have enough money through no faults of their own, and we wanted to be exactly the opposite for our kids we want them never to have to worry about money during college for a second no matter how much it costs right, and if we haven't accomplished that if we haven't satisfied that goal then we're doing it wrong right so it's like guilt guilt guilt. We get ourselves on so many guilt trips about the stuff and I'm trying people trying to, you know, get people off those guilt trips, and then the fear in the snobbery is about the subconscious or maybe the conscious sense that where our kid goes to school, where we can afford to send our kid where they are able to get in is all some kind of final exam on parenting that the results of with blade in public to the public through like you know the Facebook and Instagram sweatshirt reveals and the bumper sticker in the window right and you want that that college to be as prestigious or fancy as possible otherwise you did it wrong otherwise you know you've got to see minus as a parent. Right, or even if we managed to kind of get over that and step outside of ourselves, we're worried about other people's snobbery. Right, because if we got a 16 year old budding investment banker on our hands, and that kid has already figured out that like, Oh, okay, if I'm going to do this I want to be an investment banking analyst. Goldman Sachs or Morgan Stanley, or you know a couple of other Wall Street firms. Those places are just shock full of snobs and elitists, and they're not going to hire you out of Wisconsin whitewater, right, but they are going to hire you out of Princeton they are going to take a close look there. And so, if you've got 10,000 acres, and you know 5000 had a dairy cattle, you know up in northern Wisconsin, and you're tempted to, you know, just send your kid to Wisconsin whitewater that's great but that kid really wants to be a banker, he wants his kid to have a shot at their dream, and you're not going to earn any need based financial aid because you're making all that money, you know, selling the milk to Ben and Jerry's. You're going to think really hard about spending that $300,000 for Princeton if your kid manages to get it, not because you think it's worth it, but because somebody else on Wall Street is a big freaking snob. You know, these are, these are relatively limited circumstances, but, you know, as a parent, right, I can see how if you have the means or the ability to borrow, right, you want to do everything you possibly can or you're tempted to not to close off any avenues to your whatever and that is how people end up spending $300,000 or borrowing to do so and sometimes it's for, you know, a reasonably good reason, and sometimes it's because people are confused. You talk a lot in the book about value, and you know are you getting the value out of your education or so forth so how do you separate for each individual of course it's different. So how do you separate value and how do you find value in the college system. Sure, so I mean to begin with trying to figure out what it is that you're going to school for right so let's forget about the 16 year old investment banker for a minute. Let's think about 16 year old who wants nothing more than to be a marine biologist right and this isn't you know the eight year old who like loves the dolphins this is the 16 year old who's like shooting the lights out in an AP bio and it's done an internship and is reasonably sure that they want to go not just to college but to graduate school right. So you're thinking about a lot of things there right but probably the first thing you're thinking about hopefully is you're thinking about the quality of the education but what what you're also thinking about is the quality of the mentorship, because you know that you can't get into one of these you know teeny tiny very competitive marine biology PhD programs or you figure this out with a little bit of research you can't do that without just a glowing lights out recommendation from your undergraduate you know faculty advisor right so how are you going to find somebody in an institution who's going to actually get to know your kid well enough to be able to write that kind of recommendation and what sort of environment or circumstances are going to need to exist is there a better chance of that happening if they're in you know biology 101 with 800 other people including 300 people who want to go to medical school, or is there a better chance of that happening if they go to a small liberal arts college that happens to have a really great biology program right. So you know you start thinking about size, you start thinking about faculty content. Again, if you're, you know, up there in northern Wisconsin and you've got that that buddy marine biologist on your hands wants to do it someplace other than you know Lake superior. You know maybe you're going to send them to Madison or to Wisconsin Whitewater, but there may be a lot of adjunct professors there or part-timers aren't even going to be around two or three years later. So if they go to Lawrence University, you know smaller school, you know if they go to Knox College if they if they go to one of the, you know smaller colleges in Minnesota, they're going to have a better shot at making that kind of contact right. And then you can go looking for data which actually does exist that will tell you which undergraduate institutions the PhD students at the biggest biology programs for PhD students, you know where the undergraduates actually come from right. The state is out there so you know you start looking for whatever data or evidence you can exist you can that exists that might give you some sense of whether an institution that costs more than your state university might actually be worth it if it stands the chance of raising the odds of helping your whatever it is that they want to do. So there are a number of problems with this right. First of all, to the extent that the colleges have good data on outcomes, they're not always so great about sharing, right, because if everybody shared standardized data, then there would be even more ways to compare and rank the schools, and this is not in their interest. And so, you know there's not always great data, it isn't easy to find I spent years, you know, sort of hoovering up resources and trying to spit them out in the book but I was not ultimately satisfied with what I was able to put together and, and it's the schools fault. And then there's the not so small matter of the fact that we are dealing with children, right, for reasons lost to history but that make absolutely no sense whatsoever. We spend all this money on teenagers right we don't send them off to serve in the US Armed Forces on a mandatory basis we don't send them off to do non military national service we don't encourage them for the most part to take a year or two off before going to college. So we've got these 18 year olds who've never done a darn thing in the world except you know scoop ice cream and work at a day camp and you know sit and sit in high school, going to college and we're making these six figure decisions investments based on what we think their teachers are, but some of them have no earthly idea what they want to do, and then many of the rest who are absolutely certain about Wall Street or marine biology, change their minds. Once they get into a really good college classroom and get exposed to you know bigger and better ideas. So the whole thing is fundamentally flawed and deeply dissatisfied. They're going to help people, you know, walk through a reasonably dysfunctional system with their heads screwed on, reasonably straight. Okay, so at the end of this journey, you're going to pick out a few schools and you're going to have to apply to get into those schools. So now we need to get in. And with that in mind, the big thing see these days seems to be diversity. I was listening to some entrance experts, if you will, former admissions experts, and they were talking about diversity, diversity, diversity, not just race and religion, but athletics, anything that sets you apart from others. So how do you use diversity to get into the school you want to get into. Sure. So, I mean, let's, let's just, you know, talk briefly and bluntly about about how this works at, you know, the, the, the rejective schools right the schools that reject the highest percentage of applicants. And there you are at the biggest, you know, advantage if you are rich and if you are white. You're at an advantage if you're rich, because you can donate building, right. And it tends to be way more affluent and way whiter people who benefit from what's known as, what's known as a legacy preference, right, where your grades can be lower and your scores can be lower, as long as your dad or both or like four generations of cabbets, you know, or eight generations, you know, went to Harvard or Amherst or Stanford, those people tend to be disproportionately affluent and white. When it comes to athletic preference, which gives you even a bigger edge than a legacy preference does, you know, many of those sports, although not all, but you know, the majority of them are sports that require a great deal of investment and nurturing to, you know, get you to a place through the private tutoring, through the kind of elite level clubs for it's right, that will get you ready to swim or play golf or play tennis or play lacrosse or play hockey at an institution that will give you a preference right so there to being wealthy gives you the bigger advantage and more often than not the people who are wealthy are white. Same thing through with testing tutoring on academics. And then there are preferences based on race, which are the ones that get the most attention, but may have a little bit less to do with who gets in, then, you know, the total number of people who get in via legacy preference, or via athletic preference specifically in the rich white sports. So all of that is like a, you know, big kind of toxic stew that generates a lot of attention. But what I think people miss a lot of the time is that like a step below there at some still like really excellent high quality schools that you know reject way more applicants that they could than they can take. You know, a huge advantage to being able to pay full price, because they get 50 or 75% of the way through the number of admissions they have to hand out, and then they start running out of financial aid. Right. And then the packages get weaker, or they just start rejecting people who need a right so if you are a Boglehead, and you, you know, have those compound interest charts imprinted in your brain which I do thanks to my dad, and the USA a magazine, sending me one when I was when I was 23 years old, I knew good and well right that I didn't want money to be a factor. And it's why I just started saving for college for my kids, like well they were still in you do it. Right. So money does provide a really sizable, and sometimes measurable admissions advantage there too. So, you know, in many of these institutions, the parents would be proud to send their kids to it's good to be rich. You know, it's complicated and it becomes politicized. But the fact of the matter is that they're all sorts of people of all sorts of skin tones and backgrounds, benefiting from a certain amount of admissions preference. And that makes it harder, you know, in many instances and most instances for people who do not have any sort of a hook. But we shouldn't forget that there are hundreds and hundreds of, you know, essentially open access undergraduate institutions out there, where more or less anybody can go you know if you can fog a mirror and you know and there's a lot of dedicated instructors at those places too. And, you know, I don't want to discount the worth of those institutions. So I was reading in the book that we were talking about the advertised price of college and the two reasons why colleges put these very high prices on their website number one, because some people will pay it. And number two is because if they don't put the high price on their people don't think they're getting good value for their money. So with that in mind, how do we pay for college. First of all, let's talk about discounting. It was enlightening to me and reading your book that internally admissions people call it discounting, but externally, they call it scholarships. Go into discounting. I mean, what should you pay? Not what the price is, but what should you pay? Right. Well, gosh, where do we start here? I mean, there's a couple of different ways that these discounts happen. And, you know, we'll use the terms interchangeably, but what you want to be thinking about as a parent, as a shopper, right? Like, what is the, you know, what is my actual cost of attendance going to be? And if I get, you know, an offer of, you know, financial aid, am I 100% sure I understand which these discounts or scholarships that we're not going to have to pay back? And that, you know, we understand how much the school is asking us to actually pay out of pocket and or what is telling us to borrow, right? So there's two basic kinds of financial aid, you know, back in our day, even back in my day, I'm a couple of years younger than you, Rick. Most of the financial aid that was offered was offered based on need, right? So my family had to kind of lay ourselves bare in terms of our income and our assets. And then Amherst College decided what they thought we could afford to pay. And they basically were good for the rest of it with, you know, with a couple of, you know, campus jobs and undergraduate loans thrown in. What's changed now is that that need-based aid system still exists, you know, at the 100 or so, you know, most well-resourced private institutions in America. State systems are a little different, but, you know, at the private ones, it still kind of looks like that. But, you know, starting around in the 90s, this whole separate system hived off has become known as Merit Aid. And Merit Aid was originally designed to help, like, fourth-tier institutions improve to the third or second tier by swiping kids who were qualified for second or even first-tier institutions by throwing money at them and making them feel good, right? So if you got this unsolicited, you know, offer in the mail after you took your PSAT test and you've done well from a school that you've never heard of, you know, the letter would say, hey, we have our eye on you and we're not going to charge you any application fee. If you come here and you get in, you know, we'll give you $5,000 off the list price. And that worked so well. So many of the, you know, of the good smart kids, like, we're getting bought off, you know, from higher-tier institutions, that market forces intervened, you know, competition took hold. And over the course of 10 or 15 or 20 years, it just kind of moved, you know, farther and farther up the food chain, where now, you know, it's really only 30 or 40 schools that aren't forced to offer some kind of discount. And let's be clear, too, this merit aid discounting, it has nothing to do with your ability to pay and kind of everything to do with your willingness, right? So there are all sorts of super rich families who are being offered 10, 20, $30,000 off the year or even a full ride if the school has decided that their kids are attractive, whether because of their actual academic or extracurricular merit or just because they're throwing money around to, you know, try and get people to come. So, you know, think about it this way, right? If you're Kenyan College, right, in Ohio or Connecticut College in New London, Connecticut, if you are McAllister College in St. Paul, Minnesota. You know, excellent schools that they have slipped enough in terms of marketplace perception that even a certain number of people with the ability to pay $75,000 a year are lacking the willingness to do so, right? But if you are McAllister and your cost to educate a student is $42,000 a year, right? You're charging a list price of $70,000, right? If you throw an $18,000 merit aid package at an affluent family, that family is going to feel really good about what it has accomplished, right? Because they're going to get $18,000, $36,000, $54,000, $72,000 off over the course of four years. Their cost of attendance in any given year is $52,000, right? But if McAllister only needs $40,000 to educate that kid, that's still a $12,000 profit, right? And they can take that profit and they can toss it out a lower income family and help them too, right? So, in theory, everybody wins. But it's a real weird look to be throwing scholarships at millionaires, which is essentially what's going on. And so, as a parent, as a shopper, it is not at all clear that this is going on, the extent to which it's going on, nor is it predictable in many instances how much you will get, right? And so, for somebody with like a Boglehead mindset, the temptation and the desire, once you understand what's going on behind the curtain, is to crack the code, right, to try and beat the system. And so, I did my level best in the book to show people exactly where the data is that can give them some level of predictability about what kind of meridian might be offered. But the fact of the matter is that the schools kind of change their goals each year, in part, depending on their own institutional priorities, and also based on what's going on in the market around them. And especially in the last couple of years with the pandemic, you know, whatever algorithms they're using to try and decide like what prices to offer, you know, which students, which is another revelation for people. A lot of these meridian offers are delivered by robots, by software, not by humans, right? These algorithms can't predict how people are going to behave during a pandemic. And so, you're getting all sorts of wacky results where, you know, people are getting no discounts or, you know, they're deciding to apply to 22 schools just because it's also unpredictable and they're only getting into four and, you know, it's all a real hash. I do hope that things will have kind of leveled out and they'll be making more sense by next year. You know, it's not always predictable. So, you know, the best we can do sometimes is just to attempt to explain how the system works, even if we can't predict, you know, precisely what kind of offer it's going to make in any given year. Let's get on to a couple of other ways of saving. And that is the most popular one is a 529 plan. And a lot of people use 529 plans, parents use them, grandparents use them, some states give tax breaks, some don't. A lot of people ask the most common question I get about 529s is how much is enough? How much should I put in? What, you know, what should I put in every year and what do I need to get to by age 18 when my son or daughter goes to college? Sure. As I think most of the people in this crowd probably know, you know, the nice thing about 529s is that they come with some sizable tax benefits, right? In 30-some states you get some kind of a tax break for putting money in the first place. And then for everybody, you get a huge tax break on the way out. As long as you take the money and use it for some, you know, higher educational purpose, you don't pay any capital gains taxes on the earnings. And so if you started age zero and, you know, you get the kind of market that we've had the last 15 or 20 years, you're going to have a lot of capital gains that you're not paying taxes on. So, you know, yay for being in the system, right? So the downside is, you know, there's a bit of complexity. Every state has their own plan. You know, the rules tend to be different, different investment lineups. Sometimes, although with increasing, you know, like less frequency, you know, your plan may not have an index fund for, you know, every asset class that you want to be in, although that's mostly gone now. It was definitely the case 10 or 15 years ago. Thankfully, Vanguard is in, you know, and others who index, you know, are running or providing investments for most of these plans. So how much should you save? Well, you know, save as much as you reasonably can, right? Everybody's different. But here's something to anchor to that might make you not freak out, because, you know, I talked to a lot of parents of young kids and, you know, if they can do any kind of inflation math in their head, they're thinking, wow, if I want my kid to go to the institutions that we went to, it's going to be $500,000, you know, by the time they're 18. And that's insane, right? Like, I'm still paying off my student loan debt. We haven't bought our forever home yet. We want to have, you know, seven figures in retirement savings. How am I going to do this, right? So many years ago, I had a conversation with a financial planner in Wisconsin named Kevin McKinley, who came up with what I now refer to as the McKinley rule, which is just to think about it in fraction. You want to save a third of the money that they'll need for college, and maybe your goal is public or maybe your goal is private or maybe it's, you know, somewhere in between those two list prices as we've discussed, right? So you want to save a third? You want to pay for a third out of current income, right? So while they're in college, you stop taking vacations, you know, you eat rice and beans, you know, you do whatever you can and you pay for that while they're there. And then you borrow a third. Maybe the parents borrow half of that third and, you know, the kid borrows the other half, right? Although if your kid goes to a state university, the federal loan borrowing limit of $31,000 or so will almost cover that third all alone, right? So then this starts to feel reasonable, right? You know, if your goal is to end up with $50,000 of savings in today's dollars, you know, you can do that with 250 bucks a month or whatever it is, depending on your return assumptions. And that starts to feel a little more doable for families, right? Then you're not driving yourself crazy. Now that number is going to need to be higher if you want to have a third of a private college available to you 18 years from now. And if you have more than one kid, well, right, there you go, right? So what can you do? Well, you know, you can talk to grandparents about this, right? Even $50 a month of, you know, a contribution from a relative to make an appreciable difference going forward, okay to ask, right? Much better than all the plastic drinkets that they tend to show up with that, you know, end up underfoot and then in the garbage. And so those are the basics, right? There's an hour long debate we could have about whether you might be better off just saving a standard brokerage account for a whole variety of reasons. And that's fine if that's the way you want to go. I just urge, beg people to, you know, start early, save as much as you reasonably can. It is so rare that anybody regrets saving too much for college. That would be a high class problem. So let's talk about student loans for a couple of minutes. I mean, there are three types. The direct loans from the government, as you mentioned, then there's private loans. And then there's parent loans called direct PLU loans. Could you just briefly describe the three different types? Sure. It has worked different ways over the years, but the way it works today is that if you are borrowing from the federal government, there's no bank involved, right? And in most instances, if your kid is a dependent, they can borrow, you know, roughly $31,000 in change over the course of four years. And then what's known as a servicer will step in to start sort of collecting those payments. So those are how the undergraduate loans work. Then there are private loans from institutions like Sally May, Discover, maybe your credit union does some of this, you know, a few other companies may have heard of. And again, back in the day, undergraduates used to be able to get private loans on top of the federal loans or in lieu of the federal loans without any kind of, you know, parental grown up co-signer, and that is not the case anymore. If your kid is maxed out their federal loans and you want to borrow even more, which I would encourage you to think hard about whether that's smart or not, you will need to be a co-signer. There's going to be, you know, sort of complex dance afterwards where all of you will have to decide like who's making the payments and whose credit rating is getting messed up if the 22-year-old is making the payments and forgets, right? You know, and how much debt is too much. And, you know, for what sort of degree. Then there are those parent loans that you mentioned. There are the what's known as the plus loans that you can get from the federal government. Pretty high origination rate. Pretty high interest rate. You know, people who do feel the need to borrow sometimes will, you know, borrow against their home instead, you know, to avoid these federal loans. But parents are increasingly using them. And we actually know more about where this plus loan borrowing tends to be most persistent. And it is not, you know, as you would expect at private institutions that are not all that well resourced in terms of their financial aid offerings. And also historically black schools have a fair amount of parent borrowing there as well. So, you know, those are the basic types. Well, last, last minute here you offer a message of hope for people. Can you just give us your message of hope? Sure. So, I mean, let me tell you about the opposite of hope. I mean, the opposite of hope is, you know, all these calls that I used to get in March and April from incredibly smart people who like help run institutions. They help run institutions in New York City that you that you have actually heard of, and they have gotten to the end of the process and realize that, you know, they had no idea that they weren't going to get any discounts, and that their kid had applied to all of the wrong schools. And they're just, you know, saying to me Ron is there's something you can do to help. And after too many of these calls, I thought, Wow, it is deeply problematic here that the system is so complicated. Well, I can't solve for that. I can certainly help pull the curtain back. So the people know, first of all, how the system works, the best ways to get, you know, discounts most effectively, and how to shop for these the sort of institutions that will give their kid everything that the kid needs and at least some of what they want. And for people to know that they don't have to spend $300,000 or anything close to that to accomplish those needs. And, you know, once you're going into the process with a head of steam and frankly, like a bobblehead style system beating question authority question everything mindset. It actually starts to starts to be fun again. And, you know, less about dread, and more about this incredible experience that you are going to be able to provide for your kid one way or the other, that will change their life. And as much as you may dread letting them go, you should also be excited and hopeful about the fact that you're able to provide it for them. So I don't want this to be a downer. I don't want to be angry by the end of the book. I want them to feel ready. Right. And I want them to feel excited and jealous, frankly, that their kid gets to do this amazing thing. Well, the name of the book is the price you pay for college and entirely new roadmap for the biggest financial decision your family will ever make by Ron Lieber. Ron, thank you so much for being a guest today. It's been a wonderful presentation and we've all learned a lot. It's a pleasure and an honor. And I'm easy to find at RonLieber.com. You know, if you have questions or observations or ideas for additional avenues of exploration, you know, those ideas are gold to me. So thank you. Thank you, Ron. This concludes Bogleheads on Investing, episode number 35. Join us each month as we have a new guest. In the meantime, visit Bogleheads.org, Boglecenter.net, the Bogleheads Wiki, get involved in your local Bogleheads chapter, or a virtual community, and tell others about it. Thanks for listening.