Sometimes we make assumptions about what we think is obvious to even the most casual observer that is over 12 years of age.  However, I heard a very, very bright, young student say something the other day that caught my attention.  After winning a scholarship competition that provided his family $50,000 toward his college education, he said "I am not sure that I even understand what $50,000 is."  I found that to be a pretty remarkable statement especially coming from a young man who had clearly mastered a number of academic topics. Maybe I shouldn't be so surprised.  After all, who teaches our children the economic value of anything these days?  Financial literacy is not part of the curriculum at most high schools.  And maybe … just maybe this explains why students I have worked with…good students… have often opted to leave as much as $50,000 or more on the table when they choose their college.  They simply get caught up in the tension of a brand name, sports, a scenic campus and other factors versus money.  Maybe the value or meaning of $50,000 just doesn't register.  Well, in an attempt to do something about this, let's consider the following.

General College Finances

The sum of $50,000 is the target figure that is emerging to attend a private college for one year.  It includes tuition, room, board, books and allowances for travel and incidental living expenses (toothpaste and pizza).

If a student attends four classes for four hours a week each (i.e. sixteen hours for four weeks per month and ten months a year), that works out to 640 hours per academic year. Tuition or what you pay for the academic product delivered by the college is roughly 2/3 of the total cost. For every $10,000 of college cost, the family is paying $16 an hour. So for a $50,000 per year education, each classroom hour could be valued at $33,300/640 or $52/hour (in after-tax dollars). 

If an adult were to have a job that pays $52 per hour and worked a standard 1600 hours a year, he or she would have an annual salary of $83,200.  That is almost two times above the national average income.  If the same adult were paying 35% of their earnings in state, federal and local taxes (this is a low estimate), they would pay $29,120 in taxes and that means the family would have $54,000 to fund their household for an entire year.  But wait. If college costs $33,000 per year for the tuition and the family tried to pay just that part of the college education without debt or drawing down savings, they would only have $21,000 disposable dollars to run their household. This is an unlikely prospect in today's world…rent or mortgage alone would eat at least half of this for most families.

At these prices, if a college student skips class or fails to do the work required to be successful, the penalty is $52 per hour for tuition costs plus another $32 per hour for other expenses (room, board, books, etc.) at a $50,000 per year college. So if he or she puts forth an 80% effort (and many people at face value would consider this a solid performance) over the course of a year instead of a 100% effort, the student has squandered 0.2 x $84/hour x 640 hours, or $10,752.

Now Let's Consider the Real Cost

Up to this point we have been talking primarily about the face value of $50,000 in current or present day dollars. It is, however, necessary to look at future value or the time value of money in order to fully appreciate what $50,000 is or means.

This is not a bogus methodology.  This is a proven textbook financial principal.   It has everything in the world to do with how people accumulate (or squander) wealth. Its genesis lies in the simple concept of compound interest.

Most people benefit from investments or savings in terms of the interest paid by a bank or other financial institution for the use of the individual's money.  Let's say you get paid 5% per year on the money you have saved (say $1000), that would be $50 for one year. If you left all of your the money in the bank for another year, the interest for year two would be $52.50 and if you left everything in the bank for one more year, you would earn $55 interest.  The interest paid to you goes up each year because you are getting interest on interest…or compound interest. In this case your cumulative interest is $157 and you have only committed $1000 of your own funds…the initial deposit.

For rough estimating you should also keep in mind the doubling rule, i.e. when you keep your money working for you (in savings or investments), your account will double every ten years if you can earn 7% interest on your account each year.
Also be aware that if you fail to in invest or save, the shoe is on the other foot. If you decide to use your funds for consumption rather than saving, you will have lost or failed to receive the interest that you otherwise should have in your account.

A second fact to keep in mind is that when examining the cost of a decision, you should consider the time value of money over your working lifetime to see the real cost/benefit.  This means you need to look at one doubling event for every ten years up to, say, your 75th birthday.  Now let us say a student decides to forego a $12,500/yr scholarship opportunity at one school to attend an alternative college or university for whatever reason.  That is a $50,000 dollar decision in today's dollars.

But take the time value of money into account over the student's or his/her parent's lifetime…about 60+ more years for the student.  That is six doubling events for the student…perhaps three for the parents (depending on their age) at 7% return on the dollar invested. The first doubling changes the price of this decision to $100,000, the second to $200,000, the third to $400,000, the fourth to $800,000 , the fifth to $1,600,000 and the sixth and final doubling equates to $3,200,000.

Whether viewing this decision as a parent or a student, the reasons for leaving $12,500/yr for four years on the table ought to be extremely compelling. The wealthy people of the world understand and use the time value of money in their decision making.

Now the secret of $50,000 is out there for all to see.

Tom McGrath is President and Managing Director of  Strategies For College, Inc. Founded in 1990 by Tom's partner, Todd Fothergill, Strategies for College is a Vermont-based college planning firm. It is headquartered at 20 Chapel Street in West Rutland with offices in Williston, VT and West Lebanon, NH.  Tom and Todd can be contacted for more information at www.strategiesforcollege.com.