kitchen table math, the sequel: Net Price Calculator - get estimated college costs for YOUR child

## Friday, October 28, 2011

### Net Price Calculator - get estimated college costs for YOUR child

After running the newly mandated Net Price Calculator for a dozen colleges using a few different scenarios, I've concluded that this can be a useful step in the initial phase of the college search process.

You can see the numbers I generated over at Cost of College.

SteveH said...

I decided to do my own check with the Harvard calculator. These are some of the things I found out.

1. The income is before tax and 401K investments.

2. The equity of your home (real estate) has a HUGE impact.

Given an income of \$150K, house equity of \$300K, and investments of \$100K, the cost per year is \$39,500. for each \$100K (plus or minus) of equity in your house, the difference goes up or down by about \$5000.

3. For the amount of (non IRA) investments you have, the cost per year goes up/down about \$2500 for each change of \$50K (from \$100K) at an income level of \$150K and a house equity of \$300K.

I was surprised at this sensitivity to assets. I knew that IRA assets were not counted, but we were mislead at the Harvard admissions meeting I went to when the woman said that families with up to \$150K of income would not pay more than 10% (\$15,000) per year. Their calculator gives \$19,000 for a family with an income of \$150K and absolutely no other income or equity.

Oh, ... I see how they do it. The cost to parents is \$15000 and the additional money comes from \$1500 for "Student Summer Work" and \$2500 for "Student Term-time Work." All of the estimates include \$4K per year from the student.

Add in house equity of \$300K and the cost goes up to \$29K. That's with \$0.0 in your (non IRA) investments.

Right.

ChemProf said...

It is better than it was. In the 80's, the assumption was if you had 300K in house equity, you had 300K you could tap to pay for college. But yes, the formulas are pretty sensitive to assets -- enough that some experts recommend against saving for college.

SteveH said...

I wrote a program about 20 years ago that would calculate how much you had to save (per month or year) to pay for college for all of your kids. There were all sorts of factors for increase in costs and investment return. It took into account the time value of money and searched for a solution where the savings would go down to zero when the last child graduated. I soon realized that the program was worthless. You couldn't save that much money.

My wife and I figured out that we were old enough so that all we had to do was to put the money into our IRA accounts. We would be 59 1/2 by the time our son got to college. The downside is that we've owned our house for a long time and it's gone way up in value.

kcab said...

@SteveH - The Harvard FinAid website says that home equity isn't included. My guess is that the Real Estate equity field is intended for other real estate... I hope. Though, really, how *does* one calculate home equity these days. Comparison to Zillow est? I think a lot of people (probably not you, but possibly me) have negative home equity these days, despite downpayments and having paid off a chunk of their mortgages.

Grace said...

Regarding the treatment of home equity by Harvard -- I mistakenly included this in my calculation (didn't read the instructions carefully!), but I have since corrected it. For the \$150,000 income case the net price went down by \$5,000 to \$26,500. I was assuming \$100k in home equity.

The treatment of home equity in these calculations does vary. Generally speaking, the more selective private schools {using the PROFILE method) include it (Harvard appears to be an exception), but most state schools {using FAFSA method) exclude it. But it really varies and should be checked. Those schools that do use home equity often cap it at 2-3x income.

Anonymous said...

The shape of the curve at Harvard is interesting:

Assuming \$5K in assets for the kid and income but *NO* assets for the parents, I find the following for parent's income to estimated net price:

\$100K -> \$12K
\$110K -> \$14K
\$120K -> \$16K
\$130K -> \$17K
\$140K -> \$18K
\$150K -> \$19K
\$160K -> \$24K
\$170K -> \$28K
\$180K -> \$34K
\$190K -> \$41K
\$200K -> \$45K

Assuming \$0 income for the parents, but only assets I get the following assets to net price mapping:

\$500K -> \$24K
\$600K -> \$29K
\$700K -> \$34K
\$800K -> \$39K
\$900K -> \$44K

And ... \$100K parent income and \$500K financial assets is a \$32K net price.

There is a pretty sharp bend at the \$150K/year parent net income. Below that, Harvard assumes you can/will pay \$1K-\$2K per \$10K of marginal income. Above that, Harvard assumes you can/will pay \$5K per \$10K of marginal income.

-Mark Roulo

Bostonian said...

As Mark Roulo observes, Harvard effectively imposes a 50% marginal income tax for some income ranges. It has a \$30 billion endowment but tries to gouge people as ruthlessly as any private business. Therefore it ought to be taxed like one. I'd love to see it pay taxes on interest and capital gains in its \$30 bil endowment.

The change to the law could be that
endowments above some limit, say \$5 billion, would be placed in accounts subject to the investment taxes that ordinary people pay. Ivy League professors often promote more progessive taxation. We can start with their institutions.

Glen said...

It would be fun to see the government turn the tables by declaring that, henceforth, universities will no longer be able to charge students directly for tuition. Instead, tuition will be paid by students into a national tuition fund, and institutions will be reimbursed from that fund depending on the institution's assets and income. Rich institutions like Harvard will not require any "financial aid", while "disadvantaged" institutions may qualify for full reimbursement up to the limit of what the government declares an undergraduate year ought to cost.

The government's determination of what an undergrad year should cost (therefore, the maximum reimbursement) would vary from major to major. The amount would vary in proportion to the average net present value of the ten-year earnings forecasts for graduates in each major, with those figures updated each year according to actual hiring and income results as determined by the IRS.

It would then be easier for an institution that depended on reimbursement to hire another engineering professor than another Activist Studies professor or administrator. Poorer institutions might have to focus their limited resources where they would be of most value to their students and their families. Rich institutions such as Harvard that didn't qualify for financial aid and had to pay their own way could still employ all the political baggage they liked. They just couldn't unload the costs onto the families who were struggling to pay for future nurses or electrical engineers, blaming it on "the rising cost of education."

Allison said...

you DO understand you're suggesting that the US Congress decide what majors and grad programs are the "winners" so to speak?

And that at best, legally, Congress gets lobbied by special interests who then get favorable treatment at the expense of others, and at worst, Congress plays the graft-and-corruption game allowing the interests that line their personal pockets to become the winners?

Do you really want to see even more than that than you see now, with govt grants from NSF, DoD, DoE, NIH/CDC, USDA determining which depts at which institutions do well?

Glen said...

you DO understand you're suggesting that the US Congress decide what majors and grad programs are the "winners" so to speak?

Yes, I certainly do, which is why this image is just for fun, not a real proposal. Almost every populist urge to have the government stand up for the little guy and turn the tables on the fat cats ends up badly, because the government is the worst of the fat cats. They would end up charging the students more to major in electrical engineering in order to subsidize majors in social engineering, calling it redistribution of anticipated wealth!

I still can't resist the image of Harvard having its assets and income examined by the government and being informed that it was too rich to qualify for "financial aid" from undergrads. It just wouldn't work out in real life.

Anonymous said...

"As Mark Roulo observes, Harvard effectively imposes a 50% marginal income tax for some income ranges."

The Harvard 50% marginal tax is on top of whatever taxes one is already paying. If the income is pre-tax/pre-401k as SteveH says, then for a family making, say \$200K/year, the federal+state taxes are quite possibly in the 30% range (certainly the *marginal* taxes are in the 30% range ... this site [http://www.dinkytown.net/java/TaxMargin.html] claims 28% marginal federal bracket for a family of three making \$200K and with \$30K in itemized deductions ... California would probably be an additional 9% marginal, so 35+% marginal tax rate Federal+State) ... or higher. If you then add a 50% marginal tax on top of that, you could easily have something like 85+% of the *marginal* (ie. income on top of, say \$150K) family income for 4 years going to Harvard+Govt.

Pretty much, if your parents are rich (make more than \$150K/year or have saved \$1M), then a large chunk of the marginal income from those parents will go to Harvard for four years if the child goes to Harvard.

Interestingly, because Harvard also takes into account savings, not working for the four years doesn't help. The admissions people at Harvard are smart!

I'm not going to argue that this is *wrong* in any sense ... if you don't like the deal, then don't send your kid to Harvard. But ... wow!

-Mark Roulo

Anonymous said...

"As an aside, 'collaboration' is a big deal in the tech industry right now."

I would be careful about drawing broad conclusions from a small sample set. I work in the tech industry too, and I have not seen this at my company.

-Mark Roulo

Bonnie said...

I worked in industry as a software engineer for years. We did a lot of collaborative, group work. If you want to build large integrated software systems, you need to work in groups.

As I just noted in a post above, everytime we meet with our industrial advisory board, they beg us to do more group project work with our students.