Dooley's Uncertainty Principle for College Costs

by Roger Dooley

Werner Heisenberg shook up the world of subatomic physics with his Indeterminacy Principle, more commonly known as the Uncertainty Principal. In a nutshell, he told his fellow physicists they could never know the exact position and momentum of a subatomic particle because the measurement process itself changed the value of one of these properties.

Heisenberg felt that his ideas had relevance beyond the subatomic world, and he published numerous philosophical writings. It is safe to say, though, that he did not anticipate the relevance of indeterminacy to our modern financial aid system in the United States.

Here's my new Uncertainty Principle for College Costs:

If this sounds silly, read on...

The Financial Planning Oversimplification. Many financial planners make accumulating assets for college sound relatively simple - make a few assumptions about what kind of school little Johnny will attend eighteen years hence, plug in an inflation rate for college costs and an expected rate of return on one's investment, and bingo! - you have a monthly amount that you must set aside to be able to afford college.

Indeed, these planners aren't entirely wrong. In the absence of our complex financial aid structure, it would really be that simple. Sure, one might guess wrong on inflation or interest rates, but the family's college nest egg would still be in the right ballpark. However, the situation is more complicated for the middle class. Here's why:

True projections of college costs should include financial aid. While it is a wise and conservative assumption to ignore financial aid issues in projecting the future cost of college, the actual cost experienced by many middle class families does, in fact, reflect grants, scholarships, and loans.

Asset accumulation can affect aid, and hence, college costs. As one projects costs, and starts saving to meet them, the actual cost that will be incurred in the future goes up. This doesn't mean one shouldn't save, but it is important to note that such saving will change the actual cost in many cases.

Few families will be able to accumulate sufficient assets to pay for the entire cost of college for all family members. With the cost of a four year education at many private colleges pushing $150,000, and even the cost of attending state schools rising faster than general inflation, relatively few middle class families will be able to do what the financial planner suggests - through regular contributions, accumulate savings that will pay in full the cost of college for all of their children.

There are many reasons for this. Most obviously, families with young children are often not yet established in their professions, and are experiencing the high costs of raising a family. Allocating large sums to savings is often impossible without major sacrifices. Another factor in today's economy is retirement savings. Several decades ago, it was possible to count on a combination of an employer's retirement plan and Social Security for a comfortable retirement. Today, most employers have eliminated "defined benefit" retirement plans, and Social Security is far less certain than it is for today's retirees. Hence, families that do have some income available for savings feel compelled to invest that in retirement-oriented assets rather than college funds.

Predicting future income is difficult, if not impossible. Today's business environment is a factor here, too. Not long ago, it was common for the family breadwinner to spend an entire career at one company, meaning that income would vary with career advances or setbacks, but could still be projected with some degree of certainty. Today, not only are one-company careers passé, it is common for an individual to have multiple careers. Even the largest employers are no longer stable and predictable. Even IBM said goodbye to "lifetime employment" with massive layoffs. These days, it is often difficult to look even a few years ahead and be entirely confident of one's income level, much less many years in the future.

Other financial decisions affect college costs. An owner of a small business may decide to transfer financial assets to her children in order to keep them from the reach of creditors or prevent these assets from being targeted in lawsuits. While this decision may reflect sound business judgment, it may also dramatically affect future college costs due to the higher EFC impact of student assets.

School selection and admission are difficult or impossible to know in advance. While some parents may buy their toddler a Harvard or Purdue t-shirt, the reality of college search and college admissions is a different story. Often, students are deciding on their field of interest late in their high school career, or even remain undecided. Of course, admission to the most selective schools is notoriously unpredictable. At the same time, the student who appeared to be bound for his state school might be a surprise admit to Princeton, or might decide to major in violin or marine biology and require a program not available in-state. In short, trying to guess years in advance where a student might decide to attend, or might be admitted, is fraught with uncertainty.

Assets aren't always assets. The uncertainty involved in predicting the final choice of colleges creates yet more variables. Assets like retirement accounts, home equity, etc., may be ignored by one school but counted as available assets by another. Since one can't predict which school will be the student's final choice, one can't accurately project what assets will be considered in EFC calculation, and hence, what actual college costs will be.

Conclusion. If a family is likely to be even marginally eligible for financial aid, the number of variables involved in projecting costs make it impossible to accurately or reliably project actual college costs.

The best strategies involve either attempting to save for the "worst case" basis - costly school, zero financial aid, or saving as much as possible in ways least likely to result in a higher EFC.

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