Monday, January 2, 2012

Paying for Your Kid's College:The Principal-Agent problem

The financing of my daughter (3) and her sister's (due April 2012) education, and in particular college education is never too far from my mind. What is the best way to save and pay for college? This is a tough question given that there exists a lot of uncertainty. For starters I do not know IF either of them will decide to attend college. It is entirely possible that they may not have the aptitude or desire to continue studies beyond secondary school. Maybe they will seek a liberal arts education in the Marine Corps instead of at St. John's College. Even knowing what their career decisions will be at age 18, the saving-financing strategy is not very clear at all. Sure we could save but every dollar that gets put away for college is one less dollar for consumption today or for retirement tomorrow.

For a quick refresher as to why financing college is a difficult strategic task aside from the simple fact of scraping together a lot of money see The Atlantic article on how savers are punished when it comes to financial aid and a Fidelity website to assess the huge differential in cost between public versus private education. Then consult a CPA, a CFA, and an from an economist.

Not to dismiss those questions and issues but I think the more important question is "Should I pay for my kid's college?" and if so how much and in what way. The answer to those questions are fundamental and are prerequisites to untangling the mess above. This is where economics comes in handy.