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Thursday, September 27, 2012

College Debt and House Choice

The Survey of Consumer Finance conducted by the Federal Reserve every 3 years found that in 2010 "For the richest 10%, making at least $146,792, college debt increased from $36,033 to $44,810," as reported by the Associated Press in "College debt hits record 19% of U.S. households."

This interests me in particular because I am in the process of downsizing and selling a home and wondered about the choice some families face between college debt and home choice.

Part of my competition is a stone's throw away - new, nicer houses for around $100,000 more than I am listing my house.  In fact, I will readily admit that if you are in the "impress the Joneses" game those houses are an obvious winner - the foyers are magnificent, the chandeliers are bigger, and the hardwood floors are nice.

But consider, all prejudice aside, the home I am selling is a great place to raise a family of 3 or 4 kids. I know--I did it.

In relation to the college debt issue, a question that comes up is what is the difference in payments between the home I am trying to sell and my competition costing $100,000 more? To answer this, I went to Mortgage Calculator and started by putting in the following entries:

As you can see, I put in the payment of $100,000.  Hit the calculate button and you find that over 30 years an extra $100,000 totals up to over $230,000!

Now let's turn to little 3-year old Ferdinand who will be thinking about college in 15 years.  Over 15 years, the $641 extra monthly payment to meet the $100,000 amounts to $641 * 180 = $115,380!  This is without any investment return factored in over the period.

If you go to Bankrate's saving calculator and assume a 3% return on the $641, you'll find that it grows to $145,976.  This, of course, would be done with a 529 plan or similar vehicle to avoid taxes.

Maybe Ferdinand's family will go for the higher priced home and have no problem with college debt. The survey mentioned above, however, did find that many higher income families are in fact struggling with college debt.  They apparently are burning the midnight oil in their McMansions figuring out how to deal with it.

One suggestion is for today's young families to learn from this, think ahead, and decide whether you are buying a house for functionality or as a show piece.

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