I am a huge fan of what ifs and spreadsheets. Sometimes I like to wonder where I would be if my parents hadn’t paid for college and if they hadn’t given me any other money either.
When I graduated from college, my net worth was $32,000. Let’s say that my degree cost my parents about $60,000, so assuming that I chose the same college regardless of who was paying and that I had made the same financial and location decisions throughout my degree other than contributing to retirement accounts, my net worth when graduating would have been about $28,000.
I always liked keeping a small amount of a buffer, so I’m going to assume that my net worth would have looked like this at the time of graduation:
- Cash savings: $1,000
- Student loans: $29,000
I’m also going to assume that I still spent all of the money that I received in the form of a relocation bonus. I probably spent it on less expensive furniture, a security deposit on my apartment and first month’s rent since I didn’t get paid until the end of the month, so my net worth between the time I graduated and the end of the month before I started working (Month 2) looked exactly the same (ignoring loan interest).
Let’s assume that the interest rate on the student loans is 5%, calculated daily and added to the balance monthly, and the interest rate on the cash savings and Roth IRA is 1%.
In Month 3, I saw a net income of $5,300 and a cash bonus of $10,100. Accounting for $3,000 in spending, I would throw $12,400 at the student loans, dropping the student loan balance down to $16,959.01.
With my paycheck in Month 4, I started contributing to my employer’s 401(k), enough to get the match. I would have made that decision even with the student loans, to get the match at least. That dropped my net pay down to $5,000 and meant I was throwing $2,000 each month at the loans.
In Month 5, I adjusted my W-4 withholdings and my net pay dropped to $4,900, leaving me with $1,900 to throw at the loans each month.
In Month 7, I saw a small bonus of $1,800. I would throw all of that at the student loans.
By the end of Month 11, my student loans were fully paid off and I had a positive net worth of $4,538.69. I would have redirected the money that I was throwing at the student loans each month to my savings account to build up a good buffer.
In the real world, I spent $20,000 on a brand-new car in cash in Month 11 because I was spending about the same amount per month on using a car sharing program as I would have with the car costs amortized over 7 years. Since in the student loan world, I only had cash savings of about $1,000 at the end of Month 10 and still had some student loans left, I probably would have kept on spending the money on the car sharing program and waited longer to buy a car.
In the real world, I maxed out my 401(k) in Year 2. In the student loan situation, I probably would have found the money to max out my Roth IRA with my $7,000 bonus in Month 13 since it wouldn’t be very many years before my income would be too high to do so. I probably wouldn’t have maxed out my 401(k) until after I had bought the car.
In Month 16, I saw a good raise, giving me an extra $500 to save each month.
Almost one year later than in the real world, in Month 22, I would have bought the car $20,000, leaving my cash assets at $17,600, $5,000 in my Roth IRA, and $8,700 in my 401(k) for a total net worth of $31,288.43.
At the end of Month 22, just under two years after I graduated from college, my net worth would have looked like this:
- Cash: $17,588.43
- Roth IRA: $5,046.77
- 401(k): $8,700.00
- Student loans: none
- Net worth: $31,335.20
That net worth is pretty close to what I graduated from college with in actuality ($32,000), so I’m going to conclude that my parents paying for college put me just under two years ahead financially than where I would have been had I paid for college myself. But then I did some more forecasting and found that the gap eventually narrowed, though it did take 9.5 years for the two to reach even (according to my wildly different calculations for the two situations).
But had I paid for college, I still would have come out with a small enough amount of loans that I could have paid them off within 10 months of graduating and my forecasting with the below spreadsheet put the post-graduation time to a six figure net worth at 36 months, rather than the 24 months that it actually took. That’s not a terrible difference. Graduating with a job offer in line for a job paying me six figures, as well as having paying internships in college and going to college in a city with a pretty low-cost of living certainly helped.
If I had not taken any paid internships, I would have had to take out quite a bit more in loans because I probably would have had much lower paying full-time jobs on the non-school terms. If I had taken out a lot of loans, I could have taken out enough loans that I would have paid off in 15-18 months. Even if my parents hadn’t paid for college, I still would have gone. I might have made some different decisions throughout college, but I still think I could have paid my loans off within a year of graduating and I would have. I don’t think that having to take out student loans would have changed the part of my personality that doesn’t like debt.
Here’s a snapshot of the spreadsheet I used to generate the above numbers: (click on the image to enlarge it)
There are obviously a lot of assumptions in here and the person described with student loans isn’t in that bad of a position after graduation, since she had a high-paying job lined up. I’m not going to do the math for a lower paying job since that’s not the example I was trying to illustrate. That said, I am incredibly grateful that my parents were able to afford to pay for my college education. My parents paying for college has granted me a lot of flexibility in how I save and spend my money and definitely supercharged my net worth. I mean, I have an almost $160k net worth in under three years after graduating from college and my income is only going up.
My parents didn’t have a lot of money when I was a kid, but we did okay. My dad worked hard and grew his career and by the time I went to college, they were able to afford it. I don’t think I ever thought about how much it would cost, nor did they have much of an idea really until I got into it and we saw what it cost as I went.
Readers, if your parents paid for your college education, would you have gone had you had to take out student loans?