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What Parents Actually Pay – The “Net Price”

By College Planning

The vast majority of families do not, in fact, pay the full sticker price for their children’s college education.  Two-thirds receive some form of financial aid. And two-thirds of that aid is in the form of “free money” – grants and scholarships that don’t need to be repaid. What parents actually pay is, in the parlance of financial aid officers, the “net price.”

Here’s how it works.

The college calculates the total “cost of attendance” or “COA” at their school. Sometimes it differs by program or major. For public universities, whether a student is a state resident or not will impact the cost of tuition and fees. Then they calculate a family’s “Expected Family Contribution” or “EFC.” You probably won’t be surprised to find that what the college expects you to contribute, from your income and savings, is far greater than what you would expect you should contribute! But I digress….

The college subtracts your EFC from their COA to determine a student’s “financial need.” The financial aid officers then figure out what mix of grants, scholarships, and work study they will offer you to meet that need. What’s left is the “net price.” A family is left to pay that “net price” from savings or loans (some subsidized by the government).

So how does a college determine your Expected Family Contribution? I’ll discuss that in more detail in my next post. One thing to know now is that each college will calculate your family’s EFC every year and that each college will use its own criteria when determining what mix of grants, scholarships and federally-guaranteed loans to offer. That said, each college will have a “Net Price Calculator” on its website to help you get an idea of what they might expect you to pay, given the income and asset figures you input. More broadly, the College Board has an “Expected Family Contribution” calculator on its website ( that can give you a good idea of what you might be expected to contribute towards college costs.

Was saving for college the easy part?

By College Planning

When my daughter Caitlin was in preschool I recall a mother with much older children warning me that the days may seem endless, but that the years fly by. How true! How could it be that my little Muffin is 15 and a sophomore in high school?!

Nowadays, she and her friends worry about getting into college. Are they taking the right classes? (Do they have to take AP’s?) Big college or small? Close to home – “No!” shouts Caitlin – or clear across the country?

And then, there’s volleyball. Caitlin is so very passionate about volleyball. It’s so much fun to watch her play! She was a Middle Blocker on her school’s varsity team last fall and plays the same on her club team now. She wants to play for her college team, so that adds to the complexity of her college search.

It makes me think that finding the right college for my daughter and getting her through the application process might turn out to be the hard part after all.

What College Really Costs

By College Planning

The short answer is – a lot, even at public universities. Currently, the average annual cost to attend a public university is $25,830 for in-state students and $41,980 for out-of-state. Those figures include:

  • Tuition and fees
  • Room and board
  • Books and supplies
  • Personal expenses and transportation

The costs to attend a private university are even higher, at $73,139. College costs have been rising by 5% each year, on average, over the last thirty years. That’s faster than inflation (2.5%) and there’s no reason to expect this rate to decelerate.  This means that parents of an eight year old are looking at a four-year college bill like this:

  Four Year Cost to Attend


Public University, In-state student $186,880
Public University, Out-of-state student  303,074
Private University $502,669

Parents ask me, how much they should be saving each year in the hopes of being able to fully fund their child’s education? And – reality check – how much should those parents of an eight year old have saved by now?

  Annual Savings from Birth Accumulated  College Savings
Public University, In-state student $8,100 $79,232
Public University, Out-of-state student 12,900 126,185
Private University $21,600 $211,286

Yikes! Those are big, scary numbers for sure. But take heart. All but the wealthiest among us pay the full “sticker price” for college. I’ll explain the how and why in my next post.

Looking ahead to the future.

Planning for College – What You Don’t Know Can Hurt You

By College Planning

As parents, we all want to give our kids the same support our parents gave us for college – or more. We have a vague notion that college – even at a public university – is going to be expensive and that we probably aren’t saving enough. We wonder, will we be able to get some financial aid? One thing most don’t realize is that where we place our savings – meaning, in whose name we place the assets – can substantially impact our ability to get financial aid. Over a series of posts, I’ll explain why.

What does a “personal financial plan” really look like? (And why should I pay a professional to craft one?)

By College Planning, Financial Planning, Retirement

It’s a question I get asked often.  After all, there are plenty of online calculators out there. They’ll take some basic inputs about your big picture goals – like private college for your child or retiring at 60 – and spit out a number for how much you should be saving every year. They’re easy to use – and free!

My answer? The reason those tools are easy to use is because they make so many simplifying assumptions.  And we all know that real life is always little more complicated…. Financial planning – when done thoughtfully and rigorously – creates a detailed, customized map to help you navigate your way to where you want to go.

Your plan should include a detailed analysis of your income streams and expenses, now and in the coming years. It should allow for the running of different scenarios around big decisions that you control, like

  • sending your child to an in-state university or more expensive private college;
  • plowing some of your savings into that dreamed-of vacation home;
  • retiring early to travel or pursue other hobbies; and/or
  • electing to take your Social Security benefits earlier v. later.

Your plan must also take into account what you cannot control, namely the potential pitfalls along the way – like stock market downturns, unexpected medical diagnoses and runaway inflation – and help you steer your way through them.

A financial planner worth their salt knows how to ask the right questions to help enunciate your goals and prepare a plan that shows you how you can achieve them.

What does such a plan cost, you ask?  Well, it depends. At McPeake & Company, we are happy to discuss your current situation and future goals in a free hour-long consultation. Following that, we’ll prepare a detailed proposal and cost estimate for you. If you decide to move forward with us, we’ll get to work!

My Bond Investments Are Safe. Aren’t They?

By Investing, Risk Management

So you have some bonds in your portfolio. They’re highly rated and have been paying you the interest due. Why worry?

The threat from rising inflation, that’s why.

For the last decade, inflation – at 1.5% – has been half of the 3% average over the last century. Why? Once the real estate bubble burst and the economy fell into a “Great Recession” in late 2008, the Federal Reserve lowered interest rates to near zero to encourage companies to invest and create jobs, and to stimulate consumer spending. Bonds weren’t paying much in the way of interest, but most investors and advisors considered them a “safe” place to invest. Since longer-term bonds – those with 10+ years to maturity – typically pay higher interest than shorter-term bonds, many investors favored longer-term bonds in their portfolios.

Now, the economy has recovered, the unemployment rate is near historic lows, consumer spending is strong and inflation has risen to 2.4%. One of the Fed’s mandates is to keep prices stable and inflation in check, ideally at 2%. The Fed is thus poised to raise interest rates to temper growth and keep inflation in check.

As the Fed raises interest rates, bond prices will have to fall so that their yields can rise to meet these new interest rate levels. Longer-term bonds are more sensitive to changes in interest rates. Their prices will fall farther and faster than those of shorter-term bonds with fewer than 10 years to maturity. Investors thus are wise to migrate the fixed income portion of their portfolios to shorter-term bonds as the Fed raises rates, to protect their principal investment. Once interest rates level off at something more like historically normal levels and the Fed is comfortable with the level of inflation, investors can add longer-term bonds back into their investment risk with less worry about losing principal.

Why Target Date Funds Miss Their Mark

By Investing, Retirement

Funds that let you pick a “target date” for your retirement and invest accordingly have grown in popularity. It’s easy to see why. Analogies have been made to a plane that is now flying at 30,000 feet towards a destination – retirement – that may be 10 or 20 years or more in the future. As the plane makes its gradual descent over time, the portfolio manager shifts the fund’s allocation, reducing the share to stocks and raising the share to bonds. In retirement, the fund continues to get more conservative by adding bonds and shedding stocks. Thus, target date funds let an investor “set it and forget it.”

Target date funds are a welcome innovation for Do-It-Yourself investors and 401(k) plan administrators, but they come with significant limitations that make them a less-than-ideal retirement investment vehicle.

First, they are significantly more expensive than building a portfolio of individual ETFs. Four of the top five 2030 target date funds charge between 0.57% and 0.74% (see table below). This is 9-12x more expensive than what it would cost an individual to build a similarly diversified portfolio of ETFs (0.06%). The fifth, from Vanguard, charges much less – 0.14% – but this is still more than double the cost to DIY.

Second, target date funds don’t give investors enough exposure to foreign stocks. The United States’ share of global economic output is 25%. Because more American companies are publicly-traded (v. privately-held) and because of our greater transparency when it comes to accounting and reporting standards, the American share of the global stock market capitalization is a little more than 40%. This means that almost 60% of the money invested in stocks worldwide is invested in foreign companies. The five leading target 2030 funds allocate only 20-25% in foreign markets, however. That’s three times less than they should invest to create a truly global portfolio.

Third, target date funds are also off the mark when it comes to emerging market exposure. Emerging market countries – think China, India, South Korea and Brazil – make up about 40% of the world’s GDP. Because more of their companies are state or family owned, however, they make up only about 11% of the global stock market. A fund that aims to give its investors exposure to the totality of global growth should thus invest about 11% in the emerging markets. The leading target 2030 funds, however, invest much less, typically 5% or less.

Fourth, target date funds are not aggressive enough in their allocation to equities now and are too aggressively invested in equities in retirement. A person in their mid-40’s who expects to retire in their mid-60’s should typically have 80% of their total retirement savings invested in stocks. The leading 2030 fund, however, has only 70% allocated to equities right now. In 2030, the year of retirement, a person in their mid-60’s should have about 45% of their overall retirement savings in stocks. The leading target date funds have only 50-55% however.

For all of the above reasons, investors should re-consider using target date funds for their retirement savings. A financial advisor who is a fiduciary and who charges reasonable fees and uses low-cost ETFs can build a superior portfolio for the same price or better.


The tax code has changed. Should your investment strategy?

By Investing, Tax Planning

Republicans enacted dramatic changes to the federal tax code in late 2017. Income tax brackets were lowered, and the personal exemption and deductibility of interest on home equity lines of credit were eliminated. The standard deduction was doubled and limits were placed on the deductibility of taxes paid in income and property taxes to the states. The impact on your taxable income will depend on your specific circumstances and your tax professional may recommend certain strategies to reduce your tax bill going forward.

Given all of that, should you also make changes to how you’re investing your savings?

The short and sweet answer is “No!” Why? Because the surest way to grow your savings and retire with more is to

  • Build a globally-diversified portfolio of stocks, bonds, real estate and commodities using low-cost ETF’s;
  • Rebalance periodically;
  • Ignore the hype and resist the urge to follow the herd into this “winning” company or sector based on some piece of news.

Why? Because trying to “time the market” and pick the “winners” and “losers” has proven time and time again to deliver inferior returns.

So when should you revisit your investment strategy? When something changes in your personal life that affects your savings goals, time horizon and/or risk tolerance.

Turning 25 years old, are ETF’s really a new thing?

By Investing

The first Exchange Traded Fund – the “Standard & Poor’s Depository Receipts Trust,” nicknamed “Spider” – was born 25 years ago this month. It allowed investors to buy or sell the S&P 500 index in a single publicly-traded share for the first time.

Five years later, StateStreet created ETF’s that allowed individuals to invest in companies in specific industry sectors, like “Technology” or “Financial Services” or “Energy.”

ETF’s have distinct advantages over mutual funds, namely:

  • Expense ratios that are 89% lower.
  • Greater tax efficiency.
  • The freedom to buy or sell throughout the trading day.

Investors took note and began to direct more of their savings to ETF’s. In response, financial institutions have been launching more and more varied ETF’s. There are ETF’s that invest in bonds, commodities, currencies and individual countries. There are even “leveraged” ETF’s that return +2% for every +1% the market grows. (On the downside, they also return a negative 2% for every 1% the market drops, so invest in these cautiously!)

Over the last decade, the amount invested in ETF’s worldwide has grown by a factor of 5.5x, from $857 billion to $4.8 trillion. All told, there are more than 7,100 ETF’s worldwide and their market share has grown from 3% to 10%. As advisers and investors evangelize the benefits of using ETF’s to grow savings, their profile and share of market will continue to grow. Impressive for a 25 year old upstart!



Why are ETFs better than mutual funds?

By Investing, Tax Planning

An extremely brief history of mutual funds.

It used to be that individual investors could only buy shares in a company in “round lots” of 100 shares. If a stock was trading for $20, an individual would have to have $2,000 to invest in that company. Ordinary investors with only $10-15,000 to invest thus found it difficult to build a diversified portfolio.

Someone saw an opportunity to create a fund that would pool money from lots of individual investors so that the fund could build a well-diversified portfolio. Thus, mutual funds were born. Their growth and impact on investing was nothing short of revolutionary. It was a giant step in democratizing investing for the average person.

Exchange Traded Funds – ETF’s – are like Mutual Funds 2.0.

ETF’s and mutual funds are similar in that both bundle together hundreds or thousands of securities to offer investors diversified portfolios. They differ in several substantial respects, however.

First, as their name reveals, ETF’s trade throughout the trading day, allowing investors to buy and sell at any point in time – just like shares in Exxon Mobil or Apple. Shares in mutual funds can only be purchased or redeemed after trading has closed for the day and the Net Asset Value of each share has been calculated.

Second, ETF’s have lower operating expenses and thus charge significantly lower fees to investors. The average expense ratio for a stock mutual fund is 0.82% while the expense ratio for a stock ETF averages 0.09%. The mutual fund is nine times more expensive!

Third, many mutual funds have sales loads. ETF’s have none. Sales loads – sometimes as high as 5.75% at the purchase of a mutual fund and 0.25% each year thereafter – come out of an investor’s pocket and go straight to the investment adviser who sold them.

Fourth, mutual funds come with minimum amounts that an individual must invest. ETF’s have no investment minimums.

Lastly, ETF’s are significantly more tax-efficient. This is because when they buy or sell shares they are deemed to be “in kind” transactions that do not trigger a taxable event. When mutual fund managers trade shares in their portfolios, they trigger capital gains and losses for every one of their shareholders.

For all of these reasons, ETF’s are a smarter option for today’s investors. After all, it’s not about what you make, it’s about what you keep.