OK, But What Does “Afford” Mean?
I tend to catch a certain sort of article that comes across my radar with fair regularity, such as : “Four Steps to a Debt Free Degree” by financial blogger Jeanie Ahn, which is a rehash of the included video by Rachel Cruze.
According to Mrs. Cruze, specifically to get through college debt-free a student needs to:
- Choose a College You can Afford
- Seek out all Opportunities for Financial Aid
- Work Your Way Through School
- Ask Your Parents for Help
I take no issues with articles like these in that they provide a little bit of food for thought to those who haven’t explored even the most basic options to save and earn money for school. I would highly encourage any student to seek out these opportunities in addition to dozens and dozens more that would shave one’s out-of-pocket costs down to reasonable levels. I’m hoping this upstart blog and upcoming book can shed more specific light on some of these over the next few months.
I also wholeheartedly agree with the article’s #1 being #1. Your first step toward an affordable education should be to stay within your means. That much seems obvious. But it brings up a question: Just what does “can afford” mean?
Well, I’m glad you asked. It seems that although the first step toward debt freedom is choosing an appropriate college, one must take a few steps first to determine what appropriate/affordable would mean. For this reason when discussing keeping college expenses manageable I like to start with a survey not of the various schools but of the student. After all, affordability will vary highly from person to person and an affordable school for one may be entirely out of reach for another.
After much thought on the art and science of affordability (affordology), it seems to me that a good purchase (and yes, we can consider college a purchase) usually has three primary things going for it:
- It is of a higher RANK than one’s other potential purchases.
- It is within one’s RESOURCE capacity.
- And it accords to one’s expectations of RETURN.
While I will break this down further via my various channels, let’s address the basics of what I mean.
RANK: We must not run off and buy things, even if we have the money for them, if there are other things that would be more important. Otherwise we run into a problem with opportunity cost, that is to say by pursuing A we may now lack the opportunity to pursue B. Before seeking out colleges on cost the student needs to define the job the school needs to do for him or her prior to considering the financial aspects. Without knowing with specificity WHY you want to go to college it will be near impossible to determine WHAT college might meet the need and no matter how cheap it is you may have missed the mark altogether.
RESOURCES: Now we get into what’s usually meant by “affordable.” How much money do I have available for this venture? Again, a personal question. Here it helps to know WHAT you have available through your various channels (some of which were alluded to in the article) such as work income, savings, scholarships, family help, etc. One must also know WHEN it will become available. Schools are not an up-front expense but demand payment semester by semester. That scholarship you won, for instance, may come in installments and your parent’s chip-ins may be on a monthly basis. You can find two pdfs of worksheets in the “resources” tab that can help you lay all of this out.
RETURN: Lastly, affordability is a question of not only whether the thing we’re contemplating is the most important thing to contemplate and whether we have the funds for it, but also whether or not the return is right. Some things costs a lot but are worth it because of the yield while other things cost “too much” given the fact we could have gotten the same level of return for less money on the barrel. For instance, let’s say your number one priority (RANK) with the funds in your bank account is to generate a steady income. And let’s say you have RESOURCES to the tune of $250,000 . Does this mean you should go out, because you can, and buy a $250,000 rental house? Maybe. You can certainly do this without incurring debt. But maybe you can generate the same income on a house costing only $150,000. The return would be much higher in the second example, so why not do that? This same idea of return goes for non-financial aspects (if you’re just as happy with Chinese takeout as you would be with fancier cuisine that’s a better happiness return for the money). Same goes for colleges… even if you are clear on what you want out of your education and you can afford any number of choices, it makes sense to go with the choice that gets the most money or joy back to you in the quickest fashion.
And that, folks, is the basic 3-part test I encourage anyone to apply to derive the meaning of “affordable.” Once you understand the priorities, output level, and expected kickback (rank, resources, and return) you want from a purchase then it now makes sense to go out and seek those things/colleges that fall within your parameters.
Stay tuned for a further breakdown of how to build your affordability filters BEFORE trying to sort through the myriad of colleges that vie for your dollars.