Over the past 18 years, the price of college has increased by 125%, or 4.6% per year (source). This is more than twice as high as the overall inflation rate.
With college costs increasing rapidly, parents who want to save for their children’s education are in a tough situation. If the price continues to increase at that rate, a school that costs $50,000 today will cost $112,000 per year in 2039. This means you would need approximately $448,000 to cover four years of college.
To save that much you would need to put away $1,250 per month, or $15,000 per year, for 18 years assuming a 5% rate of return. Most parents cannot afford to save that much, especially with multiple children.
This also assumes the child finishes their undergraduate degree in four years, which only 41% of students do (source). This also does not account for the cost of a postgraduate degree.
As a financial planning professional, college funding is a struggle. While a 529 college savings account is an excellent place to save, the potential costs are exorbitant.
Assumptions have to be made when saving for a goal, but the variability in those can be massive. What remains unclear is:
- What will college look like in the next 10-20 years? Perhaps it will look similar to today but the price inflation will decrease.
- Or, will lower-priced credential options arrive? Companies like Treehouse are interesting early entrants.
- Will community college be free? The Biden administration is making a push for this to happen.
- Will my child receive a scholarship or student aid?
- Another interesting and evolving area is how to borrow for college. One new idea is income-share agreements.
Within this changing landscape, “save what you can and watch what happens” is not the most reassuring financial advice. But as with all financial planning problems, the future is unknowable and we have to accept reality on reality’s terms.
Parents should address their specific college saving goals with an advisor and revisit those assumptions and variables regularly.
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