It’s Back-To-School – But For Whom? By Chris Stack and Kevin Wasp, Columbia Threadneedle Investments
- Back-to-school time should not only be about preparing for the kids’ current school year but also for their college years and beyond.
- Gen X-ers and older alums are often shocked when they become aware how much college costs have risen since they were on campus.
- Tax-advantaged investment plans can help families address these significant costs by starting now and avoiding stress of paying later.
It’s that time of year again!
Retailers have been ramping up their back-to-school campaigns, touting the latest in back-to-school supplies and fashions. The benefits of a good education are widely acknowledged, and these retailers know that parents and grandparents will do all they can to help prepare their young family members for the new school year. That often includes enthusiastic spending on backpacks, calculators, clothes, three-ring binders and the like.
However, that is just part of the process. Many parents of current high school juniors and seniors find themselves not affording, and regretting not preparing for, the cost of college. While such opportunity for them may be lost, parents of younger children do have the ability to plan and prepare, an opportunity they can’t afford to waste.
Thus, now may be a good time to school oneself in how to minimize the stress later of paying for college. A good place to start is by focusing on the younger children and their future college expenses.
Paying for college has become more challenging
Figuring out how to pay for college is much more difficult and confusing than it was in the past. In the time since parents of college-bound children attended college, costs have risen dramatically.
Public universities typically estimate the cost to exceed $100,000 for four years while it is not uncommon for private colleges to estimate the cost for four years at more than $250,000. According to the U.S. Bureau of Labor Statistics, college tuition and fees have risen 1,225% since 1978, about the time when many parents of today’s college students were in college or graduate school themselves.
Exhibit 1: Percentage increase in consumer prices since the first quarter of 1978
By the time parents realize how much their child’s school will cost, many won’t have enough — or won’t have enough time left to save — to pay the bill. Parents who don’t learn the costs until attending college fairs and campus visits may end up frantically trying to scrape together a combination of savings, investments (even illiquid), discretionary income and, with luck, grants and scholarships.
Even financial aid offered by colleges and universities won’t spare most families from having to fund the bulk of college expenses. And unfortunately, loans comprise a big part of a typical financial aid package, which means that the total a family will pay over the long term, once interest is factored in, is actually substantially more than the costs shown in any glossy university brochure.
Calculating the real costs
Despite claims that they lack the resources, most families can’t afford not to begin investing for future college costs. For most, the decision comes down to when monthly payments for college expenses are to begin, not if they are to occur. The benefits of starting to save and invest years before a child enters college are profound, especially when compared to the cost of borrowing during the child’s college years:
Current age of child: 11
Current college cost: $50,000
Annual college cost rate of inflation: 4%
Anticipated average annual rate of return of investment: 6%
Anticipated future rate of borrowing to finance future college cost: 8%
Under the above assumptions, monthly payments of $1,855 over ten years ($222,540 total investment) are needed fund the projected four-year cost of $279,403 (including account earnings of $56,862). By contrast, if you were to borrow the entire projected cost, monthly payments of $3,390 over ten years ($406,972 total investment) would be needed, including interest (non-deductible for most families), totaling $127,388.
Thus, the additional $1,535 required each month for ten years to pay the same four-year college cost would total a staggering additional $184,251.
Saving and investing for college now means less pressure after graduation
Since 2010, student loans have surpassed auto loan, credit card and home-equity debt balances to become the second largest form of U.S. household debt, after mortgages. The Federal Reserve Bank of New York reports outstanding student debt nationwide currently exceeds $1.2 trillion. Today’s college graduates bear some heavy burdens: find a job, earn an income and increasingly, sacrifice a large percentage of each paycheck to pay student loans. Starting a saving and investing plan when children are young can help alleviate such stress; it can also allow recent college grads to start paying rent and leading independent lives rather than having to live at home and deal with debt service and the anxiety that accompanies such debts.
Preparing for the inevitable now
Back-to-school may be the perfect time to meet with your financial advisor to learn about college planning opportunities. 529 plans allow your account to grow tax-deferred and, contrary to what many think, provide an opportunity, but not an obligation, to withdraw amounts tax-free to pay most college costs of any family member. These plans make it easy to start saving and investing early rather than making higher monthly loan payments in the future. If you and your financial advisor determine that a 529 plan is right for you, consider one with the following benefits:
- A comprehensive, multi-managed investment lineup with fund options from leading firms
- Many investment choices to best match your needs and preferences
- Competitive fees
- Generous gifting and estate tax benefits
- Account owner control over assets at all times
Helping pay for a loved one’s college education is one of the most rewarding things you can do for their future. As the cost of a college education continues to skyrocket, let time be your greatest ally by starting a saving and investment plan today. Talk with your financial advisor or to learn more about the Future Scholar 529 Plan, visit www.columbiathreadneedleus.com.