If you have more than one child, you may have read the title of this month’s blog series as “reliving” the burden of college savings. However, fear not, we have plenty to help you through the process whether you have 1, 2, or 8 kids. If there are more than two, I’m very impressed and I wish you luck in the kid wrangling process, you are far braver than I.
Ok, so you have kids, your kids will go to college someday, college is expensive and costs increase with each passing year. What to do? This week we'll look at how much college costs today, projected costs for the future, and the building blocks that go into funding a college education. In the following weeks, we’ll discuss different tax-advantaged ways to save for college, and we'll also examine the role of financial aid. Our goal here is to save you money, so hopefully, that’s exactly what we’ll do, so let’s get started.
Fitting College Savings Into Your Budget
We all know that college comes with many benefits, like the ability to compete in today's competitive job market, increased earning power, and expanded horizons. But if you're like most parents, there are a lot of demands competing for your hard-earned dollars. Some of those demands include the costs associated with a new baby or growing children, monthly mortgage or rent payments, monthly car payments, contributions to your retirement plans, your own student loans, and maybe even a vacation now and then.
Add in the costs of bills and unforeseen emergencies, and it's hard to imagine how you might fit in saving for college, too. And yet, an empty nest sounds nice sometimes, so you must start your child's college fund as soon as you can.
The Cost of College Now
But why? College doesn’t start for another 18 years or so, right? Well, that’s true. If you start early, you have plenty of time to save, but you need plenty of time to save - because college costs plenty of money. That’s not a surprise to anyone, I’m sure, but let’s put it into perspective just so that you can gain a complete understanding.
According to the College Board, the current average cost for one year of tuition, fees, room, and board at a public college is $22,180 and $50,770 at a private college, though many private colleges cost substantially more.1 These figures include direct costs only - in other words, the costs that are actually billed to you. They don't include books, personal expenses, transportation, or food, which vary by student. If you’re tempted to blow that stuff off, take a second to think about how much food a teenager can eat.
Now, multiply each figure by four, and you can see how expensive college really is. And we haven't even factored in college inflation yet.
You might be thinking, “what is college inflation? I thought normal inflation was enough to worry about.” Well, in the interest of never lying to you, I have a little bit of bad news. College inflation is different, and it’s different because it’s worse.
The Future Costs of College
College inflation refers to the percentage by which college costs increase each year. Over the past decade, college inflation has generally risen more than double the rate of general inflation.
To help you see this more clearly, even though I’m sure you’d rather not see this at all, we’ll use numbers again. Let’s say that the current cost figures and a college inflation rate of 5%. If we were to chart this over the course of ten years, we would see that the cost of one year at a public college could be over $36,000, while the cost of one year at a private college be over $82,000.2
This mix of honesty and the bad news continues because college costs will likely continue to rise each year. Annual increases in the range of 3% to 5% would certainly align with historical trends. Keep in mind that the actual percentage increase in any given year could be higher or lower, and the rate could vary from public to private college.
But enough with the negativity. We can’t change the fact that inflation often feels like that mosquito that won’t go away and exists to suck you dry. But we do have inflation repellent, or at least ways to work against inflation and other expenses to save up a decent amount of college funds. In other words, the high cost of college now and the additional college costs will keep increasing, which will add to the amount you'll ultimately need to save. But, there is light at the end of the tunnel and it’s called financial aid.
P.S. If you enjoyed what you've read here and found it beneficial, we encourage you to share it with your friends and family. I firmly believe that an educated investor is more confident, which leads to healthier finances and fewer sleepless nights.
Until next time...
1Cost figures include direct billed costs of tuition, fees, room, and board. College Board, Trends in College Pricing and Student Aid 2020.
2 Projects costs based on 5% college inflation rate.