Average College Tuition Costs and Inflation
With school back in session in most of the country, many grandparents and parents are thinking about how to prepare for their grandchildren's or children’s future college expenses.
Now is a good time to sharpen one’s pencil for a few important lessons before heading back into the investing classroom to tackle the issue. Get your Retirement Checklist of over 30 things that you need to think about for your retirement.
AVERAGE COLLEGE TUITION COSTS IN 2017
According to recent data published by the College Board, the average annual cost of attending college in the US in 2017–2018 was $20,770 at public schools, plus an additional $15,650 if one is attending from out of state. At private schools, average college tuition costs and fees were $46,950.
It is important to note that these figures are averages, meaning actual costs will be higher at certain schools and lower at others. Additionally, these figures do not include the separate cost of books and supplies or the potential benefit of scholarships and other types of financial aid. As a result, actual education costs can vary considerably from family to family
AVERAGE COLLEGE TUITION COSTS IN 18 YEARS
To complicate matters further, college costs have historically increased every year. This increase is due to inflation. Inflation makes the amount of goods and services $1 can purchase decline over time.
One measure of inflation looks at changes in the price level of a basket of goods and services purchased by households, known as the Consumer Price Index (CPI). Tuition, fees, books, food, and rent are among the goods and services included in the CPI basket.
In the US over the past 50 years, inflation measured by this index has averaged around 4% per year. With 4% inflation over 18 years, the purchasing power of $1 would decline by about 50%. Said another way, the amount of goods that $1 will purchase today, will only purchase $0.50 worth of goods in 18 years!
However, the cost of college tuition has historically risen faster than average inflation. In fact, over the past 5 years, college tuition costs have risen 5% per year.
What does this mean? Well, if you plan on funding your grandchildren's or children's education, you might be in for a shock. Based on data from CollegeBoard.org, at a 5% inflation rate, the total cost to attend just one year at a public, in-state college including room, board, tuition, and fees will increase from $20,770 to $49,985! This is per year.
If you want to pay for 4 years of college, total costs may rise to $215,444 in just 18-years as seen in the chart below.
Going forward, we do not know what the cost of attending college will be. But again, we should expect that education costs will likely be higher in the future than they are today.
So, what can grandparents and parents do to prepare for the costs of a college education? How can they plan for and make progress toward affording those costs?
BEST WAYS TO SAVE FOR COLLEGE
To help reduce the expected costs of funding future college expenses, grandparents and parents have several options.
Invest in a 529 College Savings Plan.
A 529 plan is a college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs. Investment earnings in a 529 plan are not subject to federal capital gains tax and generally not taxed by state governments when used for the qualified education expenses. Additionally, some states, like Virginia, allow a state tax deduction up to $4,000 per account.
There are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan. Using a tax-deferred savings vehicle, such as a Virginia 529 plan or other state sponsored 529 plan, parents may not pay taxes on the growth of their savings, which can help lower the cost of funding future college expenses.
Invest in assets expected to grow faster than inflation.
First, you can invest in assets that are expected to grow their savings at a rate of return that outpaces inflation. By doing this, college expenses may ultimately be funded with fewer dollars saved.
Because these higher rates of return come with the risk of capital loss, this approach s