Planning for the cost of higher education
According to the Bureau of Labor Statistics, today's median bachelor's degree recipient receives 67% more in weekly earnings than the typical high school graduate.* Clearly, one of the best investments you can make for your children is an investment in their educational future.
You may think that setting up a bank savings account for your newborn's education will get him or her off to a great start. You might, however, want to think again. According to 2017 data from the College Board, the projected average cost for your newborn's four-year degree at a public college could total almost $260,000. You would have to sock away nearly $11,000 per year in a savings account, assuming it earns interest at an average rate of 3% per year, to equal almost $260,000 by his or her freshman year. And should your child decide to attend a private college, tack on about $327,000 more to your savings goal, bringing your savings account annual contribution to more than $24,000.**
But don't despair yet. Even without time on your side – if your children are teenagers, for example – a sound investment strategy coupled with knowledge of other college financing options may put your children on the road to a valuable four-year college degree.
* Source: Bureau of Labor Statistics, Earnings and Employment Rates by Educational Attainment, April 2017, based on 2016 data.
**Sources: DST Systems, Inc.; the College Board, 2017. Cost estimates are based on the 2017-2018 academic year and assume that costs increase by 6% annually. Figures include tuition, fees, and room and board. Keep in mind that unlike money market investments, which involve risk and possible loss of principal, bank savings accounts are FDIC insured.
Invest early and on a regular schedule
As with any large savings goal, it's best to start investing early and often for college. First, set your goal: Figure out how much you may need to save for each child based on his/her age (see accompanying table). Then, develop an investment plan and stick with it. Consider discussing the following guidelines with your financial professional when developing your investment plan.
If your final tuition bill is due in 12 to 22 years
With time on your side, your portfolio can potentially withstand a bit of volatility in your quest for higher returns. Stocks have historically provided the greatest long-term growth potential. For example, a one-dollar investment made in stocks that appreciated at the same rate as the S&P 500 index (an unmanaged index of common stocks generally considered representative of the U.S. stock market) at the beginning of 1998 would have grown to $4.01 by year-end 2017.3 Compare that with an equal amount invested in lower-risk, lower-returning money market investments over the same period of time; your investment would have amounted to only $1.51 over the same period of time.***
Of course, past performance cannot guarantee future results. You must remember the volatility and risks involved in stock investing and consider your ability to withstand potential fluctuations in the value of your child's college savings.
***Source: DST Systems, Inc. Performance is for the period from January 1, 1998, to December 31, 2017. The S&P 500 index is an unmanaged index generally considered representative of the U.S. stock market. Money market investments are represented by the returns of the Bloomberg Barclays 3-Month Treasury Bill index. Individuals cannot invest directly in any index. Results include reinvested dividends. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although most money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund. Past performance is not a guarantee of future results.
Projected Average Costs for Four Years at Public and Private Colleges
Source: ChartSource®, DST Systems Inc. Based on data published by the College Board for the 2017-2018 academic year. Chart is based on hypothetical growth rates; your results will vary. Copyright © 2018, DST Systems Inc. All rights reserved. Not responsible for any errors or omissions. (CS000113)
Assumes a 6% annual increase and current one-year cost of a four-year public ($20,770) and four-year private ($46,950) college.
If your final tuition bill is due in 8 to 11 years
In addition to keeping your portfolio aimed toward growth potential with stocks and stock mutual funds, you might want to add or increase a fixed-income element to balance risk. Also, now is probably a good time to teach your child about investing – by encouraging that a portion of the dollars earned through paper routes and babysitting be contributed to the college savings plan.
If your final tuition bill is due in less than 8 years
You may start allocating more of your portfolio to fixed-income and money market investments. If you have virtually nothing saved, you have a challenge ahead of you, but some cost-cutting in other areas of your life might allow you to make substantial monthly investments. The less you have saved, the more you may need to be aggressive in your investments in seeking higher returns, as long as you have the appropriate risk tolerance.
Although many investments, including stocks and bonds, have traditionally outpaced savings accounts in terms of performance, past performance cannot guarantee future results. Bear in mind, too, that unlike savings accounts, investments are not insured by the Federal Deposit Insurance Corporation (FDIC); therefore, negative performance could result in a loss.
Also remember that any investment plan needs a fresh look every year or so to determine whether adjustments need to be made. Generally, changes should be made as your time horizon narrows, the day nears when you will send your child off to college, and preservation of principal becomes a primary concern.
Other financing options
Beginning your investment plan by considering the time frame available to you is probably your best bet in seeking to meet college costs. In addition, consider these options:
Encourage savings gifts
When relatives ask what your children want for birthdays or holidays, encourage gifts that will help finance their education. Though it may not be a child's first choice now, they'll thank you later. Such gifts include Series EE Savings Bonds; shares of a mutual fund given through the Uniform Gifts/Transfers to Minors Acts (UGMA/UTMA); and zero-coupon bonds that mature in a given year around college enrollment.**** [Parents or others can contribute up to $2,000 annually (per child) to a Coverdell Education Savings Account (formerly known as the Education IRA) where any earnings can accumulate tax-free and qualified withdrawals can be made tax-free for qualified college expenses.]***** An individual can make annual gifts of up to $15,000, gift tax-free (in 2018), to a minor under UGMA/UTMA. And friends and family can pay any amount directly to a youngster's college for tuition and fees, with no gift-tax consequences.
Remember to consult your tax advisor on the tax considerations of each of these gifts so you're not caught off guard by Uncle Sam.
**** Keep in mind that the value of zero-coupon bonds fluctuates more than regular funds and therefore may not be suitable for investors with liquidity needs.
***** Income restrictions apply, and penalties may be assessed for nonqualified withdrawals.
Apply for financial aid
Even if you think you're ineligible for financial aid, complete the applications and mail them in on time.
Don't rule out less expensive schools
Public universities and community colleges can be among the best options. Higher education is certainly one area where most expensive does not necessarily mean best.
Develop networks and ask questions
High-school guidance counselors, religious and civic organizations, and the colleges your child applies to can all provide good leads for additional sources of scholarships, grants, and loans. The more you ask, the more you will learn.
Many organizations, including the U.S. government, offer alternatives such as loans and grants to help finance higher education.
Together, time and a smart investing strategy comprise your best bet for meeting the rising costs of higher education. Combine that bet with a little creativity and a lot of information, and you can help provide your children with an investment that no one can take away: a college education.
In this process, which can be daunting, your financial professional can be a valuable resource.
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