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Here in the Summit of Coin household, we are running around enjoying our time with our 16-month old daughter. And when I say run around, we sometimes chase her around as she likes to challenge us. When she knows that she is doing something wrong, she runs even faster to try to beat you to the thing that she knows she should not mess with.
She is reaching the age where she likes to challenge the rules and sometimes that can be exhausting as a parent. Despite her exhausting need to run everywhere and challenge our rules, we are loving this stage of life as parents. She is in the stage where she is so excited to learn and she loves to copy everything we do!
In the future, we plan on sending our daughter to college. And like most parents, we worry about the cost of college and how we will pay for it. Well some stats on college tuition found my inbox and I thought that the information in the article was so important that I had to write an article about the rising tuition costs.
Rising Tuition Statistics
The article, "Why is College Tuition Rising so Much? What can You Do?" was written by Mary Bromley. The article has a lot of great information and I will detail some of the data below:
"For a private school, four-year tuition in 2015 was $134,600. In 18 years, that could surge to $323,900. For a public institution, it is much the same. A four-year, in-state school will see an increase from $39,400 to $94,000."
With a 16-month old and a baby on the way, we need to anticipate and prepare for a $94,000 tuition bill in 18 years.....yikes! And another one two years later.... That's almost $200,000 in tuition in the span of six years....yowzers!! That number is not necessarily fun to see, however, good to know so we can prepare.
"In less than 20 years, that will be a jump of almost 140% across the board."
I did the math and it came out to a 138% increase over the course of 18 years. In reality, tuition increases on average 6 to 9 percent a year. This estimation is on par with the increase in tuition over an 18-year time period (based on my calculations). The issue: college tuition increases faster than inflation and wages.
"Currently, student loan debt in the U.S. is close to exceeding $1.5 trillion dollars."
Now, I know this statistic does not focus on rising tuition, but a rising tuition does lead to an ever growing student loan crisis. And I believe that student loans is one of the biggest reasons for an increase in college tuition. Without the ability to take out a student loan, colleges would have to lower tuition and housing to allow more people to attend. The ability to take out a loan has caused tuition to rise and rise even more.
Ways to Combat Rising Tuition
Ever since discovering Dave Ramsey and the financial principles from the bible, I am a big proponent of avoiding consumer debt, specifically student loans. As a parent planning to send my kids to college, I am planning to use the following steps to help save enough money for my kids college.
Number 1: Begin Investing Early
Just like with retirement investing, the earlier you begin, the more you will have in the future. In this case, we are looking at 18 years of investing (if you start right away). We did this with my daughter and plan to do the same with our second child once he or she arrives.
My daughter was born in late 2016. This allowed us to invest $2,000 in an ESA in 2016 and $2,000 in an ESA in 2017. Last year, my daughter's college fund was able to enjoy the 20% growth we saw last year in the stock market, which beat the 8% inflation rate.
Not every year will see 20% growth, but the stock market has an average 10% growth since its inception. We can anticipate seeing an average of 10% growth in her college fund over 18 years.
For example, if you invest $2,000 every year at an average of 10% growth over 18 years, you would see $100,095 in your college fund in 18 years (calculated using the future value (fv) function in excel).
Let's say 10% is a little high of an estimate. I will change the parameters to 8% growth and leave every thing the same in the future value calculator. Investing $2,000 per year at an 8% growth rate would yield $80,015 in 18 years.
In both cases, $36,000 was invested. The rest of the money in the college fund is growth. Therefore, you must take advantage of your ability to invest for college early, otherwise, you will have to play catch up later in life. Even that $2,000 investment a year puts you at barely enough to cover just tuition (public university). There's still books, room and board to worry about.
Number 2: Invest in an ESA (Education Savings Account)
The ESA is a great way to save $2,000 every year for your child's college expenses. This is our first step in the college planning process for our kids and as I detailed above, this simple step could put somewhere around $80,000 to $100,000 in your child's college fund in 18 years.
To learn more about an ESA, you can read my article detailing the specifics about the ESA. There have been some changes to tax code, since I wrote this article in 2017.
Number 3: Invest in a 529 Investment
I prefer an ESA over a 529, because you have more freedom with an ESA to invest in whatever you want. However, a 529 is a great second option. As my father-in-law told me after we put $4,000 in my daughter's ESA, "you will have to do more than just $2,000 a year." Based on the data and a future value calculator, he is right.
The ESA may cover tuition, but will not cover all of the housing, books, and other expenses associated with college. By just saving another $1,000 a year in a 529, you can increase the college fund to $40,000 (8% growth average) or $50,000 (10% growth average) over 18 years.
That might just be enough to cover four years of college!
To learn more about a 529, you can read my article detailing the specifics about the 529. There have been some changes to tax code, since I wrote this article in 2017.
Number 4: Use a Tuition Prepayment Plan
Now, I am not a huge fan of tuition prepayment plans, because you don't earn as much by investing in a Tuition Prepayment Plan as you would earn in a 529 or ESA. However, this plan is good for anyone that is not confident investing their money in the stock market.
I detailed the Texas version of this plan in an article back in September of 2016 and most tuition reimbursement plans are similar to the Texas plan across the United States.
Number 5: Don't Be Afraid to Let Your Children Work During College
Hard work never hurt anybody! I worked my way through college and I received higher grades in the semesters that I was working. My job required me to set a study schedule and actually study when I wasn't in class or working. Sure, build up that college fund as big as possible, but if the college fund doesn't cover everything, the kids can help pay their way also. It might just give them ownership over their education.
Number 6: Have your Children apply for Scholarships
I never enjoyed applying for scholarships, however, I was able to use money from scholarships to help me with my college expenses. There are lots of scholarships out there and you might as well apply for them! On a side note, any scholarship earned allows you to take money out of a college fund without penalty up to the scholarship amount.
Don't Let Rising Tuition Costs Scare You!
Sure, tuition is rising at an alarming rate, but there are tax-advantaged ways for us parents to combat those rising expenses, and save for the rising costs. We can do it and find the extra $2,000 a year to jump start our college savings for our children!
Have you started investing for your kids college? Do you feel relieved or more worried after reading this article?