The cost of a college education continues to grow very rapidly. This, of course, is not a surprise. News of tuition inflation has been prominent. Here in Washington state, the legislature is allowing state universities to raise tuition by 14% each of the next two school years.
The more startling fact is the disparity between growth in salaries and growth in education costs.
Consider these figures:
- The average cost of tuition and fees across U.S. colleges increased 92% through the past decade. For comparison, the cost of the average new car did not rise at all and inflation of food was 32%. (Source: Business Week, Dept. of Labor Statistics, American Institute of Economic Research)
- The cost of the tuition, fees, room and board at an average in-state public university has risen 6.2% per year over the past 20 years, reaching $15,213 for the 2009-2010 school year. If college costs had instead risen only by the rate of the Consumer Price Index (general inflation) over the past 20 years (2.8% per year), then, funding a year of college would cost $7,889 for the current school year. (Source: College Board, Department of Labor)
- While costs have risen, wages, salaries and earned income have been stagnant. The median salary in 2009 for someone with a Bachelors degree was 1% less than it was in 2000. For someone with an advanced degree (Masters, PhD) salaries grew by 1% over the decade. (Source: Business Week, Bureau of Labor Statistics)
Since the growth in earned income is so far behind the pace of college tuition, a parent saving for a child’s future college costs has to find a way to combat inflation. Either they have to save a whole lot more than planned or they have to hope an investment return can provide the heavy lifting necessary to keep up.
Washington’s Guaranteed Education Tuition (GET) program provides one option. It guarantees to match the rate of in-state university tuition inflation. There are drawbacks however. GET units can be applied to tuition at out-of-state or private colleges but they are not guaranteed to keep up with the tuition increases at those schools. And if you were to participate in the GET program through a periodic purchase of units over time, there is a 7.5% finance charge that essentially wipes out some of the inflation protection.
The other alternative is to fund a 529 plan, utilizing an investment strategy intended to outpace inflation. These plans allow for tax-free use of the growth on investments to pay for higher education expenses at any accredited school (private, 4-year, community college, trade school, etc.). With 529 plans, the owner accepts market risk but has the ability to save more than in a prepaid tuition plan such as GET. There are also no fees to administer a periodic savings program. The only fees are the management costs of the funds that are invested in. Given many plans to choose from, there are attractive options at very little cost.
We frequently advise people that it’s more important to save for retirement since there aren’t options like loans, grants, scholarships and work study to fund your retirement. But a shortfall in college savings leaves the unappealing likelihood of significant debt to be paid.