College Tuition Growth Rate vs. Stock / Bond Investment Performance

Inside this Morningstar article discussing the choice between a prepaid 529 plan or a 529 college-savings account, there was an updated chart comparing the 10-year growth rates of tuition at 4-year public and private universities, the S&P 500 index, and the Barclays US Aggregate Bond index. A blended 60% stock and 40% bond portfolio would have returned 6.34% annualized.

There used to be some great prepaid 529 options out there, but they have been gradually going away. Only a few states even offer a prepaid plan anymore (Alaska, Florida, Illinois, Maryland, Michigan, Massachusetts, Mississippi, Nevada, Pennsylvania, Texas, Virginia, and Washington). I’m not familiar enough to recommend any one in particular, but I do know people who still invest in both the Washington and Texas plans. You should look for one that provides at least some investment return if the student ends up going to an out-of-state school.

For many of us the traditional stock/bond route will have to do, which we see would only have just about kept up with tuition inflation over the least 10 years. I still can’t see tuition compounding away at 8% annually for the next 20 years, but I will probably make my 529 contributions under the assumption that a 60/40 stock/bond portfolio will only keep up with tuition over the long-term (as opposed to contributing less and hoping stock performance will cover the gap).

Comments

  1. My wife and I are not saving for our kid’s college tuition. The way we look at it, they are more likely to get need-based aid from their college if they don’t have a nice big pile of money set aside for tuition. And on top of that, the government makes it pretty easy to get a loan for college. We will of course counsel them not to go into debt for a college education that can’t help them pay back their debt.

  2. We currently put away $600 per month for each of our children for their college education and have been funding those accounts since before each were conceived (at a lower level at first). I have estimated that those balances after a 20-year average compounding period should cover about half of their tuition and other college costs and they will have to fund the balance themselves. My expectation is that our family will receive zero financial aid.

    The prior decade is a bit of an anomaly, particularly for the growth in public college costs, because state governments made a step change to adjust their budgets as a result of the severe recession. I expect that in the future public school tuition will revert to more normal growth rates in the 2-4% range. It is entirely possible, however, that private schools continue to grow tuition at a 4-5% annual rate over many years (in my opinion) because they have that kind of pricing power. If that’s the case, in 18 years the $200k it currently costs for four years at a private school could be closer to $500k.

    If we get decent growth over the next two decades in our 529s and tuition growth is lower, than I will be able to help my kids with 2/3 or 3/4 of the cost of college, which will be great.

  3. Nothing misleads more than stats I guess.
    I just goggled UC Berkley undergrad tuition in 2004 and in 2014, it seems to have gone from 3K to 13K, per year. That’s not 7% annualized. And if memory serves me well, I can probably show a similar increase for Stanford, etc. Perhaps places like Ohlone College move the needle of of the “average”…not sure
    ——————————–
    http://registrar.berkeley.edu/feesched0304.html
    http://students.berkeley.edu/finaid/undergraduates/cost.htm

  4. Personally, I’m more for putting money towards retirement then kids education. I have 27 years till 60, unless I have a child when my years to retirement is less than 18 I’ll keep putting my money towards retirement as it will have more years to compound. Figure its better to have to figure out how to pay for college then how to pay for me when I’m retired.

  5. There’s something fishy about that table. Why is “Smallest Single-Year Increase” “N/A” for the S&P 500 index and the Barclays US Aggregate Bond Index? If there was a biggest single-year increase, then there must have been a smallest single-year increase! (Of course, we all know that the smallest single-year increase was much smaller than the biggest!)

  6. We have been putting money in Private College 529 plan (https://www.privatecollege529.com/OFI529/home.jsp), just in case my little ones are overachievers and decided to go to expensive universities like MIT or Stanford (too bad Harvard is not a participant). We also max out Coverdell ESA’s. Our plan B and C? Since I am from Canada, I will strongly encourage my kids to seek college options north of the border, or even in Europe (http://www.scholars4dev.com/4031/list-of-european-countries-with-tuition-freelow-tuition-universities-colleges/).

    Some smaller colleges are already reducing their tuition, but I see this as a desperate move to stay competitive with quality or reputable institutions. Although online education will become prominent in the future, and maybe Coursera will become a full blown Universera (trademarked yet?!), I see the gateskeepers will continue to keep the tuition high for the best colleges, so perpaid 529 plans should still be a good investment, in my opinion.

    We are capping our contribution to their education at one year worth of tuition only, so if they decide to drop out after a year and create the next Apple or Snapchat that’s fine by me…

  7. @Peter, you obviously have not done your homework. Whether you put the money into a 529 account or not, the government looks at ALL of your entire family’s assets to determine need. You can’t hide money from them. Unless of course you are advocating simply spending all of the money now on intangible junk. That would indeed “hide” the money, so well in fact that you won’t ever get it back again.

  8. @Scott, I know what I am doing. I am saving for retirement and IRA and 401(k) investments are not counted on the FAFSA.

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