The ABCs of Education Investing — Tobin Investment Planning
According to recent data published by the College Board, the annual cost of attending college in the US in 2017–2018 averaged $25,290 at public schools, plus an additional $15,650 if one is attending from out of state. At private schools, tuition and fees averaged $50,900.
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 potential benefit of scholarships and other types of financial aid. As a result, actual education costs can vary considerably from family to family.
Figure 1: Average Estimated Full-Time Undergraduate Budgets (Enrollment-Weighted) by Sector, 2017-18
Sector Tuition and Fees Room and Board Books and Supplies Transportation and Other Expenses Total Expenses*
Public Two-Year In-District Commuter $3,570 $8,400 $1,420 $4,190 $17,580
Public Four-Year In-State On-Campus $9,970 $10,800 $1,250 $3,270 $25,290
Public Four-Year Out-of-State On-Campus $25,620 $10,800 $1,250 $3,270 $40,940
Private Nonprofit Four-Year On-Campus $34,740 $12,210 $1,220 $2,730 $50,900
NOTES: EXPENSE CATEGORIES ARE BASED ON INSTITUTIONAL BUDGETS FOR STUDENTS AS REPORTED IN THE COLLEGE BOARD’S ANNUAL SURVEY OF COLLEGES. FIGURES FOR TUITION AND FEES AND ROOM AND BOARD MIRROR THOSE REPORTED IN TABLE 1. OTHER EXPENSE CATEGORIES ARE THE AVERAGE AMOUNTS ALLOTTED IN DETERMINING THE TOTAL COST OF ATTENDANCE AND DO NOT NECESSARILY REFLECT ACTUAL STUDENT EXPENDITURES.
SOURCES: COLLEGE BOARD, ANNUAL SURVEY OF COLLEGES; NCES, IPEDS FALL 2015 ENROLLMENT DATA. THIS TABLE WAS PREPARED IN OCTOBER 2017.
To complicate matters further, the amount of goods and services $1 can purchase tends to decline over time. This is called inflation. 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.[1] With 4% inflation over 18 years, the purchasing power of $1 would decline by about 50%. If inflation were lower, say 3%, the purchasing power of $1 would decline by about 40%. If it were higher, say 5%, it would decline by around 60%.
While inflation has averaged about 4% annually over the past 50 years, stocks (as measured by the S&P 500 Index) have returned around 10% annually during the same period. Therefore, the “real” (inflation-adjusted) growth rate for stocks has been around 6% per annum. Looked at another way, $10,000 of purchasing power invested at this rate over the course of 18 years would result in over $28,000 of purchasing power later on. We can expect the real rate of return on stocks to grow the purchasing power of an investor’s savings over time. We can also expect that the longer the horizon, the greater the expected growth. By investing in stocks, and by starting to save many years before children are college age, parents can expect to afford more college expenses with fewer savings.
It is important to recognize, however, that investing in stocks also comes with investment risks. Like teenage students, investing can be unpredictable, full of surprises, and, if one is not careful, expensive. While sometimes easy to forget during periods of increased uncertainty in capital markets, volatility is a normal part of investing. Tuning out short-term noise is often difficult to do, but historically, investors who have maintained a disciplined approach over time have been rewarded for doing so.
RISK MANAGEMENT & DIVERSIFICATION: FRIENDS YOU SHOULD ALWAYS SIT WITH AT LUNCH
Higher education may come with a high and increasing price tag, so it makes sense to plan well in advance. There are many unknowns involved in education planning, and no “one-size-fits-all” approach can solve the problem. By having a disciplined approach toward saving and investing, however, parents can remove some of the uncertainty from the process. A trusted advisor can help parents craft a plan to address their family’s higher education goals.