It’s a very simple question with an answer that’s not a simple as you may think it is.

The end of every month, I contribute to my son’s 529 college savings plan. It took some self education on how the plan worked which is fairly simple.

• You name your child or anyone else you like, beneficiary and contribute after tax money into the fund.
• It then is allowed to grow tax free and be used when it’s time to pay for college without paying state or federal taxes as long as the funds are used for eligible education expenses. This can be for college, a trade school or even a private high school.
• It is not limited to in state schools as many people believe but rather, it is limited to schools which can receive student financial aid as deemed by the US Department of Education.
• There are even a number of foreign schools that are eligible. The list of schools can be found here.
• If the funds are not used for post secondary education, then you must pay federal taxes on the gains as well as a 10% penalty. This penalty is waived however, if the beneficiary gets a full scholarship.
• If for some reason, the beneficiary chooses not to pursue post secondary education, you can always change the beneficiary, even to yourself.

This last point is what made the plan attractive to me and worth investing in. Should my child choose not to go to college, I could use the funds to provide an education for someone else or even spend it on myself to go back to school purely for my entertainment and self betterment, maybe in art history or something.

The Cost and if it’s Worth it

It’s no secret that college is more expensive than it used to be. This isn’t just inflation, it’s more expensive in real terms as well. Just take a look at the real cost of both private and public tuition over the years.

Source: collegeboard.org

The above is just for tuition, throw in room and board and it tacks on another $13-14k per year.

Source: thecollegeboard.org

I also found a chart that goes back 60 years from 2008 and shows the long term movement in the real price of college. Source: nasfaa.org

It shows that the real cost has not been a smooth upward trend. Given the time period when the cost dropped in the 60’s and 70’s there may have been factors such as the poor economy and the Vietnam war that contributed to costs being flat or stagnating but that is just speculation for now.

The clear trend since the early 80’s however, has been for increasing tuition and costs. This has coincided with a strategic shift in the US economy from a manufacturing focused industrial economy, to a service oriented consumer economy. Given this shift, it’s no wonder that college degrees became more popular and maintained their value. Critical thinking, analysis, reading, and writing took precedent over physical labor as the economy changed. The easiest way to signal that one had these types of skills skills to employers was to have a college degree. In fact, despite all the headlines and emotion of students that owe huge amounts of debt, the return to a college degree has held up over the years.

Source: insidehighered.com

The wage gap to those without a college education remains substantial and a person with a bachelor’s degree can still plan to make on average over $1 million dollars more in lifetime earnings compared to someone who doesn’t go.

So How Much to Save?

So even though it’s still worth it, the challenge besides saving is to determine how much to save. Many assume that the cost of college will continue to increase as it has in the recent past, or about 4-5% a year. If that does happen, college in 18 years could look something like the below.

Source: cnbc

These are annual figures which means a four year degree from a private university could cost as much as $500,000 and that was based on 2015 projections.

This is usually the very top of most estimates. Most people don’t seem to think it will accelerate and many don’t think the growth rate of the cost will slow down mainly due to 2 factors.

The first is that the proportion of young people going to college and finishing college is as high as ever.

Source: census.gov

In 78 years the proportion of the population with a bachelors degree multiplied by 7.8 times. This is just as a proportion however, and during that time the US population grew, so the overall enrollment in college grew tremendously.

Source: census.gov

76.9 million people over 25 had attained a bachelor’s degree or higher in 2018 compared to 3.4 million in 1940. In other words, the amount of people with bachelor’s degree or higher has increased by over a factor of 22 times in the past 78 years. This is a massive growth in demand that the education system has had to handle. The most selective schools have had to become even more selective and new schools had to be opened to accommodate the millions of students flooding into higher education.

It’s no wonder that the cost of college has gone up over the years. In addition, subsidies and aid to students has increased substantially which is contributing to the rising cost.

Source: thirdway.org

If you watch the Democratic Presidential debates or the conventional news media, you may be tempted to think that the debt on students is so crushing and the costs so high that we may be near a breaking point. Based on the above data and the direction of the world economy, I don’t see anything stopping the cost of tuition to keep rising unless the schools stop raising their tuition fees out of the kindness of their hearts.

For this reason, I think I will have to assume that growth rates of tuition will continue to hover around 4-5% for the coming years for both public and private schools.

There is an argument to be made that there is some pushback though, if you take a closer look at the chart I shared previously of room and board for the past 10 years, you will see that the annual growth rate has slowed a bit to around 2.3% on an annual basis.

Source: thecollegeboard.org

What You Need to Save Assuming the High End

Let’s put that to the side for a moment and look at the “high growth rate” case of 5% growth annually. If you are starting from 0 and putting your money into a 529 plan, you are going to need some growth to help you reach that goal. I have mine in an “aggressive” savings fund which has about 80% of the principal invested in the stock market. Over time, even with market crashes, I am hoping I can achieve a 7-8% return to be able to reach the savings goal of paying 100% of the tuition for my son.

If we assume the worst case scenario, that I would need to fully pay for room and board at a private school, the current cost is about $50,000 a year. If that rate grows at 5% annually for 18 years, the cost will be about $120,000 per year in 18 years, and you would need about $500,000 to fully cover the cost of college.

A look at what one may need to save monthly to meet such a goal, assuming a 7% rate of growth is below.

As seen above, if we are investing monthly, we will need about $1200 each month to get to the goal of paying for 100% of a 4 year private education with no financial assistance.

Some private colleges already cost more than this. A quick look at Columbia estimated that before scholarships or grants, the all in annual cost for a year at Columbia could be as much as $75,000. Assuming numbers like this, college could cost as much as $700,000 by the time a newborn gets to college 18 years from now.

What You Need to Save Assuming the Low End

In the opposite scenario, if you are again starting from 0 and assuming your child will attend a private school but this time you assume that costs grow around 2.5% or half the rate we previously looked at, then the saving is still challenging but not as much as in the high growth case.

In this case of 2.5% growth, private college with room and board will cost about $78,000 annually in 18 years. That would mean you need about $312,000 in total for four years of college.

Assuming again a 7% growth rate in your savings through an aggressive portfolio. Your monthly savings would look like the below.

Overall

To give you a simplified overview of all 4 different payment options, (public, private, high and low growth) I made the below table to summarize the findings.

Source: author’s calculations

Conclusion

Although a degree is still worth it now, if prices start to touch close to the extra income one may earn over their lifetime I think there will be some pushback in terms of cost unless wages are rising with tuition, which doesn’t seem to be the case.

Source: Bloomberg

The chart above is in constant 2018 dollars and shows that median wages for recent college grads have been about flat. Even looking at overall median pay for college grads, although it is growing, it’s not growing nearly at the rate of college tuition.

That being said, only a small minority of people go to an Ivy League school like Columbia. For the rest of us who want to help out their kids, you’d better get to saving aggressively because it doesn’t look like the increases will abate any time soon, no matter what the TV says.

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