Gil’s Musings

College Funds

When we meet new clients, we often ask questions like “What is important to you?” Educating children and grandchildren is often near the top of their list. Accordingly, we are quick to recommend college 529 plans as a tax free savings vehicle to address the future dollars required to educate those little rascals.

My answer to their next question is often the one that surprises them most. When they ask about how much to set aside, I typically answer, “Set aside today whatever it would take to send them to college today”. I get some perplexed looks about why I don’t think the money will grow. It’s not that it won’t grow, it’s simply unlikely to keep up with the rising costs of college.

College tuition in the state of Texas has risen 146% since 2003. Average college tuition-only costs were $3,361 in 2003, compared with $8,256 in 2015. In order to keep pace with that increase a college fund would have to have increased from $33,610 to $82,560. A 100% allocation to stocks since 2003 would barely have experienced that rate of return and that makes the assumption that the account was fully funded to start; most people contribute over time and they normally don’t invest that aggressively. Going to college in 2008-2009 would have been particularly painful; liquidating funds that were down by half while paying tuition that had nearly doubled. It is also worth noting that housing costs have risen similarly, as have books, lab fees, and other costs.

Colleges have two general categories of expenses: classroom and administrative. Administrative expenses have risen at roughly twice the rate of classroom expenses. So what has caused such dramatic increases in costs, while at the same time overall economic inflation has been alarmingly low? There are many possible explanations. Several notable possibilities are: 60% of incoming freshmen in Texas are from low income families who receive some tuition assistance, driving costs higher for others; the Hazlewood Act passed in 2009, giving free college tuition to veterans and their children (cost $169 million in 2014 alone); low interest loans also facilitate many more attendees, driving up demand. Furthermore, the last eight years in particular have seen more unemployment than any time since the Great Depression, and many of those unemployed often return to school to wait out the bleak job market. The additional demand these returning students create with no notable increase in supply always drives prices higher.

I’m not questioning the nobility of programs designed to help low income families and veterans. I’m simply saying there are market forces at work that are seemingly disconnected from other typical economic realities, while being connected to other realities that weren’t previously a consideration.

So I’m sticking with my first point; put away far more than you think you will ever need.

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