Over the past 5 years, the total cost of college tuition and fees at a public and private four-year university has increased an average of 2.72% per year. At this rate, by the time children born today attend college, they will have to deal with tuition costs that are over 1.6 times current prices.
Costs Above and Beyond Tuition
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The ‘Cost of Attendance’
While tuition is usually the largest single component of the cost of higher education, there are others that should be considered when saving for a child's college education. Among these are:
- Room and Board - housing and food costs.
- Fees - costs associated with student activities, clubs, special events, etc.
- Supplies - books, computers and other materials needed to complete coursework
- Transportation
Collectively, the sum of these items in addition to tuition are referred to as the ‘cost of attendance’. The University of San Diego, University of California at San Diego, and San Diego State University all provide estimates of the cost of attendance on their websites. It should be noted that in all three instances, the University-provided estimates of the cost of ‘food and housing’ imply housing costs which are 30 to 35% below the current market average ($2,300/mo.) in San Diego for a one-bedroom apartment.
Planning + Saving > Saving Alone
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Planning for the Expense
Utilizing the tax-advantaged benefits of a 529 College Savings account, the amount of money which must be saved on an annual basis to fully fund the estimated cost of attendance by the time of first-year enrollment depends upon the age of your child and the allocation of the account.
As the owner of the 529 account (your child is the beneficiary) you can choose from various ‘model’ portfolios. Some funds specify a ‘target date’ around which the allocation will incrementally reconfigure to less aggressive risk exposure as the child nears age 18. Alternatively, you can choose preconfigured allocation based upon the percentage of the portfolio which holds stocks vs. bonds (e.g. a ‘60/40’ portfolio has 60% stocks, 40% bonds) and change the allocation as your child ages or simply leave it static. These allocations are usually titled with descriptors like ‘income’, ‘conservative growth’, and ‘aggressive growth’ etc. Return expectations are predicated upon the amount of stocks in the portfolio. Portfolio descriptors may not be consistent across providers thus it is important to verify that the holdings conform to your expectations.
The most important variable in determining the annual funding requirement is not the allocation itself but the age at which funding commences. If funding does not start until the child is a teenager or older, a more aggressive portfolio allocation will not meaningfully alter the annual funding requirement. The following charts illustrate the annual funding required depending on the starting age of funding and the expected rate of return (RoR’) of the allocation.
The benefit of an early funding commencement age is evidenced by the fact that the annual funding required is virtually the same irrespective of allocation if funding does not commence until age 15. By contrast, the difference in annual funding required for an account incepted at birth is materially larger for an investor in the ‘conservative growth’ portfolio than the investor in the ‘aggressive growth’ portfolio. The most efficient strategy is one in which funding begins early and allocations remain aggressive, particularly for the first 10-15 years of the child’s life depending on the specifics of your circumstances. Note that the annual funding amounts account for an expectation that the cost of attendance grows annually at 2.5%.
