Many families are concerned about the rising cost of college tuition. With the increasing financial burden, it's crucial to start saving early and take advantage of the benefits of compounding interest.
The cost of college tuition has been steadily increasing over the years. According to Bankrate, In the 2022-2023 academic year, the average cost of tuition and fees for public four-year institutions was $10,940 for in-state students and $28,240 for out-of-state students. For private nonprofit four-year institutions, the average cost was even higher at $39,400. To put this into perspective, from BestColleges.com, the cost of college has more than tripled over the last 58 years, rising from $4,648 in 1963 to $14,307 in 2021.
The inflation rate for college tuition has also been significant. Between 1980 and 2020, the average price of tuition, fees, and room and board for an undergraduate degree increased by 169%, according to a recent report from the Georgetown University Center on Education and the Workforce. This means that the cost of college has been rising much faster than the overall rate of inflation.
One of the most effective strategies for managing the high cost of college is to start saving early. By beginning to save when your child is young, you can take advantage of the power of compounding interest. Compounding interest allows your savings to grow exponentially over time, as you earn interest on both your initial principal and the accumulated interest from previous periods.
For example, if you start saving $200 per month in a 529 plan when your child is born, you could potentially save around $70,000 by the time they turn 18, assuming a 6% annual investment return. However, if you wait until your child is eight years old to start saving, you would need to contribute an additional $225 each month to reach the same ending balance of $70,000. This is a hypothetical example and is not representative of any specific investment. Your results may vary.
As a financial advisor, I understand the importance of saving for college firsthand. I recently sent my own son off for his final year at the University of Connecticut. Seeing him thrive and pursue his dreams has been incredibly rewarding, and it reinforces the value of planning and saving early.
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Contributions to a 529 plan grow on a tax-deferred basis, and withdrawals are tax-free when used for qualified education expenses. This makes 529 plans an excellent tool for maximizing your college savings.
As we celebrate College Savings Month this September, it's a great time to start or review your college savings plan. The rising cost of college tuition makes it more important than ever to save early and often. By taking advantage of compounding interest and utilizing tools like 529 plans, you can help ensure that your child has the financial resources they need to pursue higher education.
Happy saving! 🎓
David Zavarelli, CFP®
*Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
