Market Beat: Get started early on college savings plans
For parents with young children, college costs can be difficult to plan ahead for. One reason is that college tuition has risen quite a bit faster than the overall rate of inflation.
According to the BLS, Bureau of Labor Statistics, from 1978 to 2011 the CPI, Consumer Price Index, rose at a rate of 3.8 percent per year, while college tuition costs have risen at a 7.45 percent annual rate.
Let’s look at the costs of attending a nearby instate school, Cal State Sacramento, for example. Instate tuition currently costs $6,602, and you have to add another $4,435 for room, board, books and fees, giving you a grand total of $11,037.
The four-year graduation rate for Cal State Sacramento is only 11 percent, which means that most people should plan on attending for five years to graduate. So, five years at Cal State will cost $55,185 without factoring in inflation.
If you have a child born this year, and use that 7.45 percent inflation rate, in 18 years, that $55,185 will be over $200,000. Hopefully, college tuition costs will stabilize in the coming years.
One vehicle available for parents and grandparents who want to start saving early is the 529 college savings plan. With a 529 plan, your savings grow free from federal tax, and in most cases, state tax as well.
A 529 plan gives the investor the opportunity to choose from a variety of investment vehicles including stock and bond mutual funds. Most people will start with a stock fund when the child is young and switch to more conservative investments as the child reaches college age.
By starting a plan early, you can take advantage of the time value of money and have it compound in a tax favorable environment.
Students who graduate with high-debt loads can have a difficult time getting by when they enter the workforce.
By planning ahead and starting early, you can help your kids graduate with the lowest debt load possible.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.