The Cost of a US University Education
[dropcap background=”” color=”” circle=”0″]U[/dropcap]S University Education for Your Newborn Costs about US$2,000 per Year
The cost of a US public university education for a child born today will be about US$80,000. A parent could invest about US$2,000 the year their child was born and increase that contribution by 5% each year to make sure that child can go to university. They could do this by buying a broad market fund or ETF depending on what suits their situation and contributing money every year.
The cost of a US university education is US$40,000 and growing to US$80,000
The College Board in the US has recently announced its estimate of the cost of a four year college education at a public university, a whopping US$40,000. They also show that the cost of that education rose by about 4% per year over the last 30 years. If we use this 4% rate of increase that means that in 18 years that same college education would cost about US$80,000.
Average annual long term returns in the stock market have been 8-12%
Returns in the US stock market over the last 30 years have averaged 11%. Depending on the time period, over the last 100 years the US stock market return has ranged from 8-12%. When estimating future US stock market returns I use the lower end of that range to be conservative.
Your actual return could be much worse or better
The problem is that although 8% is a long term average, the actual yearly changes can be very different. If a person starts investing in years when the stock market is particularly high then their long term return would be much lower. In extreme cases the stock market could end up producing half of the long term return, or if you are lucky, double, depending on how high or low the stock market is when you start. Don’t let anyone convince you that this is something that you can know ahead of time.
To build an extra cushion aim for US$100,000 18 years from now
To deal with this unknown, I add an extra US$20,000 to the US$80,000 required so that the target amount we are aiming for is slightly higher than the original US$80,000. This way if the stock market were to be a disaster over that 18 year period your child would still end up with close to the US$80,000 needed.
Parents saving for a child’s university in the US can reduce taxes to zero, but few do
In the US parents can eliminate taxes by using a 529 Plan college investment plan. The money needs to be invested in an approved investment fund offered by an approved investment company. This could be mixed between stocks and bonds. A recent Sallie Mae survey shows that half of families with children under 18, who intend to go to university, are saving for college. About 30% of those that are saving say they are using 529 Plans. Based upon this survey, for the purposes of this analysis I will assume that the parent does not take advantage of this option. This would mean that the parent would pay taxes, which I assume would be 20%, paid on the gains at the end of the period.
Best if you can increase payments toward education each year
Further assumptions that need to be made is what is the average annual increase in contribution that a parent can afford, I assume that each year the parent can contribute 5% more than the prior year to their child’s education.
When your child is born start investing US$2,000 each year, increase that by 5% each year
Based upon all these assumptions, a parent who saved for each of the 18 years until their child’s university days would need to set aside US$1,950 in the first year, and then increase that contribution by 5% each year.
Start today! Follow this simple way to invest for your child’s university education
Investing can be complicated and that complexity usually causes people to take no action. This is a big mistake! Though things can get complicated with a 529 Plan or some mix of stocks and bonds, the more important thing is to start NOW. Take that US$2,000 and set it aside now. The easiest thing to do is to open up a bank account and put that US$2,000 into it (or even more simple divide US$2,000 by 12 and contribute US$167 per month). Then you can say you have started, anxiety gone. In the beginning, the habit of contributing is more important than where you put the money.
Once you are ready to start investing, consider funds or ETFs
As always, you must figure out what is right for your situation and companies like Vanguard, Charles Schwab, and Fidelity (I have no affiliation to any of these) can usually provide some great advice as you set up accounts to invest in their funds or exchange traded funds (ETFs).
A few investment options that may suit your needs
Below I highlight five different ways you could get broad US stock market exposure at a very low price. Two passive Index funds which give an investor broad US stock market coverage are: Vanguard Total Stock Market Index Fund (with a 0.17% fee) and Schwab Total Stock Market Index (with a 0.09% fee). In addition, these three ETFs could give a similar exposure: Vanguard Total Stock Market (Ticker code: VTI, fee of 0.05%), Schwab U.S. Broad Market (Ticker code: SCHB, fee of 0.04%), and iShares Core S&P Total U.S. Stock Market (Ticker code: ITOT, fee of 0.07%). Whether a fund or ETF is right for you depends on your situation. But remember, no matter which of these options you chose, getting started is probably more valuable than what you contribute
A US University Education for Your Newborn Costs about US$2,000 per Year
The price of a university education has definitely soared, but don’t let that hold you back from investing in your newborn’s education. Just US$2,000 starting this year can get you started on the right track.
References:
Price of a college education
http://trends.collegeboard.org/college-pricing/figures-tables/published-prices-national# (Published Charges over Time)
US economy overall Inflation rate
http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
Long term return in the US stock market
http://www.moneychimp.com/features/market_cagr.htm
Type and amount of savings for college
Funds and ETFs
https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT
https://personal.vanguard.com/us/funds/snapshot?FundId=0970&FundIntExt=INT
http://www.schwab.com/public/schwab/investing/investment_help/investment_research/mutual_fund_research/mutual_funds.html?path=%2FProspect%2FResearch%2Fmutualfunds%2Fsummary.asp%3Fsymbol%3DSWTSX
http://www.schwab.com/public/schwab/investing/investment_help/investment_research/stock_research/stocks.html?path=%2FProspect%2FResearch%2Fetfs/summary.asp?symbol=SCHB
https://www.ishares.com/us/products/239724/ishares-core-sp-total-us-stock-market-etf