Last Updated: February 22, 2010
Inflation appears to be a fact of life when it comes to college tuition. According to a survey released by the College Board, 2009 tuition and fees at private, four-year colleges average $26,273, up 4.4 percent from 2008. Meanwhile, costs at public colleges and universities are up 6 percent for in-state and out-of-state residents.
There are many ways to finance college costs. As with saving for any goal, you'll need to determine the cost of college, how much time you have to save and what kind of realistic return you can earn on the money you save. Keep in mind, the cost is not just for tuition. Figure in room and board, transportation, books and supplies, and miscellaneous expenses.
FPA member Charles Snyder, CFP®, MBA, a wealth strategist at National City, which is now part of PNC, suggested the following: "Many times my clients will want to help provide for a family or family member's education. One of the first thoughts that come to mind is establishing a 529 plan. It is a valid idea, but I typically take the discussion one step further. I encourage my clients to invest the bond portion of their investment portfolios in prepaid tuition programs and not in bonds.
"Here's how it works: Let's say you want to contribute money for a child or grandchild's education and you determine the proper asset allocation for that child is 60 percent stocks and 40 percent bonds. Instead of contributing the entire contribution to a 529 plan and having it invested in a balanced portfolio (60 percent stocks/40 percent bonds), I suggest that you consider setting up two separate education vehicles: a 529 and a prepaid tuition plan.
"My logic is as follows: It is my expectation that the cost of tuition will increase at a faster rate in the coming years than will be earned in money market or bond funds. So in many cases, I believe it makes sense to invest the amount you were going to invest in bonds (in this example 40 percent) and allocate that portion to a prepaid tuition program. The remaining 60 percent will be contributed to a 529 plan and invested 100 percent in equities.
"What you have done is essentially created a partial hedge on the bond portion of the portfolio against future college tuition increases and protected what would have been the bond portion of the portfolio from future interest rate risk. If interest rates go up, the bond fund values will go down and many of my clients cannot afford to experience significant losses in the conservative portion of their children's investment portfolios. If I am incorrect about the future interest movements, then it will not be the end of the world because the amount they are saving for — cost of college education in the future — will not be as large as was originally planned."
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