Planning for College Tuition Hikes

PLANNING FOR COLLEGE TUITION HIKES

For most people, a child’s college education is the second most expensive purchase (after that of a home) they will ever make. Estimating a college education’s cost, and the required savings to pay for it, is difficult, but the following tables can help you make an educated guess.

According to The College Board’s Trends in College Pricing 2005, the average annual cost of tuition, fees, room, and board at a four-year public institution is $12,127 for the academic year 2005-2006. For a private institution, the cost is $29,026. Public colleges and universities experienced a 6.6% tuition increase from the prior year, 2004-2005, while private colleges and universities experienced a 5.7% tuition increase.

If the cost of a college education continues to increase 6% annually, and your child enters a private college in the 2010-2011 academic year, the estimated tuition will be $39,152. Based on the projections below, a four-year education would cost approximately $156,600. For young families, skyrocketing cost projections can lead to sticker shock, but there are strategies that can help you keep pace with tuition hikes. The College Board reports that almost 60% of undergraduate students receive grant aid, and the amount of grant aid from all sources averages about $4,500 per year for a full-time equivalent student. In addition, the federal government pitches in by offering tax breaks for 529 plans and Coverdell Education Savings Accounts (ESAs), as well as other tax credits and deductions.

How Much Do You Need to Save?

By starting a disciplined savings plan now, you are better positioned to meet your child’s future education needs. The following table shows the return of a variety of monthly savings contributions, earning 6% interest, for intervals of 5, 10, and 18 years—the average college age. This hypothetical example assumes a 25% federal tax rate and 3% inflation.

Many parents put off planning education funding because they sense the task is overwhelming, or they think saving the required amount of money will force them to severely compromise their current lifestyle. While these are legitimate concerns, they need not get in the way of establishing and maintaining an effective college funding plan. Whether considering a public or private college for your child, the key to effective planning is to begin saving as early, and as much, as possible.

Copyright © 2006 Liberty Publishing, Inc. All rights reserved.