About 16 years ago I sat down and predicted the growth of my son's college savings account. I was planning to put away $2,000 each year into an Educational Savings Account (ESA). Using an investment calculator, and using an estimate of a 12% return (about the average return for the stock markets), I predicted I'd have about $140,000 by the time my son was ready to go to college. With in-state tuition at about $12,000 per year, plus money for food and housing, I was figuring a cost of about $30,000 per year, so the ESA would at least get him through undergraduate school. He could then do research/teaching/etc. to help fund grad school if he went, and hopefully get out debt-free or fairly close. That was the plan.
Unfortunately, then came the 2001-2003 stock market, where returns were low or negative. Things finally picked up after the 2003 tax cuts (yes, tax cuts do spur the economy, despite what some Liberal pundits will tell you), but then stocks fell during the 2008 housing market crash. Since that point things grew at a modest pace, until Trump was elected, from which point on things have been on fire. Despite the fairly good markets from 2009 - 2016, and the great market over the last 10 months, my annualized rate-of-return has been around 3.5% instead of 12%.
How should I invest for the next couple of years, if at all?So, sitting here with about two years until the first tuition bills come in, my son's account has a little over $52,000 in it today, instead of the $108,000 I predicted. This is enough to pay for about two years'-worth of college expenses, but not four. Alternatively, it is enough to pay for tuition, but not for room-and-board. This has left me with a big dilemma:
With less than two years remaining, if I really need the money in two years, I should really put it all into bank CDs. I cannot predict what the markets will do over such a short period of time, and they have about a 1/3 chance of being lower in two years than they are today, There is a small chance, maybe one in ten, that they will be 25% lower or more, meaning I may only have around $39,000. Then again, if we do see some great returns over the next couple of years, for example if Trump is able to pass big tax cuts and spur the economy, I could get 20% returns and have almost $75,000 when the first tuition bill arrives. Note that my original predictions assumed I stayed fully invested in stocks the whole time, which was probably a bad assumption due to the risk of doing so during the last couple of years.
Is it possible for a middle-class family to really save up and pay for college?Another question this raises, however, is
Granted, perhaps we should have been putting $4,000 or $5,000 away each year, with $2,000 in an ESA and then the rest in taxable accounts or a 529 plan after we maxed out the ESA. But I don't see how most families who don't make $150,000 per year could afford that. I mean, we have been very disciplined compared to many people our age. Despite having an income far less than $150,000 per year, we paid off our home about six or seven years ago, leaving a lot of free cash flow available that many families who keep a constant mortgage don't have. Frankly, I don't know how families who keep a mortgage are able to pay for the things they buy. (Maybe they don't, since the median amount of debt families who have a credit card balance is $17,000, according to Nerdwallet.) Paying for everything and not using credit, including the things that come up like medical bills and auto repairs, I'm really glad we don't have that $1,000 or $1500 mortgage payment each month.
I do think that many families should be able to get their children through college debt-free or close to it, but saving up everything ahead of time may not be possible. Once our son gets into college, we could direct some of our regular income towards his room-and-board. He is also likely to get scholarships that will cover most or all of his tuition. If he also gets a part-time job and makes $500 per month, that would cover about half of his room and board. Still, it does make you wonder why college prices are so high that many people need to get loans to get through.
Luckily in our case (and good planning and hard work create luck), we have some resources beyond the ESA to help pay for college. Because of this, I will probably keep the ESA fully invested in stocks, hoping that we'll see a couple of good years to boost the account balance. If we see a drop in the next couple of years, we can cover costs with other funds for the first year or two while we wait for the ESA to recover a bit. Really we don't need to assume we'll need to tap the account right away.
So what do you think? Is it possible for families making $80,000 per year to save up for college? Are tuition costs worth the value of the product they provide? Is it worth it to run up loans to pay for college?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
