September is National College Savings Month: So?

By proclamation (actually, House Concurrent Resolution 270, passed by the 108th Congress on October 15, 2003), Congress endorsed September as College Savings Month, "... in order to raise public awareness about the need to save for educational expenses". This was at the request of the National Association of State Treasurers and the College Savings Plan Network (the people that bring you the state-run 529 plans.).

So?

Are we unaware of the need to save for college? I didn't think so. Most people see saving for college as similar to going to the doctor for a yearly checkup, or cutting out fatty foods from your diet. You know you have to do it, but the impact of NOT doing it today won't be felt for a while, so you put it off. And maybe you get to it too late.

But the parallel I want to draw is with seat belts. The regular acceptance by the driving public of the simple and unconscious act of fastening your seat belt took time, but has paid huge dividends. The reduction in fatalities in due to many factors, including miles travelled, car design, road design, traffic regulations and enforcement, as well as seat belts. But a Harvard study indicated that the increase in seat belt use seen in the chart below repesents a 10% reduction in fatalities. This is much cheaper and easier than buying a safer car, or paying for safer highways.


Source: NHTSA

The mindset you have to have for saving for college is similar to seat belts - there may be resistance or relucatance at first, but once you get into the regular habit, it's automatic and painless. And the earlier you start, the more impact you can have (no pun intended). College savings needs to start early - no later than when the child starts kindergarten - to get into the habit of saving at least something. And when you use an automatic deduction to fund a 529 Plan, a brokerage account, or savings bonds, it quickly becomes painless.

An early start is important, as time will be your ally if you let it. For a student attending a public school full-time, the current average net price after grants (tuition, fees, room and board, transportation, etc) is $15,200 per year, according to the NPSAS. This is what must be covered by savings, income, scholarships, or loans.The same study shows an average inflation rate of 4.7% for net price after grants (again, full-time public schools) over the 1999-2007 time frame, much less than the often-quoted 8% tuition inflation rate (although state budget issues going forward may increase the net price after grants). The comparable numbers for private schools are a net price after grants of $25,500 with a 4.9% inflation rate.

For comparison, assuming the above inflation rates and an average return on your savings of 5.8% (based on actual returns of typical Vanguard portfolios in the Ohio 529 Plan), the chart below shows the results of various savings rates to satisfy the net price after grants for four years of attendance at a public school. Since 529 plan distributions are tax-free when used for qualified education expenses, all the proceeds are available to meet this need.

The results show that saving $400 per month for 15 years will almost fully meet the need, with greatly reduced results for either lower savings rates or shorter savings period. The gap in need would have to be met through other savings, current parent or student income, scholarships, or loans. Obviously, you may get a better return if you take more investment risk, but you may not be able to pay the bill if the student needs the funds during a market downturn. You would need to save about $700 per month to get the same results for a private school as $400 per month does for a public school.

So have you started yet? Or, should I say, have you fastened your seat belt?