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Planning for the Cost of Higher Education
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College costs continue to rise, but through regular saving and investing for growth, you can help a child realize his or her goals.

According to the Bureau of Labor Statistics, a bachelor's degree recipient can expect to earn about 65% more than the typical high school graduate earns over the course of his or her career.1 Clearly, one of the best investments you can make for your children is an investment in their educational future.
You may think that setting up a bank savings account for your newborn's education will get him or her off to a great start. You might, however, want to think again. According to 2015 data from the College Board, the projected average cost for your newborn's four-year degree at a public college could total over $244,000. You would have to sock away nearly $11,000 per year in a savings account, assuming it earns interest at an average rate of 3% per year, to equal that amount by his or her freshman year. And should your child decide to attend a private college, tack on about $304,000 more to your savings goal, bringing your savings account annual contribution to more than $22,000.2
But don't despair yet. Even without time on your side — if your children are teenagers, for example — a sound investment strategy, coupled with knowledge of other college financing options, may put your children on the road to a valuable four-year college degree.
Projected College Costs
Planning for the cost of higher education
Assumes a 6% annual increase and current one-year cost of a four-year public ($19,548) and four-year private ($43,921) college.
Source: ChartSource®, DST Systems, Inc. Based on data published by the College Board for the 2015-2016 academic year. Chart is based on hypothetical growth rates; your results will vary. Copyright © , DST Systems, Inc. All rights reserved. Not responsible for any errors or omissions. (CS000113)

A Sound Strategy

As with any large financial goal, it's best to start investing early and often for college. First, set your goal: figure out how much you will need to save for each child based on his or her age (see accompanying chart). Then, develop an investment plan and stick with it. Consider the following guidelines when developing your plan.

Goal: Final Tuition Bill Due in 12 to 22 years

With time on your side, your portfolio can potentially withstand a bit of volatility in your quest for higher returns. You might want to consider investing the majority of your college savings assets in stocks, as these investments have historically provided the greatest long-term growth potential. For example, a one-dollar investment made in stocks that appreciated at the same rate as the Standard & Poor's Composite Index of 500 Stocks (an unmanaged index of common stocks generally considered representative of the U.S. stock market) at the beginning of 1998 would have grown to $2.94 by year-end 2015.3 Compare that with an equal amount invested in lower-risk, lower-returning money market investments over the same period of time; your investment would have amounted to only $1.50.3 Of course, past performance can't guarantee future results. You must remember the volatility involved in stock investing and consider your ability to wait out potential fluctuations in the value of your child's college investments.

Goal: Final Tuition Bill Due in 8 to 11 Years

In addition to keeping your portfolio aimed toward growth with stocks and stock mutual funds, you might want to add or increase a fixed-income element to balance risk. Also, now is probably a good time to teach your child about investing — by encouraging that a portion of the dollars earned through paper routes and babysitting be contributed to the college investment plan.

Goal: Final Tuition Bill Due in Less Than 8 Years

You may start allocating more of your portfolio to fixed-income and money market investments. If you have virtually nothing saved, you have a challenge ahead of you, but some cost-cutting in other areas of your life might allow you to make substantial monthly investments. The less you have saved, the more you may need to be aggressive in your investments in seeking higher returns, as long as you have the appropriate risk tolerance.

Considerations

Although many investments, including stocks and bonds, have traditionally outpaced savings accounts in terms of performance, past performance cannot guarantee future results. Bear in mind, too, that unlike savings accounts, investments are not insured by the Federal Deposit Insurance Corporation (FDIC); therefore, your investments' value may fluctuate a great deal over time and could even result in a loss. Also remember that any investment plan needs a fresh look every year or so to determine if adjustments need to be made. Generally, changes should be made as your time horizon narrows, the day nears when you will send your child off to college, and preservation of principal becomes a primary concern.

Other Financing Options

Beginning your investment plan by considering the time frame available to you is probably your best bet in seeking to meet college costs. In addition, consider these options:
  • Encourage savings gifts: When relatives ask what your children want for birthdays or holidays, encourage gifts that will help finance their education. Though it may not be a child's first choice now, they'll thank you later. Such gifts include Series EE Savings Bonds; shares of a mutual fund given through the Uniform Gifts/Transfers to Minors Acts (UGMA/UTMA); and zero-coupon bonds that mature in a given year around college enrollment. An individual can make annual gifts of up to $14,000, gift tax free, to a minor under UGMA/UTMA. And friends and family can pay any amount directly to a youngster's college for tuition and fees, with no gift tax consequences. Remember to brief yourself on the tax considerations of each of these gifts (and speak with your tax advisor) so you're not caught off guard by Uncle Sam.
  • Section 529 plans: These state-sponsored plans allow individuals to invest in a predetermined investment pool and offer some flexibility on when you can contribute. Withdrawals for qualified higher education expenses are federal income tax free. Withdrawals may also be free of state income taxes for residents of states that allow this benefit.
  • Apply for financial aid: Each year, there are millions available in financial aid from a variety of organizations and scholarship funds. Even if you think you're ineligible for financial aid, complete the applications and mail them in on time.
  • Don't rule out less expensive schools: Public universities and community colleges can be among the best options. Higher education is certainly one area where most expensive does not necessarily mean best.
  • Develop networks and ask questions: High school guidance counselors, religious and civic organizations, and the colleges your child applies to can all provide good leads for additional sources of scholarships, grants, and loans.
Together, time and a smart investing strategy comprise your best bet for meeting the rising costs of higher education. Combine that bet with a little creativity and a lot of information, and you can help provide your children with an investment that no one can take away: a college education.
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1 Source: Bureau of Labor Statistics, Earnings and Employment Rates by Educational Attainment, December 8, 2015, based on 2014 data.

2 Sources: DST Systems, Inc.; the College Board, 2015. Cost estimates are based on the 2015-2016 academic year and assume that costs increase by 6% annually. Figures include tuition, fees, and room and board. Keep in mind that unlike money market investments, which involve risk and possible loss of principal, bank savings accounts are FDIC-insured.

3 Source: DST Systems, Inc. Performance is for the period from January 1, 1998, to December 31, 2015. Standard & Poor's Composite Index of 500 Stocks is an unmanaged index generally considered representative of the U.S. stock market. Money market investments are represented by the returns of the Barclays 3-Month Treasury Bellwether index. Individuals cannot invest directly in any index. Results include reinvested dividends. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although most money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund. Past performance is not a guarantee of future results.

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This material is authored by DST Systems, Inc. and was not authored by Merrill Edge. Assumptions, opinions and estimates constitute judgment from DST Systems, Inc. as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.

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Before you invest in a Section 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider carefully before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 plan.

Section 529 plans are established by various states and are offered to residents of all states. Depending on the laws of the customer's home state, favorable tax treatment for investing in a Section 529 plan may be limited to investments made in a Section 529 plan offered by the customer's home state.

To be eligible for favorable tax treatment afforded to any earnings portion of withdrawals from Section 529 accounts, such withdrawals must be used for "qualified higher education expenses," as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax, as well as state and local income taxes.

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