Planning for the cost of higher education

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According to the Bureau of Labor Statistics, today's median bachelor's degree recipient receives about 67% more in weekly earnings than the typical high school graduate.Footnote 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 2018 data from the College Board, the projected average cost for your newborn's four-year degree at a public college could total over $260,000. You would have to sock away about $11,000 per year in a savings account, assuming it earns interest at an average rate of 3% per year, to equal that almost by his or her freshman year. And should your child decide to attend a private college, tack on about $339,000 more to your savings goal, bringing your savings account annual contribution to more than $24,000.Footnote 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
Projected costs of public and private colleges depending on the child's current age.

Assumes a 6% annual increase and current one-year cost of a four-year public ($21,370) and four-year private ($48,510) college.

Source: ChartSource®, DST Systems, Inc. Based on data published by the College Board for the 2018-2019 academic year. Chart is based on hypothetical growth rates; your results will vary. © DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. (CS000113)

A sound strategy

As with any large financial goal, it's good 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 discussing the following guidelines with your financial advisor 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. Stocks have historically provided the greatest long-term growth potential. 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.


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 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. Parents or others can contribute up to $2,000 annually (per child, and if certain income restrictions are met) to a Coverdell Education Savings Account (formerly called an Education IRA) where any earnings can accumulate tax free and withdrawals can be made federal (and possibly state) income tax free for qualified education expenses. An individual can make annual gifts of up to $15,000, 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 and tuition at an elementary or secondary public, private, or religious school, 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 can help you meet 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.

Footnote 1 Source: Bureau of Labor Statistics, Earnings and Employment Rates by Educational Attainment, 2018, based on 2017 data.

Footnote 2 Sources: DST Systems, Inc.; the College Board, 2018. Cost estimates are based on the 2018-2019 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.

Footnote 3 Source: DST Systems, Inc. Performance is for the period from January 1, 1998, to December 31, 2019. 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.

Footnote 3Ibid.

Please remember there is always the potential of losing money when you invest in securities.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Asset allocation or diversification does not ensure a profit or protect against loss in declining markets.

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 designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection against creditors that are available only for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.
  • Subject to the applicable limits, the gift-tax exclusion may apply to contributions to a Section 529 plan. Contributions between $15,000 and $75,000 ($30,000 and $150,000 for married couples filing jointly) made in one year can be prorated over a five-year period without subjecting you to gift tax or reducing your federal unified estate and gift tax credit. Note that the foregoing limits are reduced accordingly if you make other gifts to the given beneficiary during the five-year period. If you contribute less than the $75,000 ($150,000 for married couples filing jointly) maximum, additional contributions can be made without you being subject to federal gift tax, up to a prorated level of $15,000 ($30,000 for married couples filing jointly) per year. Gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $15,000 and $75,000 ($30,000 and $150,000 for married couples filing jointly) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in his or her estate for estate tax purposes. Please consult your tax and/or legal advisor for such guidance.
  • 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. Withdrawals from Coverdell ESAs must be used for "qualified higher education expenses or qualified elementary and secondary education expenses," as defined in Section 530 of the Internal Revenue Code, as amended. 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 (unless an exception applies), as well as any applicable state and local income taxes.
  • Effective January 1, 2018, you can take a distribution, without federal tax consequences, from a 529 plan of up to $10,000 per calendar year per beneficiary to help pay for tuition at an elementary or secondary public, private or religious school. State tax treatment may vary.
  • Additionally, as of December 22, 2018, Section 529 plan assets can be rolled over into an Achieving a Better Life (ABLE) account without federal tax consequences. Rollover amounts cannot exceed the ABLE account contribution limit.

© DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

This material is authored by DST Systems, Inc. and was not authored by Merrill. 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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Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.