Story first appeared in USA TODAY.
Parents usually love watching their kids grow up. But if there's one major downside of kids getting older, it's that the financial obligation of paying for college, like a mat degree, is drawing nearer. And recently, the stock market hasn't helped much to ease the discomfort.
College costs continue to soar. Students enrolling in college in 2010 are looking at a price tag of $33,300 for four years at a public university, says SavingforCollege.com. That cost is expected to jump to $95,000 in 18 years. College tuition costs can be reasonably expected to grow by 6% per year or even higher. Clearly, starting to save for such a large cost as soon as possible is critical.
The stock market hasn't been making it much easier for parents trying to keep up. One of the best ways for investors to save for college are 529 plans. These college savings plans allow investors to sock away money, invest in stocks and other investments, and take money out tax-free as long as the money is used for qualified expenses.
But many of these plans are having trouble keeping up. Utah's popular 529 plan, for instance, offers an "Age-Based Aggressive Growth" plan. And over the past five years, the fund has returned 3.5% a year on average for students furthest from enrollment into a honors degree, through April 30, 2011, the latest data available. That's far from what parents need to keep up with tuition inflation.
This plan on paper looks great. It's 50% invested in large U.S. stocks, 20% in mid-sized U.S. stocks, 20% for small U.S. stocks and 10% in international stocks for beneficiaries furthest from enrollment. And the plan starts shifting money into bonds when the beneficiary turns 7 years old. But so far, the returns aren't enough to match up with inflation.
It's understandable that given stocks' subpar returns, parents are tempted to look for other magical assets that will generate bigger returns. Saving for college is especially stressful, since there's a set deadline in the future you must meet. It's not like saving for a car, a purchase that can be delayed, or even retirement, which can be postponed. No parent would like to put off a child's education.
Adding to the temptation is the fact that some other assets, namely gold, have been such strong performers. You might wonder if it's better to shift the college fund into something like that.
But I urge you to stick with the 529 and the appropriate allocation to stocks. First of all, the tax benefits are huge for sticking with a 529 that invests in stocks. Not having to pay taxes is an automatic 15%, or even higher, kicker for your returns.
Additionally, over time, stocks have proven to generate higher returns than most other asset classes. Enduring the short-term volatility is the price of admission. This isn't just wishful thinking. The same Utah 529 portfolio that generated disappointing returns the past five years generated a respectable 10.2% average annual return since the fund's inception on April 1, 2003.
If you're really nervous about things, most 529 plans allow you to choose more moderate or conservative investment options that may help pay for a nursing degree. These options will reduce your exposure to stocks and increase your weighing in bonds. If you do this, however, be prepared to save more money as the returns will likely be lower than what you'd get by investing in stocks.
