My College Tuition Experience

The student loan debt crisis is getting worse, not better. The current debt level is $1.5 trillion, and since 2003 it has increased 522% while inflation has risen 42%.  A child born today can expect to pay $655,000 in tuition to attend a private college or $323,000 for a public school.[1]

My daughter recently graduated from a private college in Texas, and, thankfully, we did not use student loans. Shortly after she was born, I opened a Uniform Transfers to Minors Accounts (UTMA) and transferred shares of Philip Morris to seed her account.

When my wife and I started saving for her college, we didn’t have the financial resources to contribute significant amounts of money, so we did what we could with what we had. We added $25 here and there, and when we were able to add more, we did. Her great-grandfather purchased a bond for her account, and her grandparents helped with supplies and books while attending college.

We started investing in her account during the late ‘90s, before one of the worst decades on record for common stocks. During the tech-wreck from 2000 to 2003, stocks fell 47%, so I sold the bond and added more stock. The asset allocation in her account for most of her pre-college years was 100% stocks. We owned JP Morgan, Disney, Pepsi, Apple, Amazon, and Google, to name a few.

When the market fell, I used it as an opportunity to buy great companies at discounted prices. A few years later, during the Great Recession, when stocks fell 53%, I added more companies. I bought the dip at every opportunity. During the first ten years of her life, the S&P 500 had a negative return; however, the next ten were much better, and the S&P 500 returned 338% from when we first started investing for her college career.

After I opened her investment account, I created a spreadsheet to track various colleges from around the country. The original list included fifty different schools, some private, some public. I updated the list annually to get an idea of what it was going to cost me to send my daughter to college. The figures were overwhelming and alarming, but we continued to save and invest.

As she got older, I culled the list. During her junior year of high school, it was cut to five, before she settled on her final choice. In my research, I noticed the smaller the school, the more beautiful the landscaping, the more expensive the tuition. I attended the University of San Diego, and my friends and I joked there were more gardeners than professors on campus.

When she was ready to attend college, I sold enough stocks to cover tuition, room, and board for one year. As we paid her expenses, I would sell more stock to replenish her cash balance. Thankfully, through the power of compounding and a rising stock market, her account kept a steady level, despite the withdrawals.

As I mentioned, when we started saving for college, we weren’t in a great financial position, but we were determined to pay for her tuition. We knew most of the inputs needed to figure out how much to save. For example, when she was born, we knew we were going to need a pile of money when she turned 18, and my spreadsheet allowed us to track the cost of fifty different colleges. As a result, we knew when and how much she would need, so it was an easy calculation.

Here are a few suggestions to help you and your family save for college.

1. Take an inventory of your financial assets. How much money do you have in checking or savings accounts? Do you own any stocks, bonds, or mutual funds? Does your company offer an employee stock purchase plan (ESSP)? These are assets you can use to fund your child’s account.
2. Open a 529 education account. The 529 account allows your money to grow tax-free. If you use the money for tuition and other college expenses, the distributions are also tax-free. The funds in a 529 account are invested in various mutual funds.
3. If you want to purchase individual stocks or bonds, open a Uniform Transfer to Minor’s Account.  The money you deposit into this account is considered an irrevocable gift to your child, so if they decide not to go to college and buy a Corvette instead, there’s not much you can do to stop them.
4. Identify a few colleges and start tracking their expenses. Several websites will help you find the cost of most colleges, and some college websites will also have a tuition calculator.
5. After identifying the school and cost, start investing. Set up an automatic draft so you can invest monthly to take advantage of the long-term compounding of the stock market.
6. If the cost of attending a four-year university is too expensive, consider a community college. The tuition for a community college is about a third less than a public college.[2] After a year or two, you can transfer to a university.
7. Work with a Certified Financial Planner® to help you formulate a plan for paying for college.

Unfortunately, the rate of inflation for tuition is growing at more than 7% annually.[3] At 7%, the cost of college will double every ten years – a sobering thought, so you must own stocks to help you keep up with the sharp rise in the price of tuition.

Regardless of your financial situation, saving any amount toward college will allow you to borrow less.

An investment in knowledge pays the best interest. ~ Ben Franklin.

January 26, 2020

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.