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How to plan for college tuition

Originally published on marketwatch.com http://www.marketwatch.com/story/how-to-plan-for-college-tuition-2014-12-12

One of the variables that makes long-term financial planning difficult is estimating inflation. This is true for planning for retirement or a child or grandchild’s college education.

Inflation, as measured by the consumer-price index has been relatively tame in recent years. However, when planning ahead for specific expenditures you have to be careful to look at the price history of the costs you’re preparing for and not just use the CPI rate. Two good examples are college tuition and medical care. According to the BLS, from 1978 to 2011 the CPI has increased by 3.8% a year. Over the same time frame, medical care has increased by a 5.8% annual rate and college tuition costs have increased at a 7.5% rate.

Whether you’re a parent, a grandparent or young person planning for college, there are some steps you can take to keep college costs as efficient as possible. One strategy for parents and grandparents is to use a 529 college savings plan. Earnings from 529 plans aren’t subject to federal tax and typically not subject to state tax. By establishing the plan early in a child’s life you can take advantage of the time value of money with compounding.

Young people have to be very careful about taking on too much student loan debt. According to the New York Federal Reserve Bank, over $1.118 trillion in student loan debt was outstanding as of June 30, this year. Young people who graduate with a high level of debt and enter a field that is not on the high end of the pay scale may have a difficult time making ends meet as they first enter the workforce.

Young people need to consider their career choice carefully when deciding how much debt they can take on. According to Forbes magazine, an average social sciences major will start at an annual salary of about $37,000 a year, while an engineering graduate will start out at almost $62,000 a year. That salary difference of about $25,000 will make a big difference in the debt payment you can make.

Choose your college carefully, too. There is a substantial difference between in state and out-of-state tuition rates. There is also a high correlation between schools with low-in state tuition and low four-year graduation rates. The reason for that is because those schools can get overcrowded and it can be difficult to get the requisite classes to graduate in four years.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.


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