The cost of attending college is becoming more expensive. Because of inflation, the cost of most goods and services normally increases over time, but college education costs have historically increased more rapidly than most other goods and services. Saving for future college expenses has become an essential part of the financial planning process for many families. Education planning requires a projection of future college costs and a savings plan that will prepare families for those future costs.
To help project future costs of goods and services, we evaluate historical inflation rates. The U.S. Consumer Price Index (CPI) is commonly used as a measure of inflation in the United States. CPI measures the change in average price of a defined basket of goods and services purchased by U.S. consumers. Based on the CPI, the average annual inflation rate over the past 20 years (1990 through 2009) was 2.8%. The average inflation rate during the 1990s was 3.0% per year and during the 2000s was 2.6% per year.
We also need an inflation measure specific to college expenses. A not-for-profit organization named College Board conducts an annual survey of colleges around the country and compiles data lists regarding the average cost of college. One of the College Board lists shows the historical average cost of tuition, fees, room and board at public and private four-year universities. Based on the College Board data, the average annual increase in college cost over the past 20 years (school years 1990-1991 through 2009-2010) was 6.0% at public institutions and 5.4% at private institutions.
As you can see from the data, the cost of college has been rising at about double the rate of inflation. What does this mean for families? Assume a family with a newborn child earns $100,000 annual income. 18 years from now, they want to send their child to a college that currently costs $15,000 per year, or 15% of their income. Assume their income inflates by 3% annually, and the college cost inflates by 6% annually. After 18 years, their income inflates to about $170,000 per year and the college cost inflates to about $43,000 per year. The family planned on sending their child to a college that costs 15% of their income, but after 18 years, the college now costs 25% of their income, which may be more than their budget can handle.
How can families prepare for future college expenses? Paying for all college expenses as they are incurred is too stressful on most families budgets, so a better alternative is to save for college expenses in the years before those expenses are expected to be incurred. Education planning can help families establish a savings strategy that achieves their goals for college education funding. As the cost of attending college increases, so does the significance of the education planning process. We cannot control the rising cost of college, but we can control how we plan and prepare for it.
Sources: Bureau of Labor Statistics, College Board