American families saving for college have a problem.
According to the College Board, tuition prices are rising again in 2016, and are expected to keep rising in 2017, at a growth rate of between 2.2 percent and 3.6 percent across all college and university sectors.
That is outpacing the U.S. rate of inflation, which stands at 1.6 percent, according to the U.S. Inflation Calculator.
“The continuing increase in average published tuition and fees at colleges and universities outpaces the growth in financial aid, family incomes, and the average prices of other goods and services,” the College Board stated.
“These increases, combined with stagnant incomes for many families, raise concerns about ensuring educational opportunities for low- and moderate-income students,” said Jennifer Ma, policy research scientist at the College Board.
That trend — with college costs outpacing the rate of financial aid – leaves U.S. families looking to address college costs in a tough spot.
A Way Out
One money manager wants to help them get back on their feet, and throw some haymakers of their own on the college planning front.
“I work with young families who are planning for their children’s college education, and it’s not easy to save,” said Stephanie Genkin, a certified financial planner in Brooklyn, N.Y., and founder of My Financial Planner, a fee-only state-registered investment advisor.
With the proverbial winds in clients’ faces, and not at their backs, financial advisors like Genkin need to build an accelerated plan of action to get on top of college costs.
A big part of the problem is helping clients break some bad savings habits.
“One of the biggest mistakes parents should avoid is going too conservative early on,” Genkins said. “A few years ago, I had a client with an 8-year-old son and because her husband was scarred from the 2007 financial crisis, they had all of their college savings in Treasury Inflation Protected Securities (TIPS).”
The problem was that there was no inflation and almost no growth in the portfolio, she added.
“The obsession with safe assets meant that they lost out on potential considerable gain while they were still nine years from the first year of college, a relatively long time horizon.”
A Year-To-Year Plan
With college costs rising yet again, and financial aid sliding, Genkin is prioritizing the issue with her clients. She advises her college-saving clients to make sure that they have the right mix of stocks and bonds for their investment period — in other words, not timed to market performance but when their child will be starting college.
On age basis, here’s what Genkins recommends:
Birth to 5 years old: “Up until age five, parents should invest college savings in an all stock portfolio,” Genkin said. “It’s better to be aggressive very early on because you have the longest period to recover from volatility. It also means you can afford to take less risk later on.”
Ages 6 to 14: Genkin recommends dialing back on riskier stocks and introducing bonds the year in which the child turns 6 years old. “Then shift to having 20 to 25 percent of the portfolio in bonds for next five years, and increasing the bond allocation again around ages 10 or 11 for a 50-50 portfolio,” she said.
Ages 15 and up: “By ages 15 and over, the weighting should be less in stocks and more in bonds and money market, preserving the growth that was attained in the early years in order to pay for the first year of college,” Genkin noted. “By the time the child starts college, it would be prudent to hold no more than 20 percent in stocks.”
The best collegiate portfolios, Genkin said, prioritize low-cost, diversified index funds, investing in a combination of stock and bond funds “with small allocation in international stocks.”
Key mistakes to avoid?
Avoid playing “catch up” by riding a rising market too close to college. Genkin advised.
“You don’t want to gamble with your college savings investments when your child is just a few years away from freshman year,” she said. “Better to save more aggressively than to invest too aggressively when you are close to making the first payment.”
Obviously, every money manager has his or her own collegiate savings plan. But given the dire need to stay ahead of continually rising college costs, following Genkin’s blueprint is worth strong consideration – especially since clients may be asking about it.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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