Introduction

Parents who are considering saving for their children’s college education in the next decade may face a significant financial burden. Experts estimate that in 10 years, tuition fees in the U.S. could reach over $300,000, which is double the current cost due to inflation.

According to Laura Suter, head of personal finance at AJ Bell, saving early allows the money to grow and benefit from compound growth, generating returns on top of returns. Cash savings may not be effective over the long term due to inflation, requiring parents to save more each year to reach their desired savings goal.

The Cost Breakdown

Research by T. Rowe Price shows that U.S. college tuition has been inflating at an average rate of 12% per year from 2010 to 2022, significantly higher than consumer price index increases. Currently, the average fee for a four-year private college in the U.S., including room and board, is $54,670 per year.

Assuming a more modest 5% annual inflation rate, the estimated total cost of college could be as high as $383,823. The costs vary greatly between public and private colleges, with some schools costing over $165,000 for a four-year degree.

In Britain, tuition fees are capped at £9,250 ($11,250) per year, with annual increases in line with inflation. Assuming a 2% inflation rate per year, a three-year course would cost nearly £33,200 in 10 years.

Investment Strategies

For parents in the U.S., tax-incentivized college savings plans called 529 Plans offer advantages. Similar plans can be created for investors outside the U.S. by following a similar construct. As the time of college enrollment approaches, the portfolio’s investments should shift. Starting with a greater exposure to stocks can maximize growth potential, and gradually shifting to bonds reduces volatility as matriculation nears.

T. Rowe Price recommends four broad asset allocations for college savings plans: global stocks diversified across regions, market caps, and investment styles; stocks in real assets to hedge against inflation; bonds to balance volatility; and short-term Treasury Inflation-Protected Securities.

Recommended Allocations

T. Rowe Price suggests the following allocations based on time frames:

• More than 15 years till matriculation: 100% in stocks
• 10 years away from matriculation: 75% in stocks and 25% in bonds
• At the point of matriculation: 20% in stocks and 80% in bonds

Historically, stocks have provided the best growth option. Low-cost index funds or diversified holdings like Berkshire Hathaway are recommended. As the child nears college, converting part of the investment into a money market or selling covered calls against stocks can reduce risk.

Investment Options for the U.K.

In the U.K., parents can consider Individual Savings Accounts (ISAs) that offer tax protection. Other options include investing in emerging markets for potentially higher returns, such as the Fidelity Emerging Markets fund. Smaller companies also tend to deliver higher returns, with options like the Abrdn Global Smaller Companies or the Tellworth UK Smaller Companies fund. For passive investors, global index trackers like the Fidelity World Index offer a low-cost option with favorable returns.