With the rise of 529 plans and increased focus amongst parents on saving for college, financial advisors have increasingly included college expense planning as a part of the comprehensive financial planning process for clients. And while the mathematics of funding education are relatively straightforward (at least in contrast to more complex retirement planning projections), the reality is that most advisors rely on some very simplistic college expense inflation assumptions for planning purposes (e.g., CPI + 3.0%). Yet, the increasing availability of college expense data reveals that the pace of inflation for college expenses may be slowing – at least for some types of college degrees – and that it’s necessary to take a more nuanced approach to college inflation assumptions.
In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – explores the historical data on the rising cost of a college education, and particularly the ways in which college inflation rates have varied based on institution type, location, and even the family income of the student.
For instance, according to the data in the Trends in College Pricing 2016 report (published annually by the CollegeBoard), the reality is that for students looking at private institutions, the common CPI + 3.0% inflation rate typically assumed by financial advisors has actually not been the case for some time now. Instead, the inflation rate for private colleges has been trending substantially lower for more than two decades! Yet by contrast, for high-income families looking at public institutions, a CPI + 3.0% inflation assumption for the cost of college may actually be too low!
In addition to variations by institution type and family income, considerable variability exists by location. For instance, over the past 12 years, annual real college expense inflation at public institutions has ranged from a low of 0% in Ohio to a high of nearly 8%/year in D.C. and Hawaii. Additionally, location-specific trends are made more complex by the role that declining (or increasing) public funding has in increasing (or decreasing) the amount of aid that may be available to students to offset college expenses (which impacts the typical “discount” between the published cost of college and the actual net price that students typically pay).
Of course, just because we’ve seen trends in the past does not mean that those trends will be the same in the future, but particularly given the unique dynamics of college inflation rates for above-average-income families (who most typically work with financial advisors), and the risk that for some clients there may be several college inflation trends moving in the same direction that may substantial increase (or decrease) the savings that clients need to fund their educational goals, the annual CollegeBoard’s Trends in College Pricing report provides a tremendous amount of data that advisors can (and should) use to customize their college inflation assumptions!