By John Mitchell, Director of College Savings, Illinois State Treasurer
September 28, 2021
September is College Savings Month, during which a lot of effort is dedicated to helping parents understand the details behind 529 college savings plans – including detailed breakdowns of what 529 plans are, what tax benefits they offer, and how recent legislative changes have expanded the range of educational pathways 529 funds can be applied toward. While the details can certainly be helpful, College Savings Month might be an opportune time to address two foundational questions: Why save for college at all? And how?
It Pays to Complete, And to Save For, Postsecondary Education
Why save for college at all? Simply put, it pays to complete some form of training beyond high school — be it a graduate, four-year, two-year, vocational, or apprenticeship program.
As of July 2021, high school graduates without college credits earned a median wage of $793 per week. Workers who had completed some college earned a median wage of $915 per week, or about 15% more than high school graduates. Workers with a college degree earned a median wage of $1,314 per week — or about 65% more than high school grads.
Today’s young adults recognize the advantages and necessity of obtaining postsecondary education. According to the U.S. Department of Education, 70% of American students who finished high school in 2016 have since enrolled in a two- or four-year college.
Although it pays to gain postsecondary education, you must first pay for the education. Americans understand that higher education is expensive but most also understand that the published costs can be lowered by grant aid or scholarships from the government or the school itself. Unfortunately, though grants from the federal government, states, and educational institutions can help lower college costs, they are rarely sufficient to cover all expenses.
Nationally, for the 2020 – 21 academic year:
- The average full-time community college student received $3,990 in grant aid but the average cost for community college tuition, fees, books, and supplies totaled $5,230.
- The average full-time undergraduate at a public four-year school received $7,330 in grant aid but the total cost of tuition, fees, room, board, and books was $23,420.
- At four-year nonprofit private schools, the average student received $21,660 in grant aid but the full cost of attendance – room, board, books, and supplies – was $52,010.
No matter the type of school, the average student has thousands of dollars that must be covered by the student and the student’s family through some combination of savings, income, student loans, and tax credits. Of these options, saving can be one of the best.
How to Save For Postsecondary Education
How should families save for postsecondary education? Ideally, in a way that allows a family’s savings to keep up with the growing costs of college. From 1989 to 2016, the annual cost of postsecondary tuition increased by 3.5% per year. Fortunately, one thing has kept up with, or even outpaced, rising college tuition costs: investment growth. Not all investments are the same, of course, but since 2000, the S&P 500 index — a stock market index tracking the performance of the 500 largest companies listed on stock exchanges in the United States – has grown by an inflation-adjusted average of 5.14% per year. An annual growth rate of 5% helps family savings go further. If an investment earns an average return of 5%, a $1,000 investment when a child is born will grow to $2,400 by the time the child is 18 — consisting of the $1,000 initial investment and $1400 in compounded investment earnings.
Nobody can guarantee investments will grow. Some families may always prefer to save using a bank savings or checking account. However, in today’s banking environment, many savings accounts offer lackluster interest rates. According to the FDIC, the national average interest rate on savings accounts is 0.04%. At this interest rate, a $1000 investment made when a child is born will grow to $1,161 when the child is 18 — or less than half the potential balance when the money is invested in the stock market.
That’s why 529 college savings plans offer a great choice for all families — from the risk-taking to the risk-averse. Investing in the stock market isn’t for everyone. That’s why most 529 plans offer a range of investment choices — from conservative options like Money Market Funds and FDIC-insured savings accounts to more aggressive choices like S&P 500 Index funds. 529 plans also offer “set it and forget it” portfolios that automatically move money from more aggressive options when the child is younger to less volatile, conservative investments as the child nears the end of high school.
Beyond their diverse investment menus, 529 plans also offer families a series of additional benefits – including tax advantages, helpful tips on saving for college, and gifting platforms that make saving a whole-family and whole-community affair. These combined advantages are what make 529 plans a vital tool for families with kids bound for education beyond high school.
To find out more about 529 plans, including your home state’s 529 plan(s), visit https://www.collegesavings.org/529-planning-tools/.
About the Author:
John Mitchell is the Director of College Savings in the Illinois State Treasurer’s Office. In his role, John serves as the administrator of Illinois’ two 529 college savings plans: Bright Start Direct-Sold and Bright Directions Advisor-Guided 529 College Savings. An active member of the College Savings Plan Network, John serves as Co-Chair of the network’s Data, Operations, and Technology Committee.
 US Department of Education, National Center for Education Statistics, Digest of Education Statistics, “Recent high school completers and their enrollment in college,” available at https://nces.ed.gov/programs/digest/d20/tables/dt20_302.10.asp?current=yes
 College cost and aid figures are from the College Board, Trends in College Pricing and Student Aid 2020, available at https://research.collegeboard.org/pdf/trends-college-pricing-student-aid-2020.pdf