Stock market is a big factor in the affordability of a college education
Timing is everything — especially, it seems, when it comes to paying for college.
The amount of money parents can save for their children’s higher education depends heavily on the performance of the stock market when the kids are growing up, a new study shows.
Tap your college savings after a good run in the market and you probably will be in good shape. But pull out the money after a bear market and you may have to hock the family heirlooms.
Imagine that a family began stowing away $1,000 a year when a child was born in 1979. By the time the student entered college 18 years later, the family would have saved enough to pay for 4.3 years at a public school or 1.8 years at a private institution, according Education Sector, a nonprofit think tank in Washington.
But a family who began saving the same amount each year in 1990 and pulled it out in 2008 could have covered only 0.7 years at a public school and 0.3 years at a private one.
That’s partly because of rising tuition costs. Average annual tuition and fees at public universities rose to $13,185 in 2008 from $9,679 in 1997, according to the College Board.
But the performance of the stock market was a much bigger factor, said Chad Aldeman, an Education Sector policy analyst.
The Standard & Poor’s 500 index rose an inflation-adjusted 236% from 1979 to 1997. It advanced only 14% from 1990 to 2008.
Even if tuition hadn’t increased, the savings put aside for the student born in 1990 would have covered only 1.4 years of college, Aldeman said.
The data underscore an emerging focus in the financial-planning world on the effect that trends investors can’t control have on major life developments such as retirement and college. The severe bear market that followed the global financial crisis, for example, demonstrated that you can do everything right –- plan wisely and save diligently –- and still be hurt by unfortunate timing.
“What these numbers show is that luck plays an incredible role in how much students can afford in higher education,” Aldeman said. “It’s almost more important when they’re born and when they go to college than how much money their parents put away for their savings.”
