In paying for college, better to be lucky than smart


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Timing is everything -- especially, it seems, when it comes to paying for college.

A new study shows that the amount of money parents can save for a child’s college education depends heavily on the performance of the stock market during a child’s life.

Tap your college savings after a good run in the market and you’re likely to 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 due partly to rising tuition costs. Average tuition and related fees at public schools 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 had remained the same in the two time periods, the savings of the student entering a public college in 2008 would have covered only 1.4 years, Aldeman said.


The data underscore an emerging focus in the financial-planning world on the effect of sheer luck on major life developments such as retirement and college. The severe bear market that followed the global financial crisis showed that people can do everything right –- plan wisely and save diligently –- and yet 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.”

-- Walter Hamilton