Saving for your child's college education? Here’s how to invest for the next 10 years, according to the pros

Published Sun, Oct 22 20238:06 PM EDT

Parents thinking of saving for their children's college education in around a decade could be in for some sticker shock. In 10 years, tuition fees in the U.S. could soar to over $300,000, thanks to inflation — that's around twice the cost right now, according to estimates from experts CNBC Pro spoke to. "If you start when your child is born, or in the first few years of their life, the money will have a long time to grow and to benefit from compound growth, which effectively means getting returns on top of your returns," said Laura Suter, head of personal finance at AJ Bell. "If you're saving for 10 or even 18 years then putting the money in cash doesn't really make sense. Over the long term the money would struggle to keep pace with inflation and it means that you'd have to save more each year to get to the desired pot size in the future," she added. Here's the cost breakdown and how to invest, according to those experts. Breaking down the costs U.S. college tuition inflation averaged 12% annually from 2010 to 2022, according to T. Rowe Price, citing research by Education Data Initiative . That far exceeds the pace of consumer price index increases, said Wenting Shen, the firm's multi-asset solutions strategist for Asia-Pacific. Right now, the average fee for four-year private college is $54,670 per year in the U.S. — including room and board, said Shen, citing 2022 data from the College Board. Even assuming a more modest 5% annual inflation rate, the estimated total college cost could be as high as $383,823, she said. Alan Ebright, vice president and senior investment officer at Check Capital Management, said there are many variables due to the huge difference in costs between public and private colleges. He took the 10 campuses under the University of California system as an example, saying most of those schools cost upward of $165,000 for a four-year degree — not including room and board. "And that's now. Not 10 years from now," he said. That college tuition bill 10 years from now — taking the $165,000 as a baseline and assuming a 3% normalized inflation rate and tuition inflation of 6% — could hit $295,000, according to Ebright. The situation looks milder in Britain. Tuition fees are capped, with universities able to charge up to £9,250 ($11,250) annually — though they're set to rise with inflation each year, according to AJ Bell's Suter. Assuming a 2% inflation rate a year, a three-year course would cost nearly £33,200 in 10 years, she said. How to invest T. Rowe Price's Shen said parents in the U.S. can participate in tax-incentivized college savings plans called the 529 Plans, which come with certain advantages. Though similar plans aren't available in Asia, the "same construct" can be applied to create a similar plan for investors outside of the United States, she said. "So the portfolio's investments should shift as the time of college enrollment is approaching," Shen said. "When the matriculation year is further off, the portfolio could start with a greater exposure to stocks to help maximize growth potential and then shifts over time to bonds, with the goal of reducing volatility as the matriculation nears." T. Rowe Price, which has managed college savings plans for U.S. investors since 2001, recommends four broad asset allocations: Global stocks diversified across regions, market caps and investment styles. "It is important to maintain some exposure to growth assets as tuition inflation has traditionally been higher than the broader economy," Shen said. Owning stocks in real assets such as energy, metals and real estate to hedge against periods of rising inflation. Bonds to balance out any volatility. Short-term Treasury Inflation-Protected Securities. And this is how Shen would allocate — more specifically and with 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 option for growth, added Check Capital's Ebright. He recommended a low-cost index fund, or buying a stock like Berkshire Hathaway , which has diversified holdings. "Once the child is a couple years away from needing the money, convert part of it into a money market, or in the example of owning Berkshire Hathaway, you could sell covered calls against it," he said. For those in the U.K., AJ Bell's Suter recommended parents put their money in an Individual Savings Account , a type of individual savings account that is protected from taxes. Other options include investing in emerging markets — which could see higher returns over a longer time period — via a fund like the Fidelity Emerging Markets fund, Suter said. Over the past 10 years, it has outperformed its benchmark MSCI Emerging Markets index, she noted. Smaller companies are another segment that tends to deliver higher returns, and one global fund to consider is the Abrdn Global Smaller Companies, or the U.K.-focused Tellworth UK Smaller Companies fund, Suter said. Those who won't be able to actively manage their portfolios can opt for a global index tracker such as the Fidelity World Index, which has a low annual cost of 0.12%, she said. It has returned 193% over the past 10 years.