9/2025

By Special Contributer, David Cicero, Ph.D.

Here’s a sobering statistic for you: college tuition has increased 1,200% since 1980! Inflation over that same time-period has been just under 400%, so attending college comes at a great premium these days. According to the Education Data Initiative, it currently costs an average of $27,000 to finance a year of education at an in-state University. Assuming the cost of college continues to increase at a rate of 4% annually leads to an expected cost for one year at an in-state public school 18 years from now of $55,000.

As a result of the rapid increase in the cost of education, the average new college graduate carries over $37,000 in debt. Worse yet, many individuals who could benefit from college simply do not enroll due to the high sticker price or end up missing out on schools that would have served them best. The evidence that a college education is worth the cost continues to be compelling. In 2023, college grads earn a 62% premium over high school graduates, which is up substantially from the 40% premium earned by college grads in 1990. There are good reasons to think that this premium will persist moving forward into the Age of AI as many high paying jobs will continue to require sophisticated workers.

Given the returns to higher education, it is essential that families plan wisely for their children’s college expenses. The best way to give young people a leg up when they hit the work force is to help them enter their professional lives with little to no debt that could hold them back financially and cause them to make sub-optimal career decisions.

The good news is that U.S. policymakers have provided an excellent means of saving for the rising cost of a college education – the tax-advantaged 529 education savings plans. Families can fund 529 plans with significant after-tax dollars each year ($19,000 per person/per year, $38,000 if a mom and dad each fund), and the earnings grow tax-free until they are withdrawn for qualified education-related expenses. You can even “super-fund” a plan by contributing up to $95,000/$190,000 all at once, but the excess above the annual gift limit would not be considered outside of the estate. The tax benefits are similar to those available under Roth IRA accounts, but there are no income limits for making contributions and the funds can be withdrawn without penalty at any age if they are used for qualified education expenses (which include many expenses beyond tuition as well as $10,000 of cost associated with K-12 or vocational education). The attractiveness of these plans was enhanced further in 2022 with new laws that allow up to $35,000 to be rolled into tax-free Roth IRAs for any beneficiaries that do not end up needing the funds for educational purposes.

Due to the power of compounding returns, we recommend prioritizing funding 529 plans when their children are young and consistently adding to these accounts over time. Here is a simple example. Assuming you can earn 6.5% annually on 529 plan balances, you can accumulate $100,000 for your child’s college education expenses at age 18 by contributing about $245/month from the time they are born. Wait until they turn 10 to start saving, and it will cost you $800/month to accumulate the same amount. If you start at the child’s birth, that $100,000 of college funds will cost you a total of $53,000 compared to $77,000 if you wait until age 10. Although $100,000 is unlikely to cover the full cost of college education in the future, having this amount set aside can make the full financial burden far more manageable. If you don’t like the idea of filling the funding gap down the road, doubling the numbers above can lead to $200,000 for college expenses. There is simply no better way to save for your child’s future education. To top it off, most states provide some level of tax deduction for contributions made.

But new research by economists at the University of Chicago shows that we are often not that wise, even when the calculus is clear. By analyzing over 900,000 529 accounts, Briscece, list, and Liu, show that many families fail to reap the benefits of this amazing vehicle for education savings. The reasons are mostly behavioral. For example, 61% of families that could afford to save enough in 529 plans to cover half of their children’s college costs fail to do so simply because they have the mistaken belief that their savings would be meaningless. They just do not understand the magnitude of the benefits that consistently stashing manageable sums into tax-advantaged accounts can have on their children’s (and their own) future. Not surprisingly, parents that score poorly on financial literacy tests are most likely to miss out on this opportunity. Although 79% of 529 account holders score high for financial literacy, only 32% of non-participating parents score similarly. The result is that due mostly to a lack of financial wisdom, many families miss out on one of the best opportunities available to help their children secure a bright future.

A competent financial advisor can help you navigate these issues and make sound financial decisions. It is easy to put vague questions about the potential cost of your children’s distant education on the backburner as you deal with more concrete financial issues in the present. But waiting is costly because you miss out on the magic of compounding returns in tax-favored 529 accounts. By starting early and saving with discipline, you will find that the overall cost of a high-quality education can be manageable. By minimizing the financial stress that can accompany dropping your kids off at college – which, believe me, comes faster than you think! – consistently putting even small sums into 529 plans will contribute to your family’s future joy and financial well-being.

Source:

Briscese, G., List, J., and Liu, S., 2025, Navigating the College Affordability Crisis: Insights from College Savings Accounts, National Bureau of Economic Research working paper 34126 (https://www.nber.org/papers/w3412).

David Cicero, Ph.D. is a Bray Distinguised Professor of Finance at Auburn University, https://harbert.auburn.edu/directory/david-cicero.html

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