When going to college is so vital to a successful career, putting aside money for your children's education seems like a good idea. But if current trends in financial aid continue, you might start to wonder why you bothered.
College costs have climbed at a much faster pace than inflation, roughly doubling the increase in the consumer price index (CPI) over the past 10 years. Schools have had to respond by adjusting the way they give financial aid to students. Increasingly, major colleges with large endowments have started moving to models that eliminate family contributions for students from low- and middle-income families -- effectively giving students free tuition.
Giving it away
Part of what has made this trend possible is the meteoric rise in the size of endowment funds at top universities. According to figures from the international money management newspaper Pensions & Investments, 62 schools -- ranging from Harvard to Texas Christian University -- had endowments of $1 billion or more at the end of 2006. The top 10 endowments totaled more than $118 billion.
Superior investments have made these huge endowments possible. Yale chief investment officer David Swensen, for instance, has made more than 15% annually for 20 years. Yale's current holdings include positions in REITs Douglas Emmett (NYSE: DEI ) and Acadia Realty Trust (NYSE: AKR ) , along with energy exploration company Concho Resources (NYSE: CXO ) , which has doubled since its August IPO.
Stanford's endowment has benefited from lucrative tech investments. It received Google (Nasdaq: GOOG ) stock in exchange for technology used in Google's search engines. It continues to invest in venture capital firms, which led to early investments in successes like Sun Microsystems (Nasdaq: JAVA ) , Cisco Systems (Nasdaq: CSCO ) , and Yahoo! (Nasdaq: YHOO ) .
With all this money available, it's easy for parents to get cynical about saving for their kids' higher education. Because many financial aid systems reduce aid for families with savings, it's tempting to forgo saving for college entirely. If current trends continue, you may figure, your children should be able to get a free ride for college if the need is there.
However, there are a few problems with that logic. Most importantly, if you earn above-average amounts of income, schools will likely count on you to make a contribution whether or not you've set aside any savings. Not having money to cover that contribution could keep your children out of the school of their choice.
Also, although some schools are relatively well-off, not all have rich endowments. Even if a college's endowment is doing well now, there's no guarantee that it'll still be in good shape by the time your child goes off to school. Putting some of your own money aside for college is a good hedge against the fortunes of college endowments and also gives your child more flexibility in choosing the best school.
Everything in moderation
On the other hand, it doesn't pay to take college savings too far. Financial aid does take into account the fact that parents need to save for their own financial goals, including retirement and home ownership. Diverting every penny toward your children's education may indeed hurt you in the long run.
The right approach is to incorporate college savings as one component of your overall financial plan. While you may not be able to save enough to pay the whole cost of your children's education, what you do have will make it easier for your kids to do their best in school and establish a strong foundation for the rest of their lives.
For more on saving for college, learn about: