How Inflation Affects Your College Savings

Providing for my kids is the most important thing I do with my money. With inflation on the rise, I’m working to balance our budget without sacrificing the things that bring my family joy. But while it’s easy to throw a summer birthday party on a budget (water balloons, anyone?), facing down rising college costs is a more daunting prospect. 

Whether your kids are small or already in college, here’s what you need to know about how inflation impacts college savings — and what actions you can take to protect your money.

(Curious how inflation impacts other areas of your financial life? Here’s how to think about your emergency fund and inflation and how inflation impacts your life insurance policy.)

How Inflation Affects College Tuition

Rapidly increasing college tuition has been going on for much longer than the current inflation spike. From the 1999-2000 school year to 2019-2020, average four-year tuition costs went up 136.5 percent, or an average annual increase of 6.8 percent. College tuition has been outpacing inflation for decades, at least at some schools.

In a sense, if tuition increases 6.8 percent and inflation is around 8 percent, you could argue that college tuition costs are decreasing relative to broader economic trends. Some colleges and universities set a tuition freeze in response to the pandemic and plan to keep tuition costs flat for the 2022-2023 academic year. Other institutions may decide to raise tuition to cover their rising costs.

If your student is already enrolled in college, make sure they understand the power of their voice.

“In many cases, university students are strong advocates for keeping tuition flat,” says Jennifer Finetti, Director of Advocacy and Outreach at Scholarship Owl. “Sometimes students become so active and vocal that they are able to influence the administration.”

If you’re choosing a college for your child soon, it’s worth asking campus officials about their tuition decisions. If college is still years away and you’re trying to get a handle on what your savings goals should be, don’t let inflation fears scare you away. Remember most students get financial aid, and you may not know what inflation or tuition will look like when your child is ready for college. Keep saving what you can to be as prepared as possible when it’s time to make specific plans.

Inflation and Campus Expenses

While tuition is typically the largest cost most families face for college, other fees and expenses add up, too.

Like tuition, textbook prices have risen faster than the average rate of inflation for the last 10 years. Instead of waiting to see if textbook prices keep rising or subside in response to inflation, Finetti recommends staying away from the college bookstore, at least until classes start.

“Universities and community colleges are concerned with the cost of textbooks,” she says. “I encourage students to wait until the first day of classes to buy books. Part of what you’re paying for is instructor expertise, so instructors have become good at not relying on textbooks for information.”

Students may have some leeway to rent a textbook or purchase a used book for much less than the campus bookstore charges.

A harder expense to work around may be travel costs. In June 2022, gas prices were up nearly 50 percent from the previous year. Prices dropped over several weeks in July, but commuter students and families planning college visits are likely still facing higher pump prices than last year. Airfare also outpaced average inflation, which can affect students enrolled far from home.

Comparing public transit prices against gas for commuting students can help you spot which transportation options are cheapest. Families may choose to plan campus visits to see multiple schools in one trip, or may replace some in-person visits with a virtual tour.

Will My 529 Keep Up With Inflation?

Whether you’re already paying for college or planning for the future, you may be concerned about how inflation will affect the money in your 529 plan. A 529 education savings account isn’t a true savings account — your contributions get invested, and investments can gain or lose value. You can change your 529 investments twice per calendar year, but is it smart to change your selections because of inflation?

A college finance expert can help you create a specific plan that combines information about your savings, your timeline and the schools that your child is most interested in attending. These rule-of-thumb suggestions can help you start a conversation with a qualified advisor.

If college is in 1 year

Inflation is high and the stock market is down, right when your child is getting ready to apply to college. Time may not be on your side, but that doesn’t mean your college dreams are sunk.

If your 529 account was set to automatically adjust investments for a target date (or you’ve been on top of making manual adjustments), a large chunk of your savings should already be in more conservative assets, like bonds or even Treasury Inflation-Protected Securities (TIPS). If so, some of your money may already be protected against the weakening effects of high inflation.

If you’re concerned that your savings aren’t where they should be, talk with a financial advisor about whether it makes sense for you to consider supplementing your college savings with alternative financing, such as investing directly in TIPS, equities or other investments that may keep ahead of inflation, or considering a short-term alternative like a home equity line of credit (HELOC).

If college is in 5 years

The good news is that some economic experts believe inflation should be back to healthy levels within about two years. Now may be a good time to evaluate your college savings strategy as you count down the last few years before your child enrolls.

Now is a good time to discuss moving a percentage of your 529 funds from riskier assets like stocks to more conservative ones each year, if you haven’t already. You don’t necessarily want to move a large amount away from stocks at once (which may “lock in” your losses and miss out on recovery or gains later), but taking incremental steps may help you balance protecting your funds while staying open to a market recovery. It may take up to four years on average to recover from a stock market slump, that that might still mean you have time for your savings to regrow.

This is also an important time to discuss college finance with your child, Finetti says. “A lot of times, parents are under the mistaken notion that they need to keep their finances private from their kids. By the time your child is in high school, they need to know what you can contribute to their college education and what you can’t, so they’re not surprised.”

Finetti says students can play a role in preparing for their own education by working once they’re able to, both during their high school and college years. Students can also make a strategy to apply to scholarships throughout the year. 

If college is in 10 or more years

The longer you have to ride out market volatility, the less you may need to worry about how a current dip affects future plans.

This is not to say that parents shouldn’t pay any attention to inflation. High inflation rates might make it harder to fit your usual contribution into your budget as your other costs of living increase. It’s hard to predict exactly what will happen with tuition or with investment markets over the next decade. Overall, though, your time horizon is in your favor. Keep saving steadily and checking in with a financial advisor to make sure you’re on track toward your goals.

Planning your child’s college education is an ongoing process. It’s never too early to start saving for college, and it’s never too late to review options with a college financial aid office or a trusted financial advisor. Inflation can make some aspects of college savings or life on campus look different. Steady saving and thoughtful adjustments to your plans can help go a long way toward providing a college experience that works for your family.

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