In previous articles, we have discussed what money is and how it can be inflated. Price increases that result from the inflation of our money supply affect many sectors of the economy, making products and services more expensive each year. This is very apparent in one specific sector: college tuition.

Tuition inflation

Information gathered from the College Board and the Digest of Education Statistics can give us a large sample of college tuition data. This is useful to determine the general rate of inflation for tuition across the country. When compared with the officially reported CPI numbers over the past 50 years, college costs have been between 1 1/2 to two times general inflation rates. On average, tuition tends to increase about 8 percent per year. This means that from birth to college, the price to attend a higher learning institution rises by a factor of three to four times.

Time horizon

In order to get the level of returns to keep up with this type of inflation, those saving for their child or grandchild’s college education will often take risks that are not suitable.

An investment strategy to accumulate an education fund for a 10-year-old would be similar to a 57-year-old that is planning to retire at age 65. This is because the length of time until that investment is needed is the same. In either of these situations, taking unnecessary risk could result in digging an even deeper hole if economic conditions are not ideal. The past several years have been a difficult lesson for many trying to “catch up.”

Investment options

There are several options available to save for higher education expenses. A good strategy is to diversify between several of them.

• Traditional savings accounts
• 529 Plans
• Savings bonds
• UTMA/UGMA accounts
• Precious metals like silver and gold

Using just one of these types of accounts can provide an easy way to save for college, but may expose the assets to much of the same type of investments. 529 Plans are great savings vehicles because the tax benefits are similar to Roth IRAs when used for college expenses. Typically, however, these accounts are in mutual funds that are highly tied to the stock and bond markets. 2008 was a glaring example how quickly 529s can lose value even if they are invested in less volatile funds.

Bonds and Metals

Although they will not keep up with tuition inflation, savings bonds are an inherently safe way to preserve capital. There are many options available for the government issued savings vehicles. In addition, utilizing precious metals for a portion of the overall strategy may be a way to preserve not only capital, but also purchasing power. This is because tangible assets such as gold and silver have the unique ability to buy the same thing tomorrow as they do today. This cannot be said of the dollars in our pocket.

The important thing to remember is to have a plan and execute it. The window for saving for education expenses is small and short-term decisions can be costly.