Investing for College Costs

Investing for College Costs

In Ohio and some other states, tuition plans such as those offered by the Ohio Tuition Trust
Authority (OTTA)
offer parents and grandparents one alternative for saving for college.
Consider the paper by Hanna and Peng, plus these points:

1. An important variable is the future rate of increase in college tuition costs. For the past 10
years, tuition has increase almost three times the rate of overall inflation. If this continues,
the OTTA will provide a fairly good alternative, as it guarantees results.

If tuition does not increase at a rate much faster than overall inflation, OTTA will provide a
relatively poor investment.

Some experts believe that college costs overall will not increase faster than inflation (e.g., item from U.S. News.)

My prediction is that college tuition will not increase as fast as it did in the past, and might
increase only slightly faster than inflation over the next 15 years. In my full paper, I cite two
experts that predict that trend. On the other hand, tuition has continued to increase rapidly
during the past 12 months. I believe that in the next few years we will see some elite colleges continue to increase tuitions faster than overall inflation, but many private colleges will have to hold down tuition increases.

2. My discussion of the results from investing in small stock funds assumes:

A. Use of a diversified fund, preferably an index fund that is similar to the bottom 40% in
size of companies on the New York Stock Exchange. Any fund that has “Small-Capitalization Index Fund” or something like that in its name might work in a similar

B. The results depend on periodic investing, that is, investing a small amount each month or
year for 15 years or more. Someone who had a large amount of money to invest right
now would face much higher risks from investing in stocks.

C. Investing in a stock fund over time would pose a relatively small risk (about 2%) of doing
worse than OTTA, assuming tuition does not increase much faster than inflation, and
would probably result in an accumulation several times an OTTA accumulation.

Sherman Hanna


Ohio State University Extension and

Consumer Sciences Department