Demystifying the Escalating Cost of Education and the Power of 529 Plans with Tricia Scarlata

In the landscape of higher education, the question on many parents' and students' minds remains—is the cost of college worth it? With tuition fees soaring and the financial burden on families intensifying, this question has never been more pertinent. Yet, the benefits of a college education, from increased earning potential to the development of invaluable soft skills, cannot be overstated.

Big Picture in Practice hosts, Ben and Julie, sat down with Tricia Scarlata, Head of Education Savings at J.P. Morgan Asset Management, to glean her insights about the costs and benefits of higher education, and how people can take smart savings routes to cover mounting costs.

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Tricia’s journey is rooted in her childhood memories when her father’s tuition fee in 1961 was just $2,700. "As I graduated in 1996, the tuition had increased up to $28,000, showcasing a stark hike in education expenses," says Tricia. Fast-forward to the present, the tuition price has skyrocketed to approximately $90,000, delineating a whopping 3000% increase over 63 years. This progression is a cause of concern for young parents, those planning to start a family, and individuals interested in higher education programs.

According to Tricia, "The difference in annual earnings between high school and college graduates is significant, almost double in some cases." This stark contrast not only highlights the monetary value of a college degree but also its importance in ensuring employment stability during economic downturns.

But as the worth of higher education continues to be evident, the costs associated with it are escalating at a rate that far exceeds inflation. The reasons are multifaceted, from the proliferation of course offerings to meet diverse student needs to the reduced governmental funding for institutions. The result? Tuition grows year over year, placing a heavy financial strain on families.

"Last year, the average family received about $15,000 between grants and merit scholarships," notes Scarlata. While financial aid can significantly offset college expenses, the widening gap between aid and costs underscores the need for strategic financial planning. It's important for students and families to fully understand the financial aid process, including eligibility requirements and the types of aid available. This can help them make informed decisions about their higher education options.

“Aid has gone down about 4% and costs have come up about 30% and the gap isn’t getting smaller,” shares Tricia. “That’s why financial planning is so important – now more than ever – because aid becoming available to more means less all around, so the amount of aid available is decreasing.”

In other words? Planning around aid as opposed to fully relying on aid is a smart move.

Scarlata advises young parents on the importance of early savings, emphasizing, "Start early and save often." Starting small and leveraging time can yield considerable benefits, especially with tax-advantaged options like 529 plans.

“The one thing I tell young parents is that they have the benefit of time and to take advantage of that,” says Tricia. “But it's hard. I will always tell a family to save for your retirement and your family's emergency fund before you save for college. But if you can start early and even put small dollar amounts away early and then increase that as time goes on, you are least getting the advantage of that tax-free growth over time.”

Interestingly, despite the clear benefits, 70% of families planning for college expenses do not utilize 529 accounts, with many opting for low-yield options like savings accounts or CDs. This highlights a significant missed opportunity for maximizing college savings.

529 plans are often misunderstood as being one-dimensional savings vehicles for college expenses. However, their flexibility and benefits extend much further, offering various options that can adapt to different family needs and financial situations. The dynamic nature of 529 plans makes them a potent tool for educational savings.

"What prevents people from taking advantage of 529 plans is a lack of understanding," Scarlata explains. She advocates for increased awareness and education on the versatility and advantages of 529 plans, suggesting that both advisors and investors need to better comprehend how these plans can fit within a broader financial strategy.

Embrace the flexibility and active management of the advisor -sold plans. Unlike some direct -sold plans where you go online and directly invest, the advisor-sold plan offers more guidance and is a journey that changes as the beneficiary ages. These plans aren't just for standard two- or four-year education, but now include vocational training and apprenticeships.

“We've discovered that many avoid investing because they believe it's too early or they are uncertain of their child's future,” shares Tricia. “However, with no income limit and no required minimum distributions like an IRA, the 529 plans offer incredible flexibility. It's never too early to begin investing."

In an era where the cost of education continues to rise sharply, the value of a college degree remains undiminished. The challenge for families lies in navigating the financial obstacles that come with securing that education. Through strategic planning, early saving, and maximizing the benefits of versatile financial tools like 529 plans, families can tackle the daunting costs of college. It's about making informed decisions today that will pave the way for a brighter, more secure educational future tomorrow.

In the words of Scarlata, who has successfully leveraged 529 plans, "It's not just about saving for college; it's about investing in our children's future in the smartest way possible." This sentiment echoes the need for a shift in perspective—from viewing college savings as a financial burden to seeing it as a strategic investment in the next generation's potential.