College costs have been rising much faster than inflation over the past few decades. A study by LendingTree indicated that in-state public schools cost an average of $25,290 per year in the 2017/2018 school year, while private colleges cost a whopping $50,900. That works out to a total average bill across four years of somewhere in the neighborhood of $100,000 to $200,000 -- and that's before considering those faster-than-inflation cost increases.
Price tags like that put a college education out of the range of most people's ability to cover via cash flows from their salaries. That means if you want to send your kids to college, you'll probably either need to save up a large chunk of the cost in advance or borrow the money. Borrowing money to pay for college brings its own set of problems, which makes investing to cover the costs a much better idea. With that in mind, these seven ETFs could help you send your kids to college without needing giant loans.
For longer-term college costs: buy the market
If your kids are still several years away from college, you can still invest in stock-based ETFs for the long-term growth potential they have. Indeed, that's one of the few choices you have with a decent chance of growing fast enough to keep up with those rapid increases in college costs. On that front, the Vanguard Total US ETF (NYSEMKT: VTI) is an awesome candidate to consider as an ETF to build the reserves you need to send your kids to college.
The Vanguard Total US ETF tracks the overall US stock market and carries a very low 0.03% expense ratio. That combination means it has a very strong chance of beating most professionally managed funds over time. That's a great characteristic to look for in an investment you're hoping will enable you to build a decently sized nest egg.
The key problem with that fund is that it is a stock-focused investment, which means that it is not really appropriate for money you expect to spend in the next five or so years. So as your kids get closer to actually needing to tap their college funds, you should start thinking about shifting the money you've accumulated to more conservative investment choices.
For money you need within the year: very short-term bonds
If your children are already college age and you need to come up with cash within the next year or so to cover those costs, you need an investment with much higher likelihood of stability than stocks. On that front, the iShares Ultra Short Term Bond ETF (NYSEMKT: ICSH) is certainly worth considering. While the ETF is careful to note that it is not a money market ETF, it invests in short term bonds and money market instruments. That gives it tremendous stability, which is what you need in a short term investment.
Just how stable is it? Well, since its inception in 2013, its price has never been more than $50.87 or less than $47.66. That's less than 7% movement over six years. Past performance is no guarantee of future results, but that small historical volatility is a testament to its very conservative management.
The iShares Ultra Short Term Bond ETF carries an expense ratio of 0.08%, which is important in today's very low interest rate environment. Keeping fund costs down is a critical part of assuring investors have a chance at getting any sort of positive return in a bond-oriented investment when rates are as low as they are today.
For money you'll need within the next few years: duration matched bonds
College typically lasts around four years per child, which means that once you'll pick a school, you'll have a decent estimate of your costs over those upcoming years. Although interest rates are low, yield curves are generally not inverted, which means you have a decent shot at better returns with longer-term bonds than shorter-term ones. That calls for duration-matching your bond investments with about when you'll need the money. Fortunately, Invesco has a series of bond ETFs that can help on that front.
These ETFs seek to invest in investment grade corporate bonds that mature in specific years. By owning them based on when you need the money, you have a decent chance of getting higher returns than from only being invested in ultra-short term bonds. Still, with known maturity dates on the underlying bonds, you have very good visibility to what you'll likely get when those bonds mature. The following table shows the Invesco duration matched corporate bond ETFs for the next five years:
Invesco BulletShares 2021 Corporate Bond ETF (NYSEMKT: BSCL)
Invesco BulletShares 2022 Corporate Bond ETF (NYSEMKT: BSCM)
Invesco BulletShares 2023 Corporate Bond ETF (NYSEMKT: BSCN)
Invesco BulletShares 2024 Corporate Bond ETF (NYSEMKT: BSCO)
Invesco BulletShares 2025 Corporate Bond ETF (NYSEMKT: BSCP)
As bond-focused investments, they won't provide tremendously strong returns, but if the stock market crashes again just before you need the money, you'll be glad you had it invested in bonds. Still, because the returns these funds offer are so low relative to stocks, they're really only appropriate for money you're reasonably sure you'll be spending in that time frame. With college timing and costs fairly well knowable, however, these are decent candidate ETFs for those nearer term needs.
Help your kids get to and through college
Your kids' college costs represent some of the largest expenses you'll likely face in raising them. These seven ETFs have a good shot of helping you build -- and maintain -- the nest egg you'll need to help them cover those costs. With stocks to provide long term growth potential and appropriately time matched bonds for when the timing gets close, you'll have a solid asset allocation plan to help them meet those needs.
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