Saving for College
According to the Bureau of Labor Statistics, the tuition component of the Consumer Price Index (CPI) increased by 8% per year, on average, from 1979 to 2001. This means that children born today will face college costs that are 3 to 4 times current prices by the time they matriculate.
Parents should expect to pay at least half to two-thirds of their children's college costs through a combination of savings, current income, and loans. Gift aid from the government, the colleges and universities, and private scholarships accounts for only about a third of total college costs.
Accordingly, it is very important that parents start saving for their children's education as soon as possible, even as early as the day the child is born. Time is one of your most valuable assets. The sooner you start saving for college, the more time your money will have to grow.
If you start saving early enough, even a modest weekly or monthly investment can grow to a significant college fund by the time the child matriculates. For example, saving $50 a month from birth would yield about $20,000 by the time the child turns 17, assuming a 7% return on investment. Saving $200 a month would yield almost $80,000.
It is less expensive to save for college than to borrow. Either way, you're setting aside a portion of your income to pay for college. But when you save, the money earns interest, while when you borrow, you're paying the interest. Paying for college before your child matriculates definitely costs much less than paying for college afterward. Saving $200 a month for ten years at 7% interest would yield $34,818.89. Borrowing the same amount at 6.8% interest with a ten year term would require payments of $400.70 a month. At 8.5% interest the payments increase to $431.70 a month. (If your return on investment is 4% instead of 7%, you'd accumulate $29,548.13. Borrowing this amount at 6.8% interest would entail monthly payments of $340.04; at 8.5% interest the monthly payments would be $366.35. If your return on investment is 10%, you'd accumulate $41,310.40, corresponding to monthly payments of $475.40 at 6.8% and $512.19 at 8.5%.) So if you elect to borrow instead of saving, you will be paying 1.7 to 2.6 times as much per month.
This section of FinAid discusses methods of saving for college. It starts with advice on deciding how much to save and tips on making saving easier. It also discusses common myths about saving, the best investment strategies, and the financial aid impact. There are also several college savings calculators and other useful tools. This section also provides information about the advantages and disadvantages of the most common college savings vehicles, identifying section 529 college savings plans as the best. It also discusses credit card rebate and loyalty programs that help you save for college by rebating a portion of your purchases to your college savings fund.
For a basic overview of saving for college, see FastWeb's Introduction to Saving for College.
Topics about saving in general include:
There are about a dozen different college savings vehicles available. Choosing among the many options can be confusing, so first check out our College Savings Checklist of questions to ask about every type of college savings account.
If you don't have time to make your own decision, open a section 529 college savings plan for each of your children. Section 529 college savings plans are one of the best college savings vehicles because of the tax advantages, the low impact on need-based financial aid, the flexibility, the high contribution limits and the lack of income phaseouts, and because control over the account remains with the parent. You should also explore some of the loyalty programs, because they provide an easy way to get additional money for your college savings plan.
The complete list of college savings vehicles are as follows:
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