Things to Consider When Saving For College

As another school year dawns, high school students everywhere are thinking of what will come next: college life and all that it entails. Meanwhile, their parents are thinking of the accompanying bills.

Depending on where a student goes to school, college can entail books, dorm costs, meal plans, parking, and travel to/from home – in addition to tuition. If you have a child now or plan to in the future, it is never too early to think about saving for college.

College Costs

According to CNNMoney.com, in 2008, the total costs of a 4-year private school topped $34,000. In-state public school cost about $14,000, while out-of-state public school landed in the middle at approximately $25,000. About $7,800 of the public school costs were due to room and board, so you can expect to save that much if your student lives at home.

Although inflation averages 3-4%, college costs can increase by as much as 7% each year. At that rate, college costs roughly double every 10 years.

Family Contribution and Developing a Savings Plan

Deciding how much you will contribute to your child’s education is a deeply personal decision. If you plan to pay for all or part of your child’s education, you should start thinking now about how much you will contribute. Here are some things to consider when deciding on how much to save, and how you will save it:

• Amount: Decide whether you want to give your child a flat amount or a percentage of college costs. If you give a flat amount, it will pay for less if your child chooses a private school. If you give your child a percentage of college costs, you will pay more if she chooses a more expensive school.
• Multiple children: If you have multiple children, decide what you consider “fair” when it comes to funding their educations – will you give them the same amount of money, regardless of what school they go to? What if one or more choose not to go to school?
• Your future: Your child can borrow for college, but you cannot borrow for retirement – so be sure you are saving adequately for your future before saving for your child’s college.
• Investment choices: As with any savings/investment plan, the amount you need to save each month or year depends on how much you want to have at the start of college, how old your child is now, and your rate of return. As with retirement, any blend of stocks and bonds should skew away from stocks as you get closer to the time you will have to withdraw the funds. Use this calculator to test various savings scenarios.
• Time horizon: Once you decide on your total contribution, you should start saving as much as you can as soon as possible, to allow the longest time for growth. Even if you can’t save as much as you’d like to, even $5 or $10 per month now will help ease the burden later.
• Savings options: College savings vehicles include 529 accounts, Coverdell accounts, Roth IRAs, or UGMA/UTMA accounts. Different savings vehicles impact financial aid eligibility in different ways. If you think your child may not attend school, delay school, or qualify for merit scholarships, you may want to choose a more flexible savings vehicle.

Come back tomorrow when I discuss various savings vehicles in detail!

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