The reality today for both students and parents is that not only is a college education necessary to be successful in today’s workplace, it may also be very, very expensive. Many parents are overwhelmed with the seemingly constant increase in college tuition and may wonder if there is any way that they can even help their student attend college, much less pay for it totally. But be assured; while it may not be easy, whether you are a prospective parent looking ahead or the parent of high school student, there are tips for saving for college.
First you need to understand the complexities of what you face in saving for college. Looking at figures released by the Bureau of Labor Statistics shows that the tuition component of the Consumer Price Index increases an average of 8% per year. This is somewhat dire for children born today, as they and their parents will face college costs that are 3 to 4 times the current prices. In addition, most financial records show that 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 (grants), the colleges and universities, and private scholarships, account for only about a third of the total college cost.
It may be obvious to state, but the number one thing parents can do is to start saving for their children’s education as soon as possible, even as early as the day the child is born. Time becomes one of your most valuable assets. The sooner any parent starts saving for college, the more time their money will have to grow. If parents start saving early enough, even a modest weekly or monthly investment can grow to a significant college fund by the time the child moves on to college. 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 imperative to understand that it is less expensive to save for college than to borrow. Either way, you’re setting aside a portion of income earned 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. Financial statistics show that if you elect to borrow instead of saving, you will be paying 1.7 to 2.6 times as much per month for the repayment.
Even if college is just a year or two away, it is never too late to set up a savings plan. The sooner you start saving means that many less dollars you or your student will have to borrow.
Many parents choose a Section 529 plan also known as Qualified Tuition Programs. Experts state that they are among the best ways of saving for your children’s college education. There are two types of section 529 plans. These are prepaid tuition plans and college savings plans. Both of these plans are named after section 529 of the Internal Revenue Code, which specifies the requirements for the plans to be free from federal income taxes. Prepaid tuition plans let you lock in future tuition rates at in-state public colleges. This lock in occurs at current prices and is usually guaranteed by the state. College savings plans are more flexible, but do not offer a guarantee.
Every state (including Washington, DC) now offers a state section 529 plan, with thirty-two states offering just college savings plans, two states offering just prepaid tuition plans, and seventeen states offering both. Be sure and check the state requirement for the programs where you live. Also, a group of several hundred private colleges offers a national prepaid tuition plan for private and independent colleges known as the Independent 529 Plan.
Individual needs for college financing vary widely. While there is not an easy answer on how to save for college the best advice is starting early! But no matter where you are in the timeline of your student’s education, you can find solutions to the problem of college financing. Don’t be afraid to utilize the financial aid office at your nearby college or university for further information on the savings plans available in your area.