Saving for College

We all like to think that our children are so brilliant or talented that they will receive a full-ride to the college of their choice. Unfortunately, this is a rarity with less than 20,000 students receiving these scholarships, and among full-time students enrolled at four-year colleges, just .3% received enough in grants and scholarships to cover the cost of their four years. While 20,000 may seem like a fairly large number, according to the U.S. Department of Education there were 13 million students between the ages of 18-24 enrolled in colleges across the nation in 2012. Last year, around 2/3 of males and nearly 3/4 of females graduating from high school had plans to attend college.

So, just in case your children don’t get that free-ride scholarship, what are your options? If you are a person that plans ahead, you may have started saving for their education from the time they were born. Not to shock anyone, but average cost data provided by The College Board in “Trends in College Pricing 2013” puts the average cost of college tuition and room and board, based on the national average in today’s dollars, at $19,600 per year for a public 4-year in-state school. A private 4-year school will range anywhere from $42,200 to $50,100 per year.

If your child is a year old, by the year 2032, based on projected inflation, the 4-year public in-state tuition will cost around $50,000 per year. In order to cover that cost, for the next 17 years you will need to save $524/month in a 529 plan with an annual rate of return of 6%.

Although these numbers are quite daunting, take heart. It is important to save as much as possible to help with college expenses, but most schools do offer financial aid packages and grants to help allay the costs. There are also many available scholarships which vary in amount and terms but, when added together, can help take away some of the burden. Many of these require diligent searching and researching, and it may be useful to work with a school counselor or other professional with knowledge of the ins and outs of college planning.

There are several reasons to invest in some form of college savings plan. Many are investments which provide tax-deferred benefits, while others may earn a higher rate of interest or qualify for matching funds from an employer. There is also the government’s 529 plan. Currently only 12 states offer the pre-paid tuition option of the 529 plan. The other option, which is offered in 49 states and Washington, DC, is a savings plan that differs from state to state. It is definitely a personal decision on which plan, and the options within that plan, that will work best to meet your needs.

A financial planner can explain all the different savings accounts that are available, the pros and cons of each one, possible early withdrawal penalties, changes that can be made, etc. As with any government document, it is important to fully understand how your investment will be managed and what your projected total will be when your child reaches college age.

According to an article in U.S. News and World Report, there are four costly mistakes parents should avoid making when saving for college: not saving early enough; taking a loan on your 401(k) to pay for your child’s education; failing to qualify for tax credits because of 529 distributions; and stopping 529 plan deposits once your child is enrolled in college.

If, after doing thorough research, talking to professionals, investing as much in a savings plan as possible and figuring in grants, scholarships and financial aid you are still unable to afford the cost of tuition, there are student loans available. While not the most desirable way to go due to the interest rates and knowing your child will leave college in debt, the benefits of a college degree will far outweigh it.