How Can I Afford To Send My Child to College?

Saving Money

Saving money is the primary way to prepare for the costs of college. Setting aside a certain amount every month or each payday will help build up a fund for college. If you and your child begin saving early, the amount you have to set aside each month will be smaller.

In order to set up a savings schedule, you'll need to think about where your child might attend college, how much that type of college might cost, and how much you can afford to save. Keep in mind that colleges of the same type have a range of costs and your child may be able to attend one that is less expensive. You can also pay part of the costs from your earnings while your child is attending school. In addition, your child may also be able to meet some of the costs of college by working during the school year or during the summer. Finally, some federal, state, or other student financial aid may be available, including loans to you and to your child.

You will also want to think about what kind of savings instrument to use or what kind of investment to make. By putting your money in some kind of savings instrument or investment, you can set aside small amounts of money regularly and the money will earn interest or dividends. Interest refers to the amount that your money earns when it is kept in a savings instrument. Dividends are payments of part of a company's earnings to people who hold stock in the company.

A savings instrument has an "interest rate" associated with it; this refers to the rate at which the money in the instrument increases during a certain period of time. Principal refers to the face value or the amount of money you place in the savings instrument on which the interest is earned.

Every type of savings or investment has some risk that the return will be less than needed or expected. Federally insured savings accounts are safe and guaranteed up to $100,000 by the U.S. Government. However, they may have lower interest rates, making it harder to save large amounts of money for college. Bonds and stocks often have higher returns than savings accounts or EE savings bonds but are riskier. You can reduce the risks of these kinds of investments by starting to save early. The earlier you begin the less money you will have to put aside each month and the more total savings you will accumulate. You should talk with your banker or other financial professional about different savings and investment choices. You might also talk with a friend or relative who understands these choices. You can also learn about them by reading some of the magazines that have articles on saving for college.

The chart below shows how much you would need to save each month in order to have $10,000 available when your child begins college.

The chart assumes that you are getting a return of 5 percent on your savings. If you are able to earn more than that, your total savings will be higher. As the chart shows, if you start saving when your child is born, you will have 18 years of accumulated savings by the time your child enters college. You would only have to save or invest about $29 each month in an account earning 5 percent in order to have $10,000 at the end of 18 years. If you wait until your child is 12, you will have to set aside about $119 a month. By waiting too long to begin saving, you may not be able to afford the amount of monthly savings needed to reach your goals.