Saving for College (page 3)

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.

Even if college is just a year or two away, it is never too late to start saving. There are tax benefits to saving in a section 529 college savings plan or prepaid tuition plan, and every dollar you save is a dollar less you'll need to borrow. This section 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.

Topics about saving in general include:

• Setting Savings Goals. How much should you save?
• Myths About Saving. Three wrong reasons parents use to avoid saving.
• Tips for Making It Easier to Save. These tips will help you find the money to save.
• Account Ownership: In Whose Name to Save? This includes information about the financial aid impact of account ownership, such as the very high negative impact of saving in the child's name. A separate page provides additional information about the financial aid treatment of trust funds.
• Tax Savings from Child Asset Ownership.
• Gift and Estate Taxes. This summarizes the gift tax provisions to the extent they affect saving for college.
• Investment Strategies. These tips will help you maximize your return on investment while minimizing your risk.
• Prioritizing Savings. Should you save for college or for retirement?
• College Savings Calculators. These tools can help you evaluate the impact of different decisions about college savings.
• Tuition Inflation. This includes information about historical average annual increases in college tuition rates.
• Education Tax Benefit Coordination. This describes coordination restrictions on using tax-free distributions from 529 plans and education savings accounts in conjunction with other education tax benefits.
• College Savings Surveys. This includes the results of numerous surveys of parents on the state of their college savings.