Financial Planning for College
You probably started thinking about it when your child was very young. You may even have thought about it before your child was born, perhaps while you were shopping for a bassinet and a teddy bear. After all, it’s one of the major responsibilities you face as a parent: your child’s college education.
Personal growth and expanded horizons are reason enough to send a child to college, but there are more practical considerations, too. College graduates have more jobs to choose from, and they generally make more money than people who have a high school education. That makes a college education very important for your child’s future.
The College Board reports that prices at public colleges have risen 30 percent over the past five years, even after adjusting for inflation. In 2006, average tuition and fees were up over 6 percent at four-year public and four-year private colleges. Increases at two-year colleges were somewhat less, approximately 4 percent.
Consider this: If you have a child who will enter a four-year, in-state public college this year, you can expect the total four-year cost to exceed $58,000. If your other child enrolls in the same school five years later, the estimated costs would be about $74,000. If your children decide to attend private colleges instead, which are more expensive, the total costs for your children will be approximately $125,000 and $160,000, respectively. Note that these are average estimates that do not include incidentals such as spending money and travel.
These figures might seem daunting, but it may not be as insurmountable as it seems. The reality is that the savings needed to send most students to college are below these averages. Student loans, financial aid, scholarships, and grants reduce expenses for many. Students’ earnings, and other sources of income, may also reduce the amount you’ll need to save.
It helps to begin saving early, preferably as soon as your child is born. Like buying a house, the more you save, the less you’ll need to borrow. Save and invest regularly, even if it’s just a small amount from every paycheck. Over time, look for ways to boost your college fund savings. Salary increases, bonuses, and money your child receives as a gift are good opportunities to increase savings contributions.
There are many options for investing money for educational expenses, and some provide tax advantages. This pamphlet overviews several choices: money market and bank savings accounts, government bonds, stocks, and mutual funds, as well as government-sponsored plans designed to help you build your college expense fund.
Once saving becomes part of your budget, money will begin to accumulate. It’s important to take advantage of the financial strategies that will help your savings grow in value. Perhaps the most important thing you can learn about saving is the importance of compounding— given time, compounding makes small investments large. Consider the following hypothetical example:
The week the McMillans had their first child, David, they opened an educational savings account. It wasn’t always easy, but they managed to put $200 away each month until David was 18 and ready to go to college The Rileys’ child, Barbara, was born the same month as David McMillan. Since money was tight for them, they decided to delay opening a college savings account until they were earning more. When Barbara turned 9, they opened the account and were able to contribute $600 a month until she was ready to go to college at age 18.
Both the McMillans and the Rileys invested their educational savings in the same mutual fund. It earned 8 percent compounded annually. The McMillans’ total contribution was $43,200 and the Riley’s total contribution was $64,800. Which family do you think had the larger college fund?
You’ve probably guessed the answer. The McMillans had the larger college fund at $96,657—they accumulated over $53,450 in compound interest on their investment of $43,200. The Rileys had nearly as much—their fund was worth $95,087—but they had to invest $64,800 to do it. As you can see, time is a critical component to make investments grow. It’s not just how much money you save that counts, it’s also how much time you have for that money to work for you. You need to start saving as early as possible.
Note that these are theoretical examples presented to illustrate the power of compounding; they do not take into account taxes, account fees, or inflation. Specific interest rates or conditions used in the examples may not be attainable or desirable.
It’s true—college is expensive. But there’s a lot of help available: loans, grants, and tax breaks that can significantly lower the bill. Bear in mind, though, nothing can replace a carefully planned savings and investment strategy, and the earlier you start the more likely it is you’ll reach your goal. Given how important a college education is to your child’s future, today is the best time to begin.
FROM: http://www.metlife.com