Paying For College/Education
How Will I Pay for College?
Every year, thousands of students enter college, which means thousands of parents scramble for ways to fund their child’s education – education that comes with a hefty price tag. Very few parents save 100 percent of their child’s education costs, with most only saving enough to make a down payment on the college bill. Then, when it actually comes time to pay, they supplement this down payment with:
- Federal PLUS Loan
- Current Income
- Private Loans (e.g., Home Equity Loan, Margin Loan)
- Investments (e.g., Mutual Funds, 401(k) plan, IRA, cash value life insurance)
- Child’s Savings, Investments, and/or Earnings From a Part-Time Job
- Federal and College Student-Based Financial Aid (e.g., Student Loans, Grants, Scholarships, Work-Study)
- Gifts from Grandparents
How Much Should I Save?
Ideally, you’ll want to save as much money as possible to pay for your child’s education. The more money you put aside now, the less you or your child will need to borrow (and repay with interest) later on. First, start by estimating your child’s costs for four years of college – you can find this information on your child’s school-of-choice website. Then, decide how much of the bill you want to fund – 100 percent, 75 percent, 64.5 percent, etc. Once you have all of this in mind, you’ll need to sit down with your Maier & Associates advisor and make a plan that will determine how much you’ll need to set aside each month.
In many cases, the amount of money you should contribute relies heavily on how much you can afford – every situation is different. Together we can take a good look at your family’s finances and figure out what you can afford to add to your child’s college fund each month. To increase the amount of money you’ll be able to put away, consider these options:
Options To Increase Your College Savings
- Reduce your everyday costs (e.g., eat out less often, only own one car)
- Cut back on nonessential spending or, as we like to say, ‘trim the fat’
- Add unanticipated windfalls like bonuses, raises, or an inheritance to your child’s college fund
- Have a previously stay-at-home spouse return to the working world
- Find a better job with better pay
- Ask grandparents to contribute to your child’s college fund in lieu of gifts at birthdays, holidays, etc.
Start a College Savings Program as Early as Possible
At Maier & Associates, a lot of our clients will express concern over whether they can even afford college – if you start early enough, the answer is always YES! Being able to send your child off to college for a great education is one of the top wishes parents have for their child.
A college education is a necessity in today’s economy, simply because it opens doors to many opportunities a child wouldn’t otherwise be able to access. However, although a college education is now necessary, it doesn’t come cheap. Unless you are very well off financially, you’ll find it difficult to come up with the money for college at the last minute. The best way to avoid the unpleasant surprise of college education costs is to start saving as early as possible – no matter how small the amount may be at first.
We often encourage our clients to start a college savings program when their child is young, however, new parents often find it difficult to save and also take care of day-to-day expenses. With child-related costs, demands of your own student loans, and the competing need to save for a house or car, saving for your child’s education may seem like something you can put off – you can’t. Even if you only put a few dollars a way each month, saving now will get you in the habit of saving more later on.
When your child is young, you have time to select investments that have the potential to outpace college cost increases. However, keep in mind that investments that offer higher potential returns may involve greater risk of loss. In addition, you’ll benefit from compounding – a process of earning additional funds on the interest and/or capital gains that your investment earns along the way. With regular investments spread over many years, you may be pleasantly surprised at how much you’ll be able to save in your child’s college fund. DO NOT feel bad if you can’t put aside hundreds of dollars every month, right from the start. Start with a small amount, say $25 or $50 a month, and add to it whenever you have extra cash. You’ll have a head start and be thankful you planned ahead when the time to pay for college arrives.
How Much Will College Cost in the Future? Can I Afford College for My Children?
For the 2012/2013 academic year, the average annual cost of a four-year public college for in-state students was $22,261, while the average annual cost of a four-year public college for out-of-state students was $35, 312. For a four-year private college, the annual cost was $43,289. (Source: The College Board’s Trends in College Pricing Report.) The total figures include five expense items: tuition and fees, room and board, books and supplies, transportation, and personal expenses.
Unfortunately, cost of living and tuition costs rise annually. Looking back at historical trends, annual increases are in the range of 4 to 6 percent – however, it’s important to keep in mind that the actual annual percentage increase could be higher or lower than it has been in the past, and private colleges have rates that vary significantly.