College Savings 101: How to Pay for Your Kid’s Education

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Have questions about how to save for your child’s college education, how much to save, and where to look for good financial vehicles? Gain insight with this helpful guide.

Making sure there’s enough money to support your children is a concern that keeps many parents awake at night. And it is no wonder! In today’s ever-changing world, how will you afford to fund your child’s college education?

Costs on the Rise

According to the College Board, the 2009-10 average costs were $7,020 per year (in-state) for students attending public colleges and universities, and $26,273 for students at private colleges and universities. Out-of-state students attending public colleges and universities paid an average total annual cost of $11,528.

How Much Is Enough?

Several national polls have shown that parents who are currently saving for college aren’t saving enough. According to FinAid, a comprehensive guide to college financial aid, a 2007 BankRate survey found that 86 percent of parents with children under age 18 expect their children to attend college or univeristy, but only 47 percent felt that they could afford to send their children.

Lyndsey Martin, 29, who is studying for a master’s degree in teaching, says that she is saving for her son’s education now, even though he’s only a toddler.

“I think it’s very important to save for Cameron’s education. My parents did not save for my education and I’ll be paying for my degrees even when Cam enters college,” she says.

Clearly, the sooner you start saving the better. Even if you can only set aside a small amount in each pay period, that money will have more time to work for you the further away your child is from beginning college.

Financial Aid

Information provided by FinAid suggests that parents saving $50 a month from a child’s birth would yield about $20,000 by the time the child turns 17, assuming a 7 percent return on investment. Saving $200 a month would yield almost $80,000.

But how do you do that? And how do you know that you are picking the vehicles with the highest probability of making your money grow? “In many cases, parents who know they’re behind in planning for that big event may just continue to do nothing, hoping that their children will get scholarships or loans,” says Francine L. Huff, author of The 25-Day Financial Makeover: A Practical Guide for Women. “But it’s important to look at a child’s college education as an investment for their future,” she adds.

“Starting an educational savings account or buying bonds through monthly, automatic savings plans can be a relatively simple way to accumulate savings. The easiest way to do this is to set up automatic deductions from a checking account, even if you only start with $50 a month. That way the money will be saved on a regular schedule and more than likely won’t be missed.”

Margaret A. Munro, author of 529 & Other College Savings Plans for Dummies, advises parents to “save often, save early, save a lot. Start as early as you can. Don’t get discouraged and be consistent.”

529 Plans

Munro likes 529 plans, which encourage flexible and tax-advantaged college savings. You can save up to $200,000 to $300,000 in these plans, and that maximum amount is adjusted periodically. Each state picks a financial services company to manage its plan, and you can choose any plan, regardless of where you reside.

“The first place to look is your own state’s 529 plan because many states offer tax incentives,” says Munro. “Everybody gets the federal tax incentives. If you cross state lines you may not get your state’s tax incentives.”

Tax savings aren’t the only thing you need to look at when evaluating a 529 plan. You also need to investigate the returns of the mutual funds in which you are investing, as well as any underlying management or start-up fees. Remember that high fees can erase any gains your money might make, no matter how well the fund is managed. Luckily, the Internet provides a wealth of information and calculators that can help you compare plans.

Jennifer Osorio, 31, found that surfing the Web gave her the information she needed to make a wise decision. “I did Internet research, mostly to pick the 529,” she shares. “The plans were getting a lot of publicity at the time, so I knew the basics, I just needed help picking one. In the end I just ended up opening a Fidelity 529 through Upromise.com. Any small change that I pick up through Upromise, certain credit cards, and through shopping at certain stores, also gets transferred to the 529 plan.”

A quick Web search on “saving for college” reveals dozens of reputable, incredibly detailed websites. Because these sites have the ability to change their information day-to-day, they are often better than pricey guides available at the local bookstore.

Upromise

Munro also gives accolades to the Upromise plan, which contributes part of her expenditures on everyday items, such as gas or groceries, to her child’s college fund. (Babymint.com is a similar program.)

“I love Upromise. That’s a giveaway. Why wouldn’t you take advantage of that?” Munro quips. “It’s not going to put your kids through college, but it is going to buy a few books.”

Coverdell Accounts

Another popular way to save for college are Coverdell accounts, which are tax-advantaged trusts created exclusively for paying the qualified education expenses of the trust’s designated beneficiary. They have contribution limits as well as income limits for participants.

Munro says, “The downside of a Coverdell is that you can’t really send your kid to college putting in $2,000 a year. And it’s a student asset, not a parent asset, so when it comes to financial aid that’s a problem.”

Another consideration, particularly as parents continue to have children well into middle age, is that you may be robbing your retirement to fund your child’s college education, and this is never a good idea.

“You can always borrow for college, you can’t borrow for retirement,” says Munro. “Make sure that you are funding your retirement at adequate levels. When you lack in retirement savings, you’re talking about eating dog food.”

Even if the amount you’re saving is not enough, rest assured that there are many parents who believe that paying the full freight for college really isn’t good for children. “We’re not specifically saving for our kids’ educations. My parents didn’t for me, and I still have a BA,” says Meera Collier-Mitchell, Boulder Creek, California, mother of a four-year-old and a toddler. Collier-Mitchell adds that she expects her kids to want to go to college enough to figure out a way to make it possible—whether it’s through work, scholarships, or whatever will be available 18 years from now.

Collier-Mitchell does expect to take care of some of her children’s college costs, but she explains, “I expect to do it the same way my parents did: paying what I can afford, but not giving them a free ride. If my kids don’t want to make their own education possible, then they should wait for college until they’re ready.”

Whether your goal is to shoulder the entire financial burden of your child’s college education or to lend a helping hand (or pocketbook, as the case may be!), your actions and foresight today may mean all the difference in opening doors to your child’s future.

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