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| Saving for College:
Lowering the Hurdle to Higher Education |
| The numbers can be a little startling. College expenses are increasing at twice the rate of inflation. According to some estimates, the parents of a newborn today could face college expenses of between $100,000 and $280,000. Fortunately, there are a number of things you can do today to ensure your child earns a degree without saddling yourself or them with huge debt. |
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| The first is to save early and often. Thanks to compounding, each dollar you save today is much more valuable in the years ahead. Compounding allows you to earn interest on your interest. For instance, let's say you put $10,000 in a college savings plan and it earned 8% every year. That first year your principal will have grown to $10,800 ($800 earned interest). In the second year that principal would have increased to $11, 664 ($1,664 in earned interest–$64 more than year one because of compounding). In 20 years your principal will have grown to $46,609.57. |
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| The second is to look into a 529 college savings plan, which is designed specifically to encourage saving for future college costs. These plans are sponsored by states, state agencies, or educational institutions. They aren't the magic bullet. Some have high expenses and may lack good investment options. But they do allow for generous pre-tax contributions and are easy to set up. There also are 529 prepaid-tuition programs that lock you in today's tuition rates. These plans, though, tend to be fairly inflexible in terms of college choices. |
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| Other savings options are the Coverdell Education Savings Account (a tax-deferred account that allows for annual contributions of $2,000) and UGMA/UTMA custodial accounts. These accounts are a little like trust funds, but are easier and are less expensive to set up. |
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| Because saving for college is so important and there are many different ways to save, you should talk to a financial advisor about the most appropriate option for you and your children. The one thing you don't want to do, though, is procrastinate. |
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Questions & Answers | |
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| One of the smartest ways to help pay for your child's college education is to: | |||
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