Thursday, 7 May 2015
With college costs growing ever higher, it's no wonder that many parents and students wonder how they'll pay the bill.
Average out-of-state charges - tuition, fees, room and board - at public four-year colleges and universities reached some $31,700 last school year, while the average at private, nonprofit four-year institutions hit more than $40,900, according to the College Board.
Average charges for in-state students at four-year public schools reached about $18,390, with room and board accounting for more than half the bill. Assuming a 5% tuition inflation rate, average first-year college costs for an in-state student at a public school could surpass $40,000 by 2030, according to a calculator at FinAid.
So how do you save enough to cover those bills? Here are some steps that parents or students can take to make those college bills a bit less overwhelming and even.
The earlier you start saving, the more that compounding interest or investment returns work in your favor. If you save $200 a month starting when your child is a newborn and earn an 8% annual rate of return, you'll have $96,000 in 18 years, notes FINRA, the Financial Industry Regulatory Authority.
Even if you don't have that much to sock away, time and compounding can work for you. If you save only $7 a week in an account earning 5% annually, you'll have more than $9,600 in 17 years, the U.S. Department of Education notes. That's $9,600 that your child won't have to take on in student loans, which have been leaving new graduates with daunting debt burdens.
As FinAid and others note, it costs less to save than to borrow for college. Saving $200 a month at 7% for 10 years would give you more than $34,800, while borrowing that amount at 6.8% interest for a decade would take more than $400 a month to repay, FinAid says.
529 plans, offered by states and colleges, allow investors to make federal income tax-free withdrawals for qualified higher education expenses, including tuition; room and board for students attending at least half time; required books, supplies and equipment; mandatory fees; and special needs services, PA529 says. In certain cases, plan participants may be eligible for state tax and financial aid benefits as well.
Some states offer prepaid 529 plans, which allow you to pay in advance for in-state tuition at today's rates at public universities; you can later convert the savings if your student decides to attend an out-of-state or private college.
The other common type of 529 plan is a savings plan. Similar to retirement accounts, these 529 plans allow you to invest in a wide range of mutual funds; some also offer FDIC-insured accounts and money market, according to the College Savings Plans Network. You can use your 529 savings plan at private and public institutions, including community colleges and vocational schools, throughout the United States, and at many foreign universities.
You don't have to use the 529 Plan offered by your state, though it's worth finding out if your state plan offers special benefits. Savingforcollege.com makes it easy to compare the features of different 529 Plans, and ranks the best-performing ones. It also enables you to compare 529s to other vehicles, including Coverdell Education Savings Accounts, U.S. savings bonds and IRAs.
If your kids are in diapers or in elementary school, consider swapping babysitting services with friends and saving the $40 or $50 in babysitting fees that a night out might set you back.
Or, you may decide to forgo an expensive summer resort vacation for camping at a state park, eat fewer restaurant dinners, or have a family game night with home-made popcorn rather than a costly trip to the movies. Cutting those little extras, and investing the money into a 529 Plan or some other fund can making a big difference over time.
One caveat: don't prioritize your child's college savings over your retirement savings. In general financial planners say that parents should first save for retirement. That's because savings are the primary way to fund retirement, while there are many ways to finance a college education. Which brings us to the next tip.
Many parents feel they must pay their kid's entire college ticket, but it's no sin, and may indeed be beneficial, for a student to own a piece of his or her own education.
Whether it's babysitting, working as a lifeguard, fixing computers or bagging groceries, your high school student can save thousands of dollars toward his or her own education by working part-time. The Federal Work-Study Program also helps college students with financial need to find part-time jobs. The program aims to place students in jobs related to their studies or in community service positions. The part-time job not only makes a dent in expenses. But it also can help build students' resumes.
Students and families don't have to go it alone, and most don't, considering the billions of dollars available in government, college and private-organization grants, scholarships and loans.
Students can tap relatively low-interest federal loans and defer payments until after graduation. They also may quality for need-based grants and merit-based scholarships offered by state and U.S. governments, colleges, employers and non-profit groups. Other aid is available specifically for veterans and military families. Earning excellent grades or excelling at a sport or music can help students obtain significant scholarship aid.
Some 85 percent of first-time, full-time undergraduate students at four-year institutions received federal loans or grants in the 2011-2012 school year, the government says. College Board estimates that total grant aid and tax benefits in 2013-14 cut the $18,390 tuition, fees, room and board bill at public, four-year colleges to $12,620, and the $40,920 private, nonprofit school tab to $23,290.
The path toward college savings may be complicated, but with research, planning, and perhaps help from an adviser, you -- and your child — can succeed.
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