5 tips on how to save for college

January 18, 2011

Dan Greenshields is President of ShareBuilder Securities Corporation, a subsidiary of ING Bank, fsb. The opinions expressed here are his own.

Dan Greenshields is pictured in this undated handout photo. REUTERS/HandoutNext year, my daughter will head off to college. Her list of possibilities ranges from the University of Pennsylvania at $55,000 a year to the University of Minnesota at almost $20,000 a year. In about 10 years, my two other children will be college-bound.

Twenty years ago, $52,000 was the entire cost of a college degree, according to the U.S. Department of Education. At the time, growing a fund to $52,000 over 18 years with regular, safe investments seemed achievable. But today, that’s the cost for a single year of college at many schools. And it’s only going to get worse.

By 2025, private tuition could run nearly $100,000, assuming 4.3 percent inflation compounded for 15 years. And this ignores all the extra expenses that come along with school, like room and board, books and plane tickets home. In short, the bursar’s bill is getting more daunting by the day.

But, fortunately it can be done. So take a deep breath. Here are a few ways to make saving for your child’s college education a little easier:

Set a savings goal.
With the economy still in low gear, saving money right now is certainly tough. But every day, we all face a series of ordinary decisions that could have a big impact on our savings.

Consider that morning latte. Buy one of those every day, and you will be out over $1,000 annually. Brew your own coffee, and put that $1,000 in your child’s education fund. Then, make your own lunch. That daily $10 trip to the local sandwich shop adds up to $2,500 a year!

Whether it’s $25 or $250 each week, plan out how much you’re going to set aside for your child’s future. You might not be able to save up enough money to pay for all of their college expenses, but you’ll put a pretty big dent in the bill.

Stick to your goals.Regan Grabner waves a U.S. flag with a dollar bill tied to it as he graduates from Harvard's Business School during the 357th Commencement Exercises at Harvard University in Cambridge, Massachusetts June 5, 2008.   REUTERS/Brian Snyder
If times get tough and it looks like you won’t be able to meet your weekly or monthly goal, don’t rationalize — do something. Work an extra shift, clean out your basement and have a yard sale, or switch from bottled water to tap. Force yourself to find a way to stay on track.

Leave the money alone.
No “borrowing” from the college savings fund for other purposes. It’s too easy to rationalize never paying the money back.

Open an education specific investment account.
There are several investment vehicles available to help parents save for a child’s college education more effectively. These vehicles typically offer mutual funds or exchange traded funds as a means to invest. Consider your goals, talk to your financial adviser, and then see what kind of account may be right for you.

Contributions to an Education Savings Account can be made up to $2,000 on behalf of a designated beneficiary each year on an after-tax basis. Individuals whose modified adjusted gross income for the year is less than $95,000 — or joint filers with less than $190,000 — are eligible to contribute the full amount.  Contributions to an ESA do not provide a tax break or tax deduction for the contributor, but the account’s earnings grow tax-free for qualifying higher education expenses.

A Custodial Account is a broader investment vehicle for a child’s financial future, including higher education. If grandparents give a child money as a graduation present to save for college, setting up a custodial account may make sense. There are no income or contribution limits. Once the child has reached the “age of majority” as defined by each state, the money is transferred by the custodian to the beneficiary’s legal control.

Consider a Qualified Tuition Program (529 plan).
There are two types of 529s: the prepaid tuition plans and the college savings plans. The prepaid option allows parents to pay their children’s tuition and fees at a particular school in advance, at today’s rates. Even though tuition goes up, the rate stays the same. The downside, though, is that these funds can only be used at the institution for which the plan was originally established. The second type of 529 doesn’t lock in current tuition, but participants can use the plan for any accredited college, and earnings on deposits accumulate tax-free when devoted to higher education expenses.

College costs more than ever. But by employing common sense and the right financial tools, parents can be ready to meet this huge expense and help secure their children’s educational future.


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Do be cautious of overloading 529 plans. These plans are one of the items factored in by schools to needs based scholarships. Since they have to be spent on education expenses, schools will alter their financial aid packages accordingly (as did the federal governement until they changed the rules in 2010, but they could always change the rules again…)

As for ESAs, adding $2000 a year for 18 years for someone born today invested at 5% comes out to around $56,000. While this is a nice sum, it wouldn’t cover the potential $100,000 bill facing students in 2029.

Don’t get me wrong…I have both types of accounts set up for my children, but be careful of overallocation, which can be self-defeating when financial aid is awarded. In the end, however, the rewards certainly outweigh the costs. The average salary of a high school graduate has been dropping, while college grads continues to rise, and the dispartiy is now more than $20,000 a year, making the rewards of a college education one of the greatest investments that you can make. A 20% annual return for life? Sign me up!

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