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A Primer on Saving for College

Receiving a college education may be the single most important accomplishment that one may achieve in their entire life time.

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piggy bank
It’s time to crack that piggy bank and find out what you can afford! After sorting through the nickels and dimes inevitably most families will have to plan a students future together. It’s just a fact of the modern age.

Parents should expect to pay at one least half to two-thirds of their children’s college costs through a combination of savings, current income, and loans. Gift aid from the government, the colleges and universities, and private scholarships will account for about a third of total college costs.

These days, it is very important that parents start saving for their student’s education as soon as possible, even as early as the day the child is born! Time is one of your most valuable assets. The sooner you start saving for college, the more time your money will have to compound and grow.

According to the Bureau of Labor Statistics, the tuition factor of the Consumer Price Index (CPI) increased by 8% per year, on average, from 1979 to 2001. This means that children born today will face college costs that are 3 to 4 times current prices by the time they matriculate.

As parents, if you start saving early enough, even a modest weekly or monthly investment can grow to a significant college fund by the time the child matriculates. For example, saving $50 a month from birth would yield about $20,000 by the time the child turns 17, assuming a 7% return on investment. Saving $200 a month would yield almost $80,000.

It is far less expensive to save for college than to borrow. However not all families will find themselves in that situation. If you did, you have set aside a portion of your  income to pay for college. When you save, the money earns interest, in contrast to when you borrow, you’re paying the interest. Paying for college before your child is of age definitely costs much less than paying for college afterward. Saving $200 a month for ten years at 7% interest would yield $34,818.89. Borrowing the same amount at 6.8% interest with a ten year term would require payments of $400.70 a month. At 8.5% interest the payments increase to $431.70 a month. (If your return on investment is 4% instead of 7%, you’d accumulate $29,548.13. Borrowing this amount at 6.8% interest would entail monthly payments of $340.04; at 8.5% interest the monthly payments would be $366.35. If your return on investment is 10%, you’d accumulate $41,310.40, corresponding to monthly payments of $475.40 at 6.8% and $512.19 at 8.5%.) So if you elect to borrow instead of saving, you will be paying 1.7 to 2.6 times as much per month.

Even if college is only a year or two away, it is never too late to start saving. There are tax benefits to saving in a section 529 college savings plan or prepaid tuition plan, and every dollar you save is a dollar less you’ll find yourself borrowing.

Those are the facts. If you find yourself without a savings fund started years ago, don’t feel bad as like many families these days are in the same boat. Keeping food on the table is all you can do sometimes. When it comes to sending your child to college, investigating loan options now is the main road your on.