Introduction to Saving for College
August 19, 2009
You’re about to have a baby and you’re already worrying about how to pay for their college education. Or your son or daughter just started high school and you read about some private colleges costing more than $50,000 a year. How are you going to be able to afford four years of a college education?
The solution is to start saving for a college education as soon as possible. The sooner you start, the easier it will be, and the more flexibility your child will have in their college choices.
Top Ten Practical College Savings Tips
The following practical tips present everything you need to know about how to get started:
1. Set Reasonable Goals.
You don’t have to save the full cost of college. Like any other big expense, you pay for college over time. One third of college costs will come from past income in the form of savings, one third will come from current income and financial aid, and one third from future income in the form of loans. Since college costs increase by a factor of three over any 17 year period, a good rule of thumb is to base your savings goal on the cost of college the year your child was born.
Don’t get sticker shock from the high cost of the most expensive colleges. The average cost of a 4-year private college is about half the maximum cost and the average cost of a 4-year public college is about a quarter of the maximum cost. (The overall average is about a third.)
Use FinAid’s Savings Plan Designer to translate your savings goal into a monthly contribution. For example, if you save $250 a month at 5% average interest from birth, you will accumulate $80,465 by the time your child enrolls in college. FinAid also offers several other savings calculators that you will find useful.
2. Start Saving Sooner, Rather than Later.
Time is your greatest asset. The sooner you start to save, the more time there will be for your savings to grow. For example, if you start saving from birth at 5% average interest, 37% of your savings goal will come from interest. If you wait until your child enters high school to start saving, only 10% of the savings goal will come from interest.
3. Make Saving Automatic.
Set up an automatic transfer from your checking account to your college savings plan. This makes it much easier to save.
4. Save Whatever You Can.
Get started saving, even if all you can save is $10 or $25 a month. Saving something is better than saving nothing. It is much easier to increase the amount you save after you get started. Take one step at a time. Increase the amount you save when you get a raise. Most families end up saving $100 to $250 a month, but every penny helps.
5. Save a Portion of Windfalls.
If you get an income tax refund, bonus or inheritance, or win the lottery, contribute some of the money to your children’s college savings plans. When your child no longer needs diapers or day care, redirect that money to the college savings plan. You won’t miss this money because you were already spending it.