It’s never too soon — or too late — to plan.
You may find it impossible to predict what kind of school your child will attend after high school. But it’s important to understand what you will be on the hook for and to start saving today, even if only in small amounts.
Research future college costs of potential schools at www.collegeboard.org. A good strategy to help minimize the costs of college is to have your child start off at a community college, a lower-cost public college or an in-state college that may offer lower tuition for in-state residents. After your student has completed credits at a more affordable college, she can transfer to the school of choice.
“Remember, it’s not where you start, but where you finish,” says Patricia Seaman, senior director at the National Endowment for Financial Education. “You can obtain a name-brand degree without paying name-brand college bills.”
Few parents pay the entire cost of college because scholarships (academic, athletic and others), loans, grants and other financial aid can ease the overall burden. Don’t be too quick to dismiss the idea of loans. Recent research suggests that moderate borrowing improves college completion rates.
“Obviously too much student loan debt burdens young adults for years,” Seaman says. “But avoiding loans at all costs could mean working so much that you don’t pass your classes and have to retake them, or scaling back on the number of classes you take each semester — either way, you’re dragging out school longer than you need to and delaying earning income commensurate with your college degree.”
As a parent, don’t favor college for your children over your retirement savings.
“There are loans for college, but no one will lend you money for retirement,” cautions Seaman. “You’ll have many options to pay for college, but if you don’t save for retirement, your only option may be relying on your children to support you.”
Compound interest can be your friend if you’re looking at college costs ten years or more in the future. Use an online savings calculator to see the significant growth of small amounts over a long period of time. Also, your child’s age will impact your savings choices — the longer you have, the bolder you can be. If your child is in elementary school, you can consider riskier long-term investments that yield higher returns, such as stock mutual funds. Middle school means less risky, lower-return investments, such as short- and intermediate-term bonds and bond funds. By high school, all savings should rest in low-risk investments such as interest earning money market funds.
Families can take advantage of investment and savings accounts designed specifically for higher education:
* 529 College Savings Plans: Contributions to these state-managed plans often are tax-free and usually offer multiple options for investing. Learn more and view available plans by state by visiting www.collegesavings.org.
* 529 Prepaid Tuition Account: If you know you want your child to go to a certain state or municipal school, this plan allows you to purchase tuition credits at that school at today’s prices. Annual college costs increase five to eight percent per year according to the College Board, so prepaying can save thousands of dollars.
* Coverdell Savings Account (also called an Education Savings Account or ESA): You can open this account any time before your child turns 18 and contribute up to $2,000 each year. Accounts are offered by banks, credit unions, mutual fund companies and other financial institutions. Interest earned is tax-free and funds can be used to pay for elementary, secondary or college education costs.
For more tips on saving for college, visit www.smartaboutmoney.org.