Saving for college: Options to pay for the future

Between 2006-07 and 2011-12 tuition raised at a rate 1.4% higher than inflation, but college educated workers make 77% more than their non-college counterparts. But how do you pay for tuition? Photo: Ana Botz

SILVER SPRING, Md, March 8, 2012 – Something that is universal for parents is that they want to give their children a better life than they had. They want to see their children succeed. One of the things that has come to represent that desired success is a college education. But college is expensive, and you certainly can’t count on scholarships paying the way. In a report about trends in college pricing, the College Board said that between 2006-07 and 2011-12 tuition raised at a rate 1.4% higher than inflation. The rapid rise has left college out of reach for many, and placing many others into debt as they enter the work force. The College Board says that 2011-12 tuition averaged $8244 for in-state tuition and fees at public college, $12526 for out-of-state public colleges and a whopping $28,500 for private college. Many estimate this trend will continue.  

The benefits of a college education are stunning when you look at income differences between college educated workers and those with only a GED. According to a U.S. Census report issued in February 2012, college educated workers make about 77% more than those with only a high school degree or GED. So, what is a parent to do?

Start Early

Just like the advice given for saving for retirement, start your college savings early. The principle of compounding interest will serve to grow whatever it is you can put aside.  Just like saving for retirement, procrastination can be a huge hindrance to savings that can ultimately result in not having saved as much by the time those 18 years have flown by and your child is touring college campuses.

College is expensive, but investing early will help you grow your money. Photo by Pen Waggener, via Wikimedia Commons. Click to enlarge

Sure, the first year with baby can be extraordinarily expensive. Between diapers, formula, baby food, and new clothes every three months, parents see large portions of their pay checks going to baby stores. But even if you can only put $100 into an account the first year, get that account open. Opening in your baby’s first year of life ensures that you have vessel in which to place money in the future, whether that’s an additional $50 a week or $20 a month. 

529s and tax deductions

529s are a great college savings option for parents. Each state has its own plan, which frequently offers a state income tax deduction. Since 529s are specifically for education costs, they are restricted to use for qualifying educational expenses like tuition and room and board. But they are broad in who can use them. If your oldest child decides not to go to college, a younger sibling can use those funds, or you can use them to return to school. If there is money left over in an account after an undergraduate degree, your child can use it to pursue graduate school.

There are differences among the plans for fees, minimum opening balances, minimum contributions, and caps. So, shop around. You don’t have to live in a particular state in order to take advantage of their 529, but you do have to live in that state to take advantage of whatever state income tax deduction they offer. 

529s are generally brokerage accounts that offer a variety of investment options, including age-based funds designed to adjust risk in relation to the amount of time until the age your child will need the funds. These start out with a more aggressive investment risk and scale down towards lower risk to help take advantage of growth opportunities early on without leaving your account exposed to being wiped out just when you need the money.

Pre-paid college tuition

If you are afraid of what the cost of tuition will be when you finally go to write that first check given the outrageous leaps education cost have seen year after year over the last decade, you have the option of pre-paying the education of your child today, thus locking in your rate. Not all colleges participate in a pre-paid plan. Many are backed by states and are good for any college within that state’s public university network. State-backed plans tend to be guaranteed, ensuring you will get a certain value upon enrollment - completely covering the cost of tuition at one of their network schools. If your child attends a school not part of the network, they cut you a check for a predetermined value.

This sounds like a great option, and for those with extra cash, it might be right for them, but the way you lock in today’s rate is by paying today. This can provide huge savings if you can pay up front. While most pre-paid tuition plans offer a payment plan of some version, you will wind up paying much more over time. With these options you are essentially taking a loan out from the state and having to pay current tuition rate plus interest. It also locks you into a minimum monthly payment, which for some budgets may not be affordable and doesn’t give you the flexibility to determine how much you contribute to the pot each month.

College graduates on average earn 77% more than their non-college educated counterparts. Photo by Xbxg32000 via Wikimedia Commons. Click to enlarge.

There are also 270 private colleges that participate in an Independent 529, which is also a pre-paid tuition program. Information about this program is available at https://www.privatecollege529.com/OFI529/ including participating schools.

Other options

There are other options for college savings.

The Gerber Life College Plan is essentially a universal life insurance policy. You choose the level of payout you want and make monthly payments. The money can be used for college or cashed-out. As mentioned before, it functions a life insurance policy, so in the unfortunate event of your child’s death you would receive that pay-out.

Cloverdell ESAs or Education Savings Accounts (formerly known as the Education IRA) are another option available. They are capped at $2000 per year in contributions, but you are able to withdraw funds to pay for private primary and secondary schools in addition to colleges. If you child decides not to attend college, the funds would eventually be provided to your child, not to you, and they are not transferable as 529 funds are.

Other traditional investments, like CDs and high yield savings accounts are also options. These are secure investments, although these tend to yield the lowest returns.

SavingforCollege.com is a comprehensive resource for all of your college funding research needs. It will help you identify the 529 that offers benefits for your state of residency. It allows you to compare plans and talks about ESAs. There are also calculators to help you determine how much you should be saving, if you have specific goals in mind.

Remember, college is expensive and even if you can’t pay the entire expense for your child, anything that you can contribute will help the achieve their career dreams.


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Brighid Moret

Brighid is a freelance writer and first time mother.  She holds an MA in Writing from Johns Hopkins University.  Find her on Facebook @Brighid Moret

 

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