Newsletter | September 2011

Affording Your Child’s College in Tough Times

Most parents worry about college tuition from the time their child is born. The key is planning ahead. Unless you are very well off financially, you won’t be able to wait for years and then have the funds to pay for college when your child is ready to go. As is the case with retirement planning, the best thing to do is to start saving as early as possible, even if you're able to save only a small amount at first.

What is the cost of college?
The 2010-2011 average total costs per year (including tuition, fees, room and board) were $20,399 for students attending four-year public colleges and universities in-state and $32,329 out-of-state, and $40,476 for students at four-year private colleges and universities. Assume an additional $4,000 for textbooks, supplies, transportation and other expenses. The cost of tuition continues to rise at about an average of 8 percent per year.

How can you pay for it?
A 529 plan is one of the most attractive options available to help families save for college because anyone can open one, the money deposited grows tax-free, and it can then be withdrawn to cover college costs without being taxed. You can even begin saving before your child is born. Under a 529 plan, you deposit each month as much as you can afford based on plan guidelines. Your money is then invested and grows completely tax-free under a professionally managed plan.

Many parents save less than 100 percent of their child's education costs before college. Usually they put aside enough money to make a down payment of sorts on the college bill. Then, at college time, parents can supplement this down payment by:

Obtaining private loans (e.g., home equity loan, margin loan)
Obtaining financial aid-related loans (e.g., PLUS loan)
Tapping their own investments (e.g., mutual funds, 401(k) plan, IRA, cash value life insurance)
Having their child apply for financial aid (e.g., student loans, grants, scholarships, and work-study)
Having their child contribute a portion of his or her savings and/or investments
Having their child obtain a part-time job during college
Encourage your student to take as many AP courses as possible and to prep well for AP exams. High scores on AP exams can save considerably on college tuition. Many colleges award course credits for them, which can reduce the amount you need to pay in tuition.

How much should I save?
You'll want to put aside as much money as possible in your child's college fund. The more money you put aside now, the less you or your child will need to borrow later. Start by estimating your child's costs for four years of college. Then decide how much of the bill you’re able to fund--100 percent, 75 percent, 50 percent, and so on. In many cases, the amount of money you should contribute really boils down to how much you can afford to contribute. Every situation is different. You'll need to take a detailed look at your family's finances in order to determine what you can afford to add to your child's college fund each month. To increase the amount of money that you're able to put away, consider these options:

Cut back on nonessential spending.
Reduce your standard of living (e.g., own only one car, eat out less often) .
Add unanticipated windfalls like bonuses, raises, or an inheritance to your child's college fund.
Have a previously stay-at-home spouse return to the workforce.
Obtain a new job with better pay.
Ask grandparents to contribute to your child's college fund in lieu of gifts.

Start a savings program as early as possible.
Perhaps the most difficult time to start a college savings program is when your child is young. New parents face many financial strains that always seem to take over--the possible loss of one income, child-related spending, the competing need to save for a house or car, or the demands of your own student loans. Yet this is the time when you should start saving.

Don't feel bad if you can't put aside hundreds of dollars a month right from the start. Start with a small amount, say $25 or $50 every month, and add to it whenever you can. You'll have a head start, and you’ll be surprised at how that amount will add up to over time.