The Gallup organization has reported that 86% of Americans believe a college education will be beyond the reach of most families in the future. It's a subject of almost universal concern among parents. Since 1980, as measured by the consumer price index, college costs have grown 2-2½ times faster than inflation. Estimates of $150,000-$200,000 are tossed out as the total cost package for getting one child through a good school. Some people may pay that amount, but most can't and you don't have to, either. What follows are some practical tips on tackling what can easily be the single largest expense item of your life.
The first key is to get started now. You want to start early because the amount of time you have available to let the principle of compound interest work for you makes a huge difference in your eventual investment results. The "College Cost Calculator" below dramatically illustrates the importance of getting an early start. For example, if you have 14 years before your youngster goes off to college, you only need to set aside $230 per month in order to build a college fund of $65,800. That $65,800 is expected to represent about 70% of the total bill for four years of college at a public school. That's a reasonable goal, as the American Council on Education says that parents and students now combine to pay about two-thirds of college costs; student aid, either from the school itself or from the taxpayers, pays the remaining third.
On the other hand, if you get off to a late start, your opportunity for compounding is diminished. If, for example, you have just six years remaining until college days arrive for your youngster, you'll need to invest $536 every month in order to accumulate the roughly $48,000 you'll need for the parents' 70% share.
The earlier you begin, the more risk you can take. This means selecting an aggressive portfolio that is initially 100% stocks, and adding short-term bonds or money markets as you get closer to the time when you'll need the money. The state-sponsored 529 plans we'll be talking about later can automate this process for you.
The second key is to let your kids know that paying for college is their responsibility as well as yours. Spending for college is no different than any other purchasing decision. Just as some of us can't afford the most expensive house on the block, in the same way some of us can't afford to foot the bill for an expensive college education. Let your children know how much you will try to contribute toward their college education. If they can find a school for that amount of money, great. If not, it's up to their savings, summer jobs, scholarships, financial aid, and student loans to make up the difference.
To get them started thinking along these lines, it helps to open a college savings account when they're very young. Some families are able to begin when the child is born, either with previous savings or cash gifts received from grandparents. It doesn't have to be a large amount, but opening the account early makes a statement that this is an important expense that must be planned for far in advance. Over the years, the account can be added to with money received for birthdays, earnings from yard work, baby-sitting, and so on.
Choosing the Right AccountThe college savings landscape is dramatically different today than a decade ago. Back then, the most popular vehicles were EE savings bonds and UGMA custodial accounts. The bonds offered tax advantages but were an inferior investment product. The UGMA accounts offered better investing options but had other drawbacks. Changes to the tax laws in 1997 and 2001 have eliminated those tradeoffs for most college savers, allowing them to invest on a tax-free basis without having to settle for either inferior investment products or giving up control of the money invested. Here's a quick overview of the primary college savings account types.
