How to Pay for College
- Matt Bell SoundMindInvesting.com
- 2011 9 Sep
A new survey of moms found that 76 percent have financial concerns, and paying for school or college is at the top of their list. I assume that their spouses share that concern about getting the kids from diapers to diplomas, so here are some ways to pay for college.
Figure Out How Much College Might Cost
The best free online calculator for estimating college costs is on the web site of SavingForCollege.com (look for the College Cost Calculator). After you enter your child’s current age (let’s use age one as an example), the calculator will give you a number. A big number.
You can get more specific estimates by picking specific schools. Where it says, “Your child: will be attending a college that currently costs $25,000 annually,” click on “Help” and you’ll be able to go to a web site where you can get the costs of different schools.
The total annual in-state on-campus cost at Arizona State right now, for example, is about $22,000. About 70 percent of beginning students receive scholarship or grant aid averaging about $8,000 (info that’s available at the same site where you get the tuition and room and board costs). So, you could base your projections on an annual cost today of $14,000.
Determine How Much of the Tab You’ll Pay
Different parents have different philosophies. Some want to pay for all of their kids’ college expenses. Others want their kids to pay for at least a portion of the cost. Talk it over with your spouse. Let’s say you decide to pay half:
- Plug $14,000 into the College Cost Calculator
- Choose 50 percent as the percentage of the cost you plan to cover
- Decide whether you want to have all the money saved by the time your child starts college or whether you plan to keep investing while he or she is in school (I chose the latter)
- Indicate how much you have saved so far (I put in zero)
- Pick the rate at which you think college costs will rise each year (I entered 8 percent)
- Pick an expected rate of return on the money you invest (I chose 7 percent)
Hit “Submit,” and it’ll tell you how much you need to save. In this example, that’s $246 per month.
If you have multiple kids, you’ll have to run separate calculations for each one.
Consider a 529 Plan
Most states offer a so-called 529 savings plan. It’s a tax-advantaged way to save for college, with any interest earned coming to you tax free, as long as the money is used for college costs.
You can choose any state’s plan and, in most cases, the money can be used for qualified expenses at schools in any state.
One reason to consider your own state’s plan is that in some states you get a state income tax deduction on the money you contribute.
These plans offer several investment choices, usually including an age-based fund that’ll automatically shift to a more conservative investment mix as your child gets older. The SavingForCollege.com web site mentioned above rates each state’s plan and provides a lot more information about 529 plans.
The earlier you get compound interest working for you the less you should have to set aside each month or year.
In the above example, if you wait until your child is 12 instead of starting to invest when he or she is one, you’ll have to invest $367 each month.
Get Relatives Involved
Encourage your kids’ grandparents or other relatives to contribute to their college fund as birthday or Christmas gifts. Or, ask for contributions as baby shower gifts.
Consider a Community College
If your kids are willing to go to a community college for the first two years, that can save a lot of money. After they transfer to a four-year school, that’s where their degree will be from.
One family got their kids to opt for this route by telling them they’d be better able to help them with a down payment on a house down the road.
Match Your Kids’ Investments
When your kids are very young, it’s probably unrealistic to get them to save for such a distant goal as college. However, when they get to be about 12 or so, you may be able to motivate them by matching some of the money they invest.
How else have you tackled the college funding challenge?
Matt Bell is the author of three personal finance books published by NavPress, including the brand new "Money & Marriage: A Complete Guide for Engaged and Newly Married Couples." He teaches a wide variety of workshops at churches, conferences, universities, and other venues throughout the country. To learn more about his work and subscribe to his blog, go to: www.mattaboutmoney.com.