Becoming Educated on Paying Your Child's College Costs
Elizabeth Coit - Executive Director, Networks Financial Institute at Indiana State University
Categories: Family, Financial Planning, Personal Finance
September is National College Savings Month. Unfortunately, not everyone will join in the celebration. Estimates of future four-year higher education costs frequently run into many hundreds of thousands of dollars, striking fear into the hearts of some parents.
Before panicking, however, anyone with college-bound children should take a deep breath and consider the actual facts.
Yes, the College Board’s Trends in College Pricing reported far from inexpensive 2005-2006 higher education costs. Average annual totals (for tuition and fees, room and board, books and supplies, transportation and incidental expenses) were $11,692 for two-year public colleges, $15,692 for four-year public colleges and universities, and $31,916 for four-year private colleges and universities.
But, there are two possible points of relief to keep in mind.
First, about 70% of students currently go to colleges with tuitions and fees totaling less than $8,000. And, as many as 40% attend schools where the total is below $4,000.
Second, you don’t need to have total cost amounts saved by the time your child is ready for college. Experts say a good rule of thumb is to expect to save one third of total costs, to pay one third through financial aid and your available income, and to borrow one third (in parental and/or student loans).
So how much do you need to save? A statistical coincidence makes a quick mental calculation easy. The Bureau of Labor Statistics estimates that tuition goes up by about 7-8% a year. Based on that rate of inflation, total costs essentially triple from when a child is born to when he or she enters college. Using the one third rule then, your savings goal should be about the same as total college costs in your child’s birth year.
Say, for example, that you plan for a child born this year to attend an “average-priced” four-year public university which has current total costs of $16,000 annually—or $64,000 for all four years taken together. When your child reaches college age, that $64,000 will have tripled to $192,000 in total costs. As suggested above, by that time you’ll need to have one-third of this amount—or $64,000—ready in college savings.
Putting together an extra $64,000 may sound like a daunting task. But, experts have some common sense tips for making it easier.
1. To give yourself the maximum benefit from interest compounding start, saving as soon as you can.
2. Save as much as you can as regularly as you can even using automatic payroll deductions, if possible.
3. Try to increase the amount you save each year.
4. Be on the lookout for additional funds to contribute. If you ever unexpectedly come into money, strongly consider putting it into college savings.
There are also some available plans that help make saving for college more practical and less painful. Some of the best are Internal Revenue Service section 529 plans. They work something like IRA and 401(k) retirements plans but offer different tax benefits and higher contribution limits. The Indiana CollegeChoice section 529 plan allows a cumulative contribution of $236,750 for each student. Interest earned and withdrawals are exempt from both Federal and State income taxes if used for qualified higher education expenses. (In Indiana, section 529 funds do not count against you in determining whether your child qualifies for needs-based college financial aid.)
In spite of all your intentions, however, time can slip by quickly. If it gets away from you and you fear you’ve waited too long to reach your savings goal, remember there are options for catching up. Other family members, friends, and even total strangers can contribute to your 529 plan. So can the child involved. The child can also help by taking on student loans and participating in work-study programs or other options offered by individual schools. (Though some parents may feel uncertain about it, asking a child to invest in his or her own future is not only proper and loving, but it also helps to teach personal responsibility.)
Finally, low- and moderate-income families may also want to look into Indiana’s 21st Century Scholars program. The program gives scholarship assistance to Indiana high school students of good character who maintain at least a 2.0 grade point average and who, after graduation, go immediately to an Indiana college, university or technical school. To become 21st century scholars, students must apply by June 30th of their 8th grade year. (For answers to questions about the program, call toll-free 1-800-992-2076.)
Using the Internet, you can find information on current costs for specific colleges and universities through the “College QuickFinder” at www.collegeboard.com. Then, you can calculate what those costs will likely be for your child in the future with the “College Cost Projector” at www.finaid.org.
Elizabeth Coit is executive director of Networks Financial Institute at Indiana State University. Networks Financial Institute considers financial literacy to be a lifelong learning endeavor, and its financial literacy programming, under the banner of “Cash Counts,” has been created utilizing standards based, stakeholder driven approaches. For more information, visit www.networksfinancialinstitute.org. Or contact Elizabeth at elizabeth.coit@isunetworks.org.
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