Smart Saving for College—Better Buy Degrees
College costs are rising. According to The College Board®, the average increase in tuition and fees at public four-year colleges in 2011 was 8.3 percent for in-state students and 4.5 percent for out-of-state students.
But don't despair. The cost of college remains within reach of many American families, especially those that start saving early. The College Board reports that half of all full-time public and private nonprofit four-year college students attend institutions charging tuition and fees of $9,936 or less.
Don't be put off by the amount you may have to save. Small amounts of money, if invested early and prudently, can become sizable investments through the power of compounding. For example, if you save $200 a month at a 6 percent annual rate of return for your newborn child, you will have more than $76,000 for college when she turns 18.
Estimate How Much You’ll Need to Save
Use our College Savings Calculator to see how early and regular saving can make your money grow. When estimating future college costs, remember to factor tuition, room, board and books into your calculation. If you know where you want your child to go to college, but don't know the current costs, you can use the National Center for Education Statistics' school locator to research the costs. If you are unsure where you want your child to go to college, you can get national public and private school averages from The College Board.
Don’t Forget Financial Aid
As part of saving for college, you need to know whether your child will be eligible for financial aid, which reduces what you may need to save for college.
Be aware that saving for college might impact financial aid. Any investments or savings can affect federal financial aid eligibility. But the impact on financial aid varies depending on whether the savings belong to the parent or the child. Savings in a parent's name can reduce federal financial aid eligibility by at most 5.64 percent, but assets saved in a child's name can reduce aid eligibility by 20 percent. State 529 accounts owned by a child, or set up as custodial 529 accounts, are treated at the lower 5.64 percent rate. States and private colleges may have their own rules for financial aid, and some states give more favorable treatment to pre-paid tuition plans and other college savings options.
Student Aid on the Web provides details on federal student aid programs, including grants, campus-based aid, work-study programs and loans. The Department of Education also streamlined the process for applying for financial aid, enabling parents and students to submit the Free Application for Federal Student Aid (FAFSA) online and monitor results. The FAFSA website also features the FAFSA4caster tool, which estimates in advance how much aid your student could qualify for and how much the family might be expected to pay—referred to as the Expected Family Contribution (EFC). Another helpful website for understanding financial aid and determining eligibility is FinAid! The SmartStudent™ Guide to Financial Aid.
But remember that not all financial aid is a gift—about one-third of aid consists of loans.1 While savings may decrease financial aid, you and your child will likely be in a much better financial situation on graduation day if you start saving for college now. The more you save, the less you will need to borrow.
1 Trends in Student Aid 2010, The College Board.
Download the print version:
FINRA Investor Podcast, Smart Saving for College—Part 1: 529 Plans
FINRA Investor Podcast, Smart Saving for College—Part 2: Other Tax-Advantaged Options