Saving Money for College

Saving for college is on the lips and minds of nearly every parent in America. Although few people are actually able to save the total cost of tuition, fees, room, and board needed by college freshmen, the pressure of trying to do so is still stressful to parents. This section will help to reduce some of that stress.

College costs can be a bit confusing; this section clears up what these costs are and what the average is today.

Tuition and Fees

This covers the salaries of professors, maintenance of buildings, use of school medical clinic, and so on. Basically, it's the cost of being a student (whether a commuter or resident) on a campus.

At public colleges, this number is currently averaging just under $6,000 for in-state residents; it is over $22,000 for private schools, and about $2,300 per year for two-year public colleges.

Room and Board

Room and board includes a place to live and food to eat. Prices for tiny dorm rooms are exorbitant — room and board tends to cost between $7,000 and $8,000 per school year. You can usually save a bundle by living off campus, particularly if you share a rental house with other students.

Sometimes, parents with a bit of extra cash will buy a house for their college kids. The kids living there split the cost of the mortgage payment, taxes, and insurance (and often pay the same price they would if renting), and the parents sell the house when the kids graduate. It's really not a bad idea.
Books

College textbooks are expensive — textbooks can cost over $100 each. The average bill for books for a school year is about $900.

Study Abroad

Many college students try to take one semester or year and study abroad. Expenses vary by the student and the location, but this cost generally includes airfare to and from the location; tuition at the foreign school; and spending money at the location. However, when attending a very expensive university (such as Harvard, MIT, Notre Dame, and so on), studying abroad may actually cost less, even factoring in the increased travel costs.

Internships

Internships are becoming more and more vital to graduating college seniors. If you're able to work in your field of interest before graduation, you'll have a much easier time finding work in your field. Many students live at home while interning during summers; those who can't live at home will need to pay for an apartment during the internship period.

Transportation

Some economists predict that college costs (tuition, fees, room, and board) will rise 6 percent per year, which means that current public-university tuition costs of, say, $6,000 per year, will rise to over $17,000 in 18 years.
Some freshman aren't allowed to have cars on campus, but if a student is to have any flexibility at all, taking a car to school — even an old clunker — is a good idea.

You will, however, have to estimate gas, maintenance, insurance, excise or personal property taxes, and license. Transportation costs vary widely based on the cost of gas, but you can estimate about $1,000 per year for on-campus students and about $1,500 for commuters.

Miscellaneous Expenses

Miscellaneous expenses range from music downloads to late-night pizzas to gas. They generally run around $1,500 per year, for a student on a budget.



Determining How Much You Can (or Want to) Help Out by Tere Stouffer
This isn't a subject that many people talk about, but at some point, you need to make a decision about how much you can or want to help your child pay for college.

Paying for all of a child's college expenses is out of reach for many parents, and if you do so, it may make your child less able to appreciate the gift that attending college really is. A child who really wants to attend college will find a way, either by working part time, winning scholarships, or taking out loans.

Don't assume that you and your spouse or partner feel the same way about whether to pay your kid's college expenses. While you want to try to come to a consensus, agreeing to disagree is okay, too.

Also be sure to include your growing child in this conversation. Kids who expect to pay for all or part of college will be better equipped to deal with finding money than will kids who assume money is available and then are told later that full support is not available.

Just as you can support your child financially, you can also support your child by visiting, calling, texting, sending emails, sending care packages, and so on. College can be quite lonely, especially during the first semester, and your emotional support will surely help.



Seeing How Much You Can Save by Tere Stouffer
How much you can save for your child depends on three factors: How much you're able to invest; how long you have; and how much you can earn in interest.

In general, investing a small amount each month for 18 years will yield greater savings than investing larger amounts for four or five years. Table 18-1 below gives some examples of what you'd save if you put money for college in a tax-free or tax-deferred account.

To find out how much you can save for your child's college fund, visit the FinAid site and click on their Calculators section. You can play around with the numbers and determine how much you can save over time.

TABLE 18-1

Saving for College
Monthly Deposit

Interest Rate

Number of Years

Total Savings

$25

5%

5

$1,707.24

$25

5%

18

$8,766.43

$165

5%

18

$57,858.41

$165

2%

18

$42,928.53

$165

9%

18

$89,161.77

$500

5%

3

$19,457.41

$500

5%

18

$175,328.52


Taking Advantage of Government-Sponsored Savings Plans by Tere Stouffer
If you have 18 years to save for college, chances are you'll end up with quite a bit of money for your child. But even if you don't have that much time, three tax-free college-savings vehicles can help you save for your child's college expenses.

Between the grants that are available to students and the tax savings you can realize, the government can actually be a big help to you and your child. On average, students receive more than $3,000 in grants and tax benefits at public four-year colleges; $9,000 per year at private four-year schools; and $2,200 per year (or nearly the entire amount of tuition) at two-year colleges.

Coverdell Education Savings Accounts

Although renamed the Coverdell education savings accounts several years ago, these are still often called by their old name: Education IRAs. These accounts allow you to contribute $2,000 per year, tax free, for college. The withdrawals are tax free, too.

The account is in the name of the child (called the beneficiary), and nearly anyone can contribute to it tax free, including grandparents, godparents, aunts and uncles, and you, up to the maximum amount each year. Contributing more than the maximum amount, even from several different sources, can result in penalties.

The tax savings for contributing to Coverdell accounts begins to phase out at $95,000 in income for individuals and $190,000 for couples. That's a lot of income, yes, and probably doesn't apply to you, but if other family members or friends want to contribute to your child's IRA, they should be aware that there are income limits on who can receive the tax break.
The money in Coverdell accounts can be used not only for college tuition, fees, room, board, and books, but also for an education-related computer, academic tutoring, and transportation to and from school. The money can also be used for K-12 expenses, including private-school tuition.

If the funds aren't used for education, the account remains in the name of the beneficiary — it doesn't revert back to you or the other donors, and this might really grind your gears.

There's only one catch, really: The funds must be used within a month of your child turning 30 years old. If money were ever left in a Coverdell account and your child turned 30 plus a month, he or she could start another account in the name of another child. This does mean, however, that Coverdell accounts aren't very useful for older adults who want to return to college.

Okay, there's kind of another catch, too. The financial institution that holds your Coverdell account will charge the account a maintenance fee for managing the investment account. The fee is usually small, however.

529s: College Savings Plans

All U.S. states currently sponsor college-savings investment plans. Currently, money put into a state-sponsored 529 is tax free upon withdrawal, and some states give a tax break when you contribute to the plan, too. Beginning in 2010, however, withdrawals will be taxed at the child's current tax rate.

How can I get information about my state's plan?
The Saving for College website lists every 529 savings plan administered in the country, and then reviews information about the plan's manager and its investment rating.
The fact that states sponsor the plans (and may give state income-tax breaks on the deposits) leads some people to believe that your child has to attend an in-state public university in order to use the funds. Only state-sponsored prepaid-tuition plans have that requirement; funds in 529 college-savings plans can be used at any college or university in the country.

Basically, the plans operate very much like an education IRA, except that instead of the money being owned and controlled by the child, 529s are owned and controlled by the parent. Your child is still the named beneficiary, but he or she has no legal right to the money if you choose not to authorize a withdrawal. And you can change the named beneficiary at any time. Anyone can contribute to the 529 fund.

Another striking difference between an education IRA and a 529 is that the amount you can contribute to a 529 is virtually limitless, with no loss of tax benefits for high-income donors. Also, the plan doesn't stop at age 30, so you can establish one for yourself to earn your first degree or attend graduate school.

The tax implications of 529s are not easy to understand. If you're already using the services of a tax accountant, be sure to discuss your college-savings plan, too. If not, consider hiring a qualified tax accountant to help you wade through the many regulations covering these plans.
The account is placed in the hands of an investment-fund manager who charges a maintenance fee, and you can establish direct-deposit funds into the account, making deposits to the plan simple and relatively painless.

Another Kind of 529: Prepaid Tuition Plans

A prepaid-tuition plan allows you to buy tuition shares or units and then hold on to those shares until your child wants to use them. Buying a share is just like paying tuition, but at today's prices. You lock in at today's tuition rates, thus avoiding the dreaded annual increase in tuition.

Family members and friends can buy shares for your child, too, but some states require contracts that lock you in to buying a certain number of shares in a given period of time.

When your child receives the prepaid-tuition shares to use to pay for college, the federal government usually taxes them as income. Since your child has a low tax rate, it may still result in tax savings. States don't usually tax prepaid-tuition shares.
The plans vary greatly in where and how they can be used. Some colleges and universities sell tuition shares directly, but they can be used only at that school.

In other cases, states sell the shares, and they can be used at any public — and sometimes private — college in that state. Some blocks of schools (like a group of private schools) sell the share.

If your child decides not to attend that college or isn't accepted at one, you may be eligible for a refund of the tuition shares, but often a penalty is levied. If you purchased the shares directly from the college or university, you may be able to sell them to another family to use.

Finding Other Ways to Pay for College by Tere Stouffer
Tax-free savings plans are great if you have a few thousand dollars a year to invest for your child. If you're not able to squeeze that much out of your budget, however, consider the following ways to help your child pay for college.

A 15-Year Home Mortgage

One creative way to pay for college if you don't currently have the money to do so is to buy a house (or refinance an existing house) on a 15-year mortgage when your child is born. When you pay off the house 15 years later, begin putting that “mortgage payment” into a savings account or low-risk investment fund.

The account will have 36 “mortgage payments” in it by the time the child is ready for college — an amount that, depending on your mortgage payment, could be substantial. At 5-percent interest, a $1,000-per-month “mortgage payment” into your savings account will yield $38,914.81 in three years. You can then continue using what was mortgage money for college money throughout your child's four or five years at college.

Scholarships and Grants

Scholarships range from athletic grants to academic scholarships to money that's based on geography or heritage. Peruse the many money-for-college books at your local library, and encourage your child to apply for any and every scholarship that looks appropriate.

The majority of academic scholarships now offered to college-bound seniors are based on scores received on the PSAT and SAT. Because only the best scores are reported, encourage your child to take the test early and often, perhaps even investing in a study course.

While the tests and study courses do cost money, they could add up to tens of thousands of dollars in scholarships if your child scores among the top students in the country. Some colleges even offer free tuition and fees for students who score a perfect or nearly perfect mark.

To become eligible for any government grants or loans, your child must complete a Free Application for Federal Student Aid (FAFSA). This form can be time-consuming to complete and may include information that you would rather keep private. Still, no government grants or loans are given unless this form is on file.
The most well-known college grant is the federal Pell Grant, which gives money (up to $4,050) directly to low-income children attending college. It does not have to be repaid, and is available only to undergraduates earning their first degree.

Federal Supplemental Educational Opportunity Grants, which range from $100 to $4,000, may also be available to low-income students.

Loans

Loans are different from scholarships and grants in that they must be repaid after the child graduates from or stops attending college. Federal student loans are usually borrowed directly from the government or from qualifying private lenders — both offer an attractive low interest rate. Many families, even those that do not appear to demonstrate much of a need, are eligible for federal student loans.

Federal Perkins Loans are borrowed directly from the school (also at a low interest rate), but are available only for low-income students. You can borrow up to $4,000 per year for undergraduate study.

Federal Family Education Loans (FFEL) and the William D. Ford Federal Direct Loan are administered by the U.S. Department of Education as either Stafford Loans or PLUS loans.

Stafford Loans are available directly to students, and may or may not be based on need. Total loans vary from $3,500 per year to $10,500 per year for undergrads. PLUS loans are available to the parents of college-bound students, but instead of being due when the child graduates, they must be repaid while the child is still in school.

Work Study and Other Jobs

A lot of students work while in college, and not only does working often not hurt the student's chances of succeeding, it can actually improve his or her chances of being hired after college! Working forces students to be disciplined, and also may provide real-life experience (especially when doing a co-op or internship) that can make a resume shine.

Here are some broad categories of work opportunities for your child:

Work study. Federal work-study programs allow students with financial need to be employed, usually by the university or surrounding community, for a certain number of hours per week. This option is considered part of a student's financial-aid package, along with grants and loans.

Part-time job. A student can apply for a job at the bagel shop or as a professor's assistant and is usually paid minimum wage.

Full-time job. Your child can opt to work full time and attend school part time. Although the full-time job usually isn't professional work, the company may offer some tuition assistance or a flexible work schedule built around class schedules. Most students take six to 10 years to finish a degree while working full time.

Co-operative education. A college co-op education alternates semesters of full-time college attendance with semesters of full-time work in the student's field of interest. The semesters of work usually pay quite well — sometimes enough to pay all of the student's college expenses, plus living expenses during the work semesters.

Co-op positions are difficult to get, and they're demanding because the student must behave professionally during the work semesters and must take full course loads while at school. Most co-op students graduate in five years. Because of their real-life experiences, however, students who co-op are usually the first ones hired upon graduation.

Internship. An internship is similar to a co-op, except that students usually attend their eight semesters of school like other students, interning only during summers and other school breaks. Unfortunately, some internships pay poorly or not at all, but they do provide necessary real-world job experience.


Creating a Budget That Includes College Expenses by Tere Stouffer
In order to begin saving for your child's (or your own) college expenses — whether you have 18 years or 18 months — you'll need to sharpen your pencil and rework your budget.

First, look at your budget to see how much you might be able to pull together each month by reducing your expenses. Then visit FinAid to determine how much you'll be able to save.

WORKSHEET 18-2

A Child-in-College Budget

Monthly Expense

Amount

Ways to Reduce/Eliminate

New Amount

College costs

$

N/A

$

Groceries and household items

$

$

Day care

$

$

Contributions

$

$

Savings

$

$

Rent on furniture or appliances

$

$

Entertainment/babysitting

$

$

Eating out

$

$

Rent or mortgage

$

$

Car payment or lease

$

$

Electric bill (average)

$

$

Gas bill (average)

$

$

Water bill

$

$

Sewer bill

$

$

Trash pick-up bill

$

$

Cable/DSL/satellite bill

$

$

Telephone bill

$

$

Cell phone bill

$

$

Bank charges

$

$

Haircuts/manicures/pedicures

$

$

Home equity loan

$

$

Other loan

$

$

Credit card or store-charge bill

$

$

Credit card or store-charge bill

$

$

Credit card or store-charge bill

$

$

Credit card or store-charge bill

$

$

Credit card or store-charge bill

$

$

Credit card or store-charge bill

$

$

Child support or alimony

$

$

Car maintenance

$

$

House maintenance

$

$

Auto insurance

$

$

Property taxes

$

$

Gifts

$

$

Events to attend

$

$

Clothing and shoes

$

$

Home insurance

$

$

Vehicle registration

$

$

Vacation

$

$

Club membership

$

$

Other:

$

$

Other:

$

$

TOTAL:

$

$

Another way to determine your savings is to ignore the fact that you'll be earning interest on your money, and just multiply your monthly contribution by the number of months you have between now and the time your child will start college.

FedMoney lists dozens of government programs that give students money for college. If you've been thinking that you can't afford college, visit this site before you give up! There are other sites, too: Search on the phrase “college scholarships.”
Compare that number to today's tuition, fees, room, and board, and you'll have a good idea of how much college your savings will buy. The reason this method works fairly well is that college costs are rising by about the same amount that most investments are yielding.

If you're not satisfied with your potential savings, see if you can find extra money in your budget (by cutting back even further on your expenses), and then calculate how much you'll have saved by putting away that amount.