Cash for College
Education isn’t cheap—but it can be cheaper.
By former Army Capt. Phil Dyer, CFP, Deputy Director, Benefits Information

Planning how to pay for a college education, the topic of this month’s “Financial Planning 101,” can be daunting for parents and grandparents who are trying to help with education costs. According to the College Board’s study, “Trends in College Pricing,” published in 2003, the average annual total charges (including tuition, fees, room, and board) at a four-year public institution are $10,636. A four-year private institution will set you back an average of $26,854 a year. What’s more, the College Board estimates that a child born today will pay $128,000 or $304,000, respectively, for four years of public or private education.

But don’t panic. After factoring in grants, tuition assistance, and other forms of financial aid, nearly 29 percent of full-time undergraduate students attending four-year institutions pay less than $4,000 a year in tuition and fees; about 70 percent pay less than $8,000; and roughly 8 percent pay more than $24,000 a year. These costs still are high, but the College Board’s study also reveals the lifetime earnings gap between a college graduate and someone with a high school diploma exceeds $1 million.

Let’s take a look at three steps to successful college financial planning:

Start early. Let’s assume you want to cover the expenses of a four-year public college education with a total cost of $12,500 a year in today’s dollars. If you start saving immediately after your child is born, you must put away about $3,242 a year—that’s $270 a month (assuming a 5 percent annual inflation in college costs and an 8 percent annual rate of return in your savings). Waiting until your child is 7 years old to start saving increases the deposits to $5,248 a year, or $437 a month. Delaying until the child reaches age 14—which is when many parents start focusing on paying for college—increases the necessary annual investment to $13,949 a year, or $1,162 a month. Clearly, it pays to start early.

Use the right tools. There is a bewildering array of grants, scholarships, tax breaks, and savings plans to help you prepare for college expenses. One of the most popular and powerful college savings tools available today is the Section 529 Plan. Available in every state, it allows parents, grandparents, and even adult students to save a lot of money each year and benefit from tax-deferred compound growth. Under current tax law, money withdrawn from Section 529 Plans for qualified education expenses is free from federal (and most state) income taxes. Many states offer state income tax deductions for in-state Section 529 Plans, and most plans allow funds to be transferred to family members or from one state to another once a year without penalty.

But keep in mind that not all plans are created equal. Some plans carry heavy expense ratios that must be overcome by investment performance to break even with less expensive plans. Make sure you fully understand the fees and expenses involved before investing in a Section 529 Plan. For more information about Section 529 Plans, visit www.savingforcollege.com.
 
Be flexible. There is no one-size-fits-all solution for college funding. Most families use a combination of tools to cover rapidly escalating costs. Also, there is no law requiring each child go directly to a four-year program after graduating high school. Community college, junior college, or part-time attendance, coupled with working full or part time, is an excellent route for students, particularly if they don’t yet know what they want to do.

Next month, the last article in the “Financial Planning 101” series will tackle estate planning.