Tips & Hints for Parents - Saving for College

  • Saving For College

    Most parents want their children to go to college. At the same time, most parents now identify "paying for college" as their biggest financial concern. As a parent, you have a legitimate cause for concern. Over the past decade, college costs have risen faster than inflation and faster than family income. More and more, the burden of paying for a college education is falling on the family. This is affecting their decisions about whether to send their child to college and where to have their child enroll.

    Now, you may be saying to yourself "But wait a minute. Isn’t financial aid available to help cover college costs? And isn’t the amount of available financial aid going up each year? Won’t I be able to get my fair share?"

    Yes, it is true that student financial aid is available, and it is being awarded in record amounts. Over $100 billion in financial aid is awarded each year from need-based and merit-based grant and scholarship programs that are funded at the federal, state, and local levels. However, most of the increase in recent years has come in the form of new loan programs and expanded borrowing capacity. In fact, student loan debt now averages more than $17,000 for four-year graduates, and parents are borrowing more and more each year to cover college costs. This not only places a financial burden on young college graduates, it also makes it more difficult for parents to afford to pay for a second, third, or fourth child to go to college.

    One way you can reduce the amount you and your child will need to borrow is to save as much as you can before they enroll in college. Saving for college is an often overlooked strategy for covering college costs. Most families do not begin saving any money for college until the student is in seventh grade, and the amount they are able to save averages just $11,000. This "tuition nest egg" is usually gone in a year or two, and the family must then turn to borrowing. By starting much earlier, even when the student is in elementary school, parents can significantly reduce their future borrowing or provide their child with additional options with regard to their choice of school.

    There are many reasons why parents don’t save for college. Let’s explore a few of them to see if we can correct some misconceptions and give you some new options:

    "I don’t have any money to save."
    Some families are living paycheck to paycheck and do not have any money to save toward future college expenses. But in other cases, families can find money to save just by reviewing their expenses, their lifestyle, and their priorities. For example, a two-pack-a-day smoker could save around $100 a month by cutting down to one pack a day. Money can be saved by canceling subscriptions to magazines that you never get around to reading. If you brown-bag it instead of eating out for lunch a few days a week, you can "find" an extra $50 each month. Add it up, and all of a sudden you have the means to start a college fund. You just need to make saving a priority and come up with a plan.

    "I don’t know where to invest money to save for college."
    There are more college savings options now than ever before. Traditional savings accounts through banks and credit unions are easy to set up and manage. Money market accounts and mutual funds can be arranged through financial service providers. Recent changes to the tax laws have provided families with even more opportunities to save – Education IRAs, 529 Plans, and Custodial Accounts are three of the most popular ways in which parents can now save money for their children’s college education. And now you can even save for college when you shop. Through the Upromise program, when you shop at hundreds of grocery stores, drug stores, retailers, and other participating companies, they rebate a portion of your purchase price back into your college saving account. So as you can see, there are many options available to you when it comes to saving money for college. To determine the best way for you to save, consult your local lender, tax advisor, or financial service provider.

    "My child will get scholarships, so I don’t need to save for college."
    Hopefully, your child will receive many scholarship offers to attend college. But the reality is that seldom will those scholarships cover the entire cost. Even a full tuition scholarship will still leave the student with expenses such as room and board, books and supplies, transportation, and personal needs. Federal and state financial aid programs can help, but often there is still a gap that must be met. These remaining expenses will have to be covered by the family, and without savings, the family will likely turn to loans.

    "If I save money for college, I won’t get financial aid."
    This is perhaps the biggest myth surrounding the financial aid process. Many parents believe that having money in the bank will prevent them from receiving need-based financial aid. To avoid losing aid, parents will spend money, hide money or invest money in places where even they can’t touch it. Even worse, many never bother saving it in the first place. The fact is that parental savings are treated very generously in the financial aid formula.

    First of all, assets such as home equity and qualified retirement plans are not reported on the financial aid forms. So don’t worry about how much your home is worth or how much you have invested in retirement vehicles such as company plans, IRAs, or a 401K. For all other assets (cash, savings, checking, mutual funds, money market accounts, rental properties, etc.), an allowance is applied to protect a significant portion of your assets. In most cases, less than 5% of the total value of parental assets is included when determining eligibility for need-based financial aid. And if the parents’ income is less than $50,000, their assets don’t count at all.

    Also, keep in mind that family savings are only a factor when the student is applying for need-based financial aid. Students being considered for merit-based aid on the basis of academics or other factors do NOT have savings taken into account.

    The principles of saving for college are the same as those for retirement or other purposes. Time and consistency are your greatest allies. Begin saving early – as early as elementary school or sooner – and invest on a regular basis – such as through automatic monthly deductions from your checking account – and you will be well on your way to developing an effective college savings plan. Use our Savings Calculator to see how this strategy will allow your college savings to grow almost as quickly as your child will!

    When it comes to paying for the cost of college, it is always better to have money in the bank than to not have money in the bank. In most cases, savings will not have an impact on financial aid eligibility. Plus, having a college savings fund will give you options – it could reduce student and parent borrowing, it could reduce the student’s work obligation while going to school, and it could make it possible for your child to attend the school of his or her choice. In short, saving for college can help ease your mind when it comes to paying for your child’s education.

    There is just one catch – your child is not getting any younger! The clock is ticking, so start your college saving plan today.