 without draining your current cash flow? What should you do if they are a few years away from college and your education fund won't be enough? How can you increase your chances of getting financial aid? What tax benefits might be available to you? This Financial Guide answers these questions.
With the costs of a college education rising every year, the keys to funding your child's education are to plan early and invest shrewdly. However, there are steps you can take if you get a late start. Moreover, there are a number of effective techniques for increasing financial aid opportunities and reducing taxes.
According to the College Board, the annual increase in inflation-adjusted average tuition and fees at public four-year colleges and universities has declined in each of the past five years, from 9.5% in 2009‑10 to 0.9% in 2013-14. Despite the decline, college is still expensive and proper planning can lessen the financial squeeze considerably--especially if you start when your child is young. It should also be noted that in 2012-13 the average amount of aid for a full-time undergraduate student was about $13,370.
Here are some guidelines--geared to parents whose children are no older than elementary school age--for funding your child's education.
Start Saving Early
We cannot emphasize enough that getting an early start is basic to funding your child's education. The earlier you start, the more you'll benefit from the compounding of interest.
Planning Aid: For an estimate of the amount of money you would have at the time your child enters college if you begin saving now, see the Financial Calculator:College Savings Calculator.
When should you start saving? This depends on how much you think your children's education will cost. The best way is to start saving before they are born. The sooner you begin, the less money you will have to put away each year.
Example: Suppose you have one child, age six months, and you estimate that you'll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you'll need to save $3,500 per year for 18 years (assuming an after-tax return of 7%). On the other hand, if you put off saving until the child is six years old, you'll have to save almost double that amount every year for twelve years.
Another advantage of starting early is that you'll have more flexibility when it comes to the type of investment you'll use. You'll be able to put at least part of your money in equities, which, although riskier in the short-run, are better able to outpace inflation than other investments after time.
Find Out How Much You'll Need To Save
How much will your child's education cost? It depends on whether your child attends a private or state school. In the 2013-2014 school year, the total expenses--tuition, fees, board, personal expenses, and books and supplies--for the average private college are about $40,917 per year and about $18,391 per year for the average public college. However, these amounts are averages: the tuition, fees, and board for some private colleges can cost more than $55,000 per year, whereas the costs for a state school can be kept under $10,000 per year.
Planning Aid: Use College Search, a database of over 3,200 two-and four-year colleges, to find and select the best colleges for your child.
Don't forget to add the costs of graduate or professional school to the amount your child will need.
Planning Aid: If you're trying to estimate future costs, you can estimate that school costs will grow by about two percentage points above the inflation rate. To be on the safe side, we suggest you assume costs will grow by at least 7% per year. For the most recent increases, refer to 2013 Trends in College Pricing.
Choose Your Investments
As with any investment, you should choose those that will provide you with a good return and that meet your level of risk tolerance. The ones you choose should depend on when you start your savings plan-the mix of investments if you start when your child is a toddler should be different from those used if you s